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Fuelling the M&A pipeline in US oil and gas

Two oil and gas companies, Chevron and Occidental, recently submitted proposals to acquire their peer Anadarko. Audra Stundziaite, Deputy Head of Credit Research at Hermes Investment Management, explores the theme of consolidation in the energy sector and asks: will the deal presage a new buying spree in the Permian Basin?

A wave of M&A activity has been expected in the US oil and gas industry for some time. However, until the recent Chevron-Anadarko announcement and subsequent bid from Occidental to also acquire Anadarko, a lack of deal activity in the sector prompted investors to question the consolidation theme.

On 12 April, oil major Chevron announced its intention to acquire US exploration and production company Anadarko, for an enterprise value of $50bn1. The deal values the equity at $33bn, which Chevron will fund with shares ($25bn) and cash ($8bn)2 – and it is the first large M&A deal from a major integrated oil company since the decline in crude prices began in 20143. Subsequently, on April 24th, Occidental made an offer for Anadarko for a total enterprise value of $57bn, with an equity portion valued at $38bn. We are yet to find out whether Chevron will make a counter-offer.

The importance of scale in an industry inherent with cash flow volatility
The acquisition of Anadarko would help both companies to substantially strengthen their operating portfolio by adding more than 10bn barrels in the Permian Basin, deep-water Gulf of Mexico and Anadarko’s Mozambique LNG project.

Pending on the ultimate outcome of the transac