Major news was reported by Chevron Corporation (CVX) last week when the energy company said it would acquire all the outstanding shares of Anadarko Petroleum Corporation (APC) in a deal worth $ 33.0 billion. The transaction is a major part of Chevron's shareholders because the acquisition increases the company's core strengths and points to production and free cash flow growth ahead.
On Friday, Chevron said it would acquire Anadarko Petroleum in a stock-and-cash deal that appreciates the $ 65 / share slate company (reflecting a premium premium of ~ 39 percent). Anadarko Petroleum's share price rose by 32 percent on Friday and closed at $ 61
As regards the terms of the transaction, the agreement will be executed as a share and cash agreement with the majority of the consideration coming in the form of Chevron shares (75 percent) and the remainder (25 percent) in cash.
Source: Chevron Corp. Investor Presentation
The acquisition is expected to be accretive to Chevron's operating cash flows, free cash flows and earnings. In addition, Chevron expects to raise $ 2 billion annually in acquisition synergies starting one year after the transaction closes.
Source: Chevron Corp.
The proposed transaction not only has economic benefits for Chevron, but also strategic sense for the company because it plays to its core strengths and will support production growth. Acquiring Anadarko Petroleum's assets will strengthen Chevron's position in the fast-growing Permian Shale Theater and expand its high-margin deep-sea drilling capabilities in the Gulf of Mexico. In addition, Anadarko Petroleum's Mozambique LNG project will be a good form of Chevron's existing LNG platform.
Source: Chevron Corp.
Yield Growth and Buybacks
In my last article on Chevron titled "Chevron Corp.: This 4.0% -Value Top-Notch Energy Company just increased its dividend by 6.3%," I recommended the energy company for investors Due to its strong value proposition and yield growth in both good and bad times: Chevron has consistently grown its payout over the last energy carrier market from 2014 to 2016, which is a high quality income vehicle property. The company also raised quarterly cash dividends in January from $ 1.12 / share to $ 1.19 / share, which was an increase of 6.3 percent.
The proposed acquisition of Anadarko Petroleum points to (free) cash flow growth one year after the transaction closes, even though the energy company has not yet provided a specific guidance. In any case, increased exposure to the Permian Theater and an improved LNG resource base will further support Chevron's generation of excess money that can be used to grow profits and buy back.
The company has said it due to expected growth in the FCF related to the acquisition, it plans to increase its shares repurchase from $ 4 billion to $ 5 billion annually after the transaction closes.
Chevron's share price declined after the transaction was announced, which is nothing unusual: the acquirer's share of the price often falls after a transaction announcement because the acquiring company often pays a significant premium to gain control over the target assets .
Chevron's shares fell 4.94 percent on Friday.
Today, Chevron's shares sell at 14.6x next year's expected profits, which is the lowest future earnings more in its peer group. However, the company's earnings and cash flows are likely to boost if the transaction closes, further enhancing CVX's value proposition.
Downside / Upside
There are two main risk factors here:
- The transaction cannot be closed if shareholders do not approve the transaction , which, in my opinion, is not likely.
- A larger price Crash corresponding to the market decline in 2014 may adversely affect the value profile here and void the deal economy.
However, a continued rise in price realization supports the investment deal, as higher prices immediately benefit companies that have significant upstream businesses, like Chevron.
The acquisition of Anadarko Petroleum is not a game changer for Chevron, but the deal economy looks good and is attractive to shareholders. If the transaction closes, Chevron has earnings and (free) cash flows upwards that can trigger a reassessment of the company's valuation on the market. Chevron will also buy back several shares and have a real shot at increasing its yield on a fast-paced forward. Strong Purchase for Income and Capital Assessment.
Disclosure: I am / we are long XOM, COP. I wrote this article myself and express my own opinions. I do not receive compensation for it (except from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.