Playing the Field: Competing Bids for Anadarko Petroleum Corp Custom Case Solution & Analysis

1. Evidence Brief: Case Research Findings

Financial Metrics

• Chevron (CVX) Initial Bid: $65.00 per share (75% stock, 25% cash), valued at approximately $33 billion (April 12, 2019).
• Occidental (OXY) Competing Bid: $76.00 per share (50% stock, 50% cash), valued at approximately $38 billion (April 24, 2019).
• Market Premium: OXY bid represented a 63% premium over Anadarko (APC) pre-deal closing price of ~$43.00.
• Breakup Fee: APC owes Chevron $1 billion if the merger agreement is terminated.
• Berkshire Hathaway Investment: $10 billion commitment in exchange for 100,000 shares of cumulative perpetual preferred stock with an 8% annual dividend.
• Asset Divestiture: OXY reached a binding agreement to sell APC African assets to Total SA for $8.8 billion, contingent on deal closure.

Operational Facts

• Permian Basin Assets: APC holds 240,000 net acres in the Delaware Basin, contiguous with OXY and CVX holdings.
• Gulf of Mexico: APC operates deepwater assets with high cash flow and existing infrastructure.
• Mozambique LNG: APC leads a world-class Liquefied Natural Gas project with 75 trillion cubic feet of recoverable reserves.
• Production Volume: APC average production was approximately 666,000 barrels of oil equivalent per day (boe/d) in Q4 2018.

Stakeholder Positions

• Al Walker (CEO, Anadarko): Prioritized deal certainty and long-term strategic fit but faced fiduciary pressure to maximize immediate shareholder value.
• Vicki Hollub (CEO, Occidental): Aggressively pursued APC to achieve scale in the Permian; bypassed OXY shareholder vote by increasing the cash component of the bid.
• Michael Wirth (CEO, Chevron): Maintained a stance of capital discipline; refused to enter a bidding war that would compromise CVX return on capital employed (ROCE).
• Carl Icahn (OXY Shareholder): Publicly opposed the OXY bid, characterizing it as overpaying and a bet-the-company move.

Information Gaps

• Specific tax liabilities for APC shareholders resulting from the shift from 25% cash (CVX) to 50% cash (OXY).
• Detailed internal decommissioning liability estimates for APC deepwater Gulf of Mexico assets.
• Exact operational cost-per-barrel projections for the integrated OXY-APC Delaware Basin acreage.

2. Strategic Analysis

Core Strategic Question

• Can Anadarko justify rejecting a $5 billion (17%) higher offer from Occidental based on Chevron's superior balance sheet and lower execution risk?
• Is the Permian Basin consolidation benefit significant enough to offset the high cost of capital associated with the Berkshire Hathaway financing?

Structural Analysis: M&A Strategic Fit

The consolidation of the Permian Basin is the primary driver. In shale operations, profitability depends on lateral drilling efficiency and contiguous acreage. The APC assets in the Delaware Basin are geographically intertwined with both bidders, but the scale of the OXY-APC combination would make OXY the dominant producer in the most lucrative U.S. oil field.

The Mozambique LNG project represents a divergence in strategy. For Chevron, it fits a global portfolio of large-scale energy projects. For Occidental, it is a non-core asset, evidenced by the immediate contingent sale to Total SA. This indicates OXY is pursuing APC primarily for its domestic shale footprint.

Strategic Options

Preliminary Recommendation

Anadarko must accept the Occidental Petroleum bid. The 17% price gap between the two offers exceeds the threshold where board members can reasonably claim that Chevron's lower risk profile compensates for the loss in value. Fiduciary duty requires the board to capture the $76 per share price, provided the Berkshire Hathaway commitment secures the financing.

3. Operations and Implementation Planner

Critical Path

• Termination and Penalty: Formally terminate the Chevron merger agreement and immediately pay the $1 billion breakup fee.
• Financing Finalization: Execute the $10 billion preferred stock agreement with Berkshire Hathaway to ensure liquidity for the cash component.
• Asset Carve-out: Initiate the operational separation of African assets for the $8.8 billion transfer to Total SA. This is the primary debt-reduction mechanism.
• Integration Planning: Establish a joint integration management office (IMO) focused specifically on Delaware Basin drilling schedules and overhead reduction.

Key Constraints

• Debt Service: The 8% dividend on the $10 billion Berkshire investment creates a permanent $800 million annual cash drain that must be covered by operational cash flow.
• Market Volatility: The high debt load makes the combined entity extremely sensitive to fluctuations in West Texas Intermediate (WTI) prices.
• Organizational Friction: OXY aggressive tactics and the bypassing of their own shareholders may create a hostile environment for APC leadership during the transition.

Risk-Adjusted Implementation Strategy

The strategy must prioritize rapid deleveraging. Beyond the Total SA sale, OXY must identify an additional $2 billion to $5 billion in non-core asset sales within the first 12 months. Operational focus should be restricted to the Delaware Basin to realize the projected $3.5 billion in annual cost savings. Any delay in the Total SA transaction would leave the company overexposed to credit rating downgrades.

4. Executive Review and BLUF

BLUF (Bottom Line Up Front)

Anadarko should terminate the Chevron agreement and accept the Occidental Petroleum (OXY) offer of $76 per share. The $5 billion valuation gap is too significant to ignore. While Chevron offers a more stable balance sheet, OXY has secured the necessary capital through Berkshire Hathaway and a contingent asset sale to Total SA. The board's fiduciary duty to maximize shareholder value outweighs the operational comfort of the Chevron deal. The primary risk is the high cost of OXY's debt, but this is a burden for OXY's shareholders, not APC's selling shareholders.

Dangerous Assumption

The analysis assumes that West Texas Intermediate (WTI) prices will remain above $50-$55 per barrel. OXY's massive debt load and the 8% Buffett dividend leave zero margin for error. If oil prices drop during the 12-month integration period, the combined entity faces a liquidity crisis that could force fire-sale prices for the very assets it just acquired.

Unaddressed Risks

• Execution Risk (High): OXY has never integrated an acquisition of this magnitude. The technical challenge of combining drilling operations while simultaneously divesting $8.8 billion in international assets is understated.
• Credit Rating Contagion (Medium): The sheer volume of debt required to fund the 50% cash component may trigger a downgrade to junk status, significantly increasing the cost of refinancing existing APC debt.

Unconsidered Alternative

A structured counter-offer to Chevron was not fully explored. APC could have used the OXY bid to pressure Chevron into a $70-$72 per share offer. A middle-ground price from a more stable acquirer like Chevron would have provided a superior risk-adjusted outcome for long-term shareholders who are receiving stock as part of the consideration.

Verdict

APPROVED FOR LEADERSHIP REVIEW