Global Insight Perspective | |
Significance | Anadarko has added notable U.S.-based production and reserves holdings to its portfolio, and while a record premium has been paid, the acquisitions have made Anadarko the fifth-largest oil and gas producer in the U.S. |
Implications | The trend towards consolidation in the oil and gas industry looks set to persist. Beyond the new upstream assets it will command, especially in the Gulf of Mexico, the technical expertise acquired raises the fortunes of Anadarko's wider international E&P efforts. |
Outlook | Extensive assets sales are expected to help offset the US$21.1-billion all-cash outlay. The development of Rocky Mountain gas reserves could be increasingly influential in Anadarko's overall future performance. |
Bold
Anadarko Petroleum Corp. announced on Friday (23 June) that it had agreed two separate all-cash deals to simultaneously acquire Kerr-McGee Corp. and Western Gas Resources Inc. for a combined US$21.1 billion. It is a confident step forward for the mid-major and there can be little doubting the attractiveness of the holdings that have been brought into the Anadarko stable.
In Kerr-McGee, the company has acquired a convincing array of E&P assets and expertise. These include an extensive concentration in the Gulf of Mexico (GoM), where over 30% of the company's 900 million barrels of oil equivalent in proven reserves are to be found. Besides the acreage itself and production figures of 109,000 b/d and 351 Bcf for oil and gas respectively, the deep waters of the Gulf have cultivated technical proficiencies that will complement the variety of E&P work Anadarko has on its books around the world. Despite a number of sales, notably in the North Sea, Kerr-McGee's international holdings from China to Angola remain attractive. As for Western Gas Resources, the name says it all. The company's broad reserves, some 3.0 Tcf of probable and possible conventional gas, from Wyoming to West Texas, offer the potential for long-running development in keeping with the needs of the U.S. market.
Heavy Premium
There is indeed a strong U.S. orientation in the assets Anadarko has paid for. Nevertheless, the North American portfolios have come at a premium. The company has offered US$16.4 billion for Kerr-McGee. At roughly US$70.50 per share, that is a 40% premium over Thursday (22 June)'s closing price. Western Gas has been valued at US$4.7 billion, or US$61 per share. That itself is a 49% premium. Even in terms of the high outlays that have accompanied major acquisitions of late, Anadarko has set new standards here. The last big North American gas deal, ConocoPhillips's US$35 billion purchase of Burlington Resources, brought a 26% premium. It is worth looking back to Devon Energy's 2003 move for Ocean Energy, a deal that carried only a 2.9% premium.
Coffers have indeed swelled since then, but so have the opportunities for upstream gains shifted somewhat. In short, many potential areas of investment have lost a measure of their sheen. Higher operating costs, greater competition for foreign NOCs and less-than-favourable fiscal, operational and security conditions abroad - alongside bullish domestic demand forecasts - have refocused attention on North America. However, at a time when concerns over supply access are on the rise, North American assets are in demand. They offer access to a mature market, political stability and financial incentives that are likely to command even greater premiums in the future.
Outlook and Implications
Consolidation will be the watchword for Anadarko itself. Given the wealth of operational components that have been added to its holdings and in lieu of the outlay they necessitated, a fairly extensive asset sale will now follow. Its share price took a measure of a beating on Friday (23 June), losing 7% of its value. Investors are clearly concerned about the price tag and the burden assumed, as the deals additionally include the assumption of some US$2.2 billion in debt. The company has stated that it intends to use cash flow, equity issuance and asset sales to pay down its newfound debt by US$15 billion over the next 18 to 24 months The onus will be on Anadarko to quickly offload one or two non-core holdings and wait for the confidence that the long-term value of natural gas holdings in particular should garner to positively influence investor sentiment. The newly minted fifth-largest oil and gas producer in the U.S. will require a little time to grow into these shoes.
Some would argue that, under the swollen prices seen in international markets today, it is no time to be buying on this scale or at such prices. Nevertheless, it is a trend that looks set to continue - and equally, divide opinion over its merits. Indeed, Anadarko has been subject of its own take-over rumours and these are unlikely to subside. If anything, this latest news makes the company all the more attractive for a major looking to secure the same sort of benefits Anadarko had in mind.