Chevron becomes a hidden gem in the Anadarko case – The Motley Fool

The main reason Chevron (NYSE: CVX) pays $ 50 billion to acquire Anadarko (NYSE: APC) will consolidate its leadership position in the Permian fast-growing basin. The additional benefit is that the agreement will also strengthen the presence of the oil giant in the Gulf of Mexico, add a convincing liquefied natural gas (LNG) project in Mozambique and give it a significant position in two shale areas in the Gulf of Mexico. the Rocky Mountains.

With the focus on oil and gas properties that Chevron will acquire, most investors are probably unaware of another gem that the oil giant would get in this deal: Anadarko's 55% stake in West current (NYSE: WES). The addition of Western Midstream would strengthen Chevron's mid-market business, which could increase the long-term value created by this merger.

Spotlight on the midstream

As an integrated oil and gas company, Chevron operates across the value chain. However, most investors know the company for its upstream production activity, while many consumers are aware of its downstream retail activities. Few people know much about the mid-term activities of Chevron Pipe Line. This entity operates approximately 3,000 miles of pipelines carrying more than 1.2 million barrels of oil, refined products and chemicals per day. The company also has sufficient storage capacity to hold about 2.6 million barrels of products. These assets support Chevron's upstream and downstream operations by transferring hydrocarbons from production basins to end-users.

While Chevron has stepped into midstream activities in its global oil and gas empire, Anadarko has worked hard to showcase the value of these assets. This led the company to form a limited partnership more than a decade ago to help stimulate the growth of the median sector. Anadarko has gradually divested its intermediate assets to this entity, which has unlocked value while providing the company with an injection of funds. The MLP also acquired several assets from third parties and built a new infrastructure to support the growth of Anadarko and other producers.

Today, Western Midstream holds interests in more than 12,700 kilometers of pipelines in the Rockies, Texas, New Mexico and Pennsylvania. It also operates natural gas processing plants and other intermediate assets. Long-term fee-based contracts underpin the bulk of these assets, which provide predictable cash flows to Western Midstream. The company returns more than 80% of this money to investors – including the majority owner Anadarko – through its high yield distribution.

Several ways to win this jewel

One of the benefits that Chevron will get by assuming that 55% stake in Anadarko in Western Midstream resides in a constant cash flow via the distribution of the MLP. This revenue stream is expected to increase as Western Midstream continues to expand its footprint.

Another benefit will be a mid-market competitive advantage in the Permian Basin to more effectively support Chevron's growth. Western Midstream operates natural gas, crude oil and water collection systems that manage Anadarko production in the rapidly growing region. These assets reduce operating costs and guarantee market access for the production of the company. Due to its majority stake in Western Gas, Anadarko controls the construction of infrastructure that meets its needs. Chevron can take advantage of this by ensuring that Western Midstream develops similar assets in its field position in the region.

Chevron could also follow ExxonMobilof (NYSE: XOM) the mid-term master plan by helping to push the longest pipelines back to the finish line. Exxon is working with several mid-market companies in the region to build pipelines and pipelines to reduce bottlenecks. The oil giant is not content to commit to capacity on the lines but is investing money to build them.

Finally, Chevron could use Western Midstream as a financing vehicle. On the one hand, it could follow Anadarko's approach and dispose of its intermediate assets to this entity. This would allow the company to retain control of these assets while freeing up the capital to reinvest it elsewhere or return it to shareholders through its buyback program. Another option would be to give up some of his interests in the company.

A beautiful van

In purchasing Anadarko, Chevron's main goal is to strengthen its upstream oil and gas business. However, the operation has the bonus of strengthening its mid-term operations. Investors should not neglect this aspect of the transaction, as Western Midstream will bring several financial and operational benefits. This increases the likelihood that Chevron's bold gamble will create significant value for its investors in the years to come.