Occidental Petroleum Corp. has closed on what ended up being a $55 billion acquisition of Anadarko Petroleum Corp., which has made Occidental CEO Vicki Hollub, the company's board of directors and Anadarko shareholders very happy.
It would not be a stretch to say that very few others share that sentiment.
"I don't know a whole lot of people who put out a positive spin on this," KeyBanc Analyst Leo Mariani said.
During the nearly three months between the time the deal was announced on May 9 and its closing on Aug. 8, commentary on the move became increasingly negative, and Occidental shareholders have taken their frustrations out on the company's stock. But the question of whether the deal will actually benefit Occidental is one that probably will not be answered for several years to come.
Hollub, who made the acquisition of Anadarko a personal mission for more than two years, adamantly defended the move as being a big plus for Occidental. "With Anadarko's world-class asset portfolio now officially part of Occidental, we begin our work to integrate our two companies and unlock the significant value of this combination for shareholders," she said when the deal was closed.
Analysts largely disagree with Hollub over the assertion that the deal is beneficial for Occidental. Many believe it is a major blunder that shows the worst tendencies of the oil and gas exploration and production sector. In its investor's note reinstituting coverage of Occidental, Evercore ISI slammed Hollub and Occidental's leadership, saying the Anadarko purchase "destroyed value."
"The purchase of Anadarko makes Occidental larger but significantly less valuable. This capital management model was the default approach in US E&P during the past decade and represents a failed business model. It elicited massive underperformance in E&P with Generalist investors abandoning the sector along the way," the firm said.
Investors seem to largely share Evercore's sentiments. While activist Carl Icahn has drawn media attention with his attacks on Occidental's "abysmal" leadership and effort to unseat four members of the company's board of directors, other shareholders have fled the company in droves. Occidental's stock on the New York Stock Exchange was down more than 4.5% to $44.99 on Aug. 12, its lowest levels in more than a decade.
"Shareholders are pissed," Raymond James analyst Muhammed Ghulam said. "[Hollub] knew the deal wouldn't get approved by their shareholders, so she went behind their backs and made a deal with [Warren] Buffett."
Hollub and Buffett struck a deal in which Occidental received $10 billion in cash from Berkshire Hathaway Inc. to help seal the Anadarko acquisition in exchange for $10 billion of preferred stock at a dividend rate of 8% per year.
"Eight percent. That's crazy," Ghulam said.
Even though Raymond James has largely panned the deal, Ghulam said the battering the company's stock has taken has been beyond reasonable levels.
"Would it have been better if they had not done the deal? Yes. They've taken on too much debt and are going into areas where they have no experience. But has the price fallen too far? Also yes," he said.
One of the more generous assessments of the deal came from Morningstar's David Meats, who said it was "a wash, to be honest."
"I think Oxy correctly identified an underpriced company but then paid a hefty premium, offsetting the benefit," Meats explained. "So it's neither better nor worse but less resilient to the downside in the next couple years due to the balance sheet — so a recession or oil price collapse would hurt more than it otherwise would have."
Mariani said the move to buy Anadarko was a gamble for Occidental and depends on one thing: oil prices. With West Texas Intermediate crude oil trading near $55 per barrel, the gamble has yet to pay off.
"The bottom line is that this is a very oil price dependent deal. They were expecting $60 WTI and they were levering up the company," he said. "That has definitely cut into their balance sheet … The success or failure of this deal depends on what oil prices do the next couple of years."