Strategic Thinking of Anadarko Acquisition by Chevron

Chevron announced its acquisition of Anadarko Petroleum Corporation at $50 billion on April 12, 2019. These two corporations have quite similar asset type and asset location; thus, the cost of integration was low. The value of assets would be greatly promoted for both corporations after integration, and Anadarko could improve its finances with the aid of Chevron's unstinted cash flow to defend itself against the slump in oil price. Chevron's payment would mostly be given in shares and debt. It leveraged a lot of assets by using a small amount of cash and thus was under small financial pressure. The acquisition was a winwin deal and could achieve a 1+1>2 result by maximizing the potential of both corporations. There is something to be learned from this transaction. Keywords—strategic thinking; potential value; asset integration; low oil price I. TRANSACTION PROFILE Chevron announced on April 12, 2019 that it would acquire Anadarko Petroleum Corporation, one of the largest independent oil companies around the world, at $33 billion, which would be paid in Chevron's 75% stock and 25% cash. According to Chevron's closing price on April 11, 2019, Anadarko shareholders would receive 0.3869 shares of Chevron and $16.25 in cash for each share they own, or $65 per share. Chevron would also assume $15 billion of Anadarko's debt. The total value of the transaction is $50 billion [1]. The acquisition is the largest integration of unconventional oil and gas resources in the United States in recent years, and the strategic significance is worth pondering. Starting from the whole oil and gas industry chain, this paper will analyze and summarize the company's macro-long-term strategy from the perspective of economics, finance and strategy, so as to provide decision-making basis for other company operators. II. ASSETS OF THE TRANSACTION This transaction had been planning for a long period of time. Chevron is focusing its business on unconventional and deepwater oil and gas, which are the business strength of Anadarko. Their assets are overlapping and complementary, thus these two corporations could learn each other's good points for common progress in economic benefit and cost reduction. It is anticipated that pretax cost and capital expenditure reduction will reach $1 billion [1]. The assets acquired are detailed as follows. A. Unconventional Oil and Gas in the Permian Basin. Chevron possesses huge assets in the Permian Basin. The total area of licenses is 116,104 acres, and total reserves are 16.2 billion barrels. Chevron is the biggest owner of the Permian Basin [2]. But unconventional oil and gas in the Permian Basin are not Chevron's business strength. All its assets lie in basin margin with poor geologic conditions, low per-well production, and high gas content. Oil yield only accounts for 60% of total production. The economic benefit is low in view of low gas price in the US. The quality of resources and profit rate of Chevron in three major plays (Bone Spring, WolfCampMidland, and WolfCamp-Delaware) are below the average, and Chevron had to maintain its production to make profit. To address the issue of low profit rate, international oil companies, e.g. Chevron, applied factory drilling to the Permian Basin. More rigs, factory drilling, and digital analysis were used to raise production efficiency and reduce production cost. These measures did work in the first couple of years, but the room of cost reduction and efficiency raise was limited just through technical progress. Now the cost has been reduced to the lower limit. Further cost reduction may only be realized through improving the quality of petroleum assets [1]. Anadarko possesses the best petroleum asset in WolfCampDelaware, which lies in the center of the basin with high perwell production, high oil yield, and low gas content. Oil yield accounts for 75% of total production. Thanks to the lowest breakeven point, Anadarko has achieved more economic benefit than other owners of this play [2]. In addition, Anadarko holds the mining rights of 24,104 acres in WolfCamp-Delaware, and total reserves reach 4 billion barrels of oil-gas equivalent. Anadarko's possession is the most valuable asset in this play(Fig. 1). Chevron's asset in WolfCamp-Delaware and Anadarko's asset in the same play, which is close to Chevron's asset, could Fourth International Conference on Economic and Business Management (FEBM 2019) Copyright © 2019, the Authors. Published by Atlantis Press. This is an open access article under the CC BY-NC license (http://creativecommons.org/licenses/by-nc/4.0/). Advances in Economics, Business and Management Research, volume 106