Warren Buffett’s entry into the Anadarko Petroleum (NYSE:APC) fray in support the takeover bid by Occidental Petroleum (NYSE:OXY) places the competition with industry giant Chevron (NYSE:CHV) in a new light that is now more reminiscent of the T. Boone Pickens corporate raider days of the 1980s than of the quiet deals negotiated behind the scenes over the last 30 years.
Oxy announced Tuesday morning that Buffett’s firm, Berkshire Hathaway, has committed to a provisional investment in Oxy of $10 billion, contingent on the company’s being successful in negotiating a final deal with Anadarko. In return for that investment, Bloomberg reports that:
Berkshire will hold 100,000 shares of preferred stock that will pay a whopping 8 percent annual dividend – or $800 million. Berkshire will also receive a warrant to buy up to 80 million Occidental common shares for $62.50 apiece. To put those figures into perspective, Occidental’s dividend yield is currently 5.2 percent. Its average share price over the last 20 trading sessions was $64.59, and analysts see it rising to about $74 over the next year.
That’s a pretty sweet deal for Berkshire, but it’s probably worth it to Oxy because it assauges concerns from investors that the company would have to assume too much new debt in order to finance an Anadarko takeover. The pledged influx of capital also helps to balance the financial playing field with Chevron, whose market cap is almost 500% of Oxy’s, and whose overall balance sheet is in better condition.
In a press release, Oxy CEO Vicki Hollub said “We have long believed that Occidental is uniquely positioned to generate compelling value from Anadarko’s highly complementary asset portfolio. We are thrilled to have Berkshire Hathaway’s financial support of this exciting opportunity. We look forward to engaging with Anadarko’s Board of Directors to deliver this superior transaction to our respective shareholders.”
The move to secure Buffett’s support shows that Hollub is willing to pull out all stops in order to get this deal done. In an email Tuesday morning, Ron Beck, Market Strategy Manager at AspenTech (NASDAQ:AZPN) said she has firm reasons to do so:
In addition to the fairly clear economics yielded increasing Occidental’s holdings in the productive Permian Basin and leveraging their experience there, this play also has a very strong sustainability flavor.
Occidental is already one of a handful of oil and gas producers with a large, commercial scale carbon sequestration projects in production, made both economically and environmentally lucrative through use of the CO2 as injected gas for enhanced oil recovery. Addition of Anadarko’s sizeable reserves gives Occidental both an increase source of CO2 to capture and inject, and also additionally mature fields that can benefit from the CO2 EOR technology that Oxy has differentiated experience with.
Anadarko’s large natural gas position also drives a shift towards clearer hydrocarbons; adding to Oxy’s already credible sustainability push with a leading (25%) share in a Mozambique LNG mega project that will be supplying clean natural gas the energy-hungry, growing economies in India and Indonesia in particular. Anadarko already has contracts with Bharat Petroleum (BPCL) and Pertamina in place.
The rapidly accelerating digital transformation that is transforming upstream oil and gas is one of the big enablers making a merger of upstream assets of this scope efficient and sensible in today’s volatile environment. A merger such as Oxy – Anadarko ( or Chevron – Anadarko, whichever one prevails) becomes much easier to integrate faster and more fully, driving cross-fertilization of technologies, driving operational efficiencies, and providing agility in asset utilization as the global energy economics shift.
Buffett’s decision to come into this battle doesn’t secure the deal for Oxy – Chevron is certainly capable of beefing up its own offer for Anadarko if the company believes it makes financial sense. But this is a very bold move by Hollub, one that shows a seriousness of purpose and strategic creativity that leaves no doubt that her company is in this to win.