How to play oil stocks after the Chevron-Anadarko deal.



By moving to buy
Anadarko Petroleum

for $ 33 billion,
Chevron

made a smart decision – and yet was punished by Wall Street.

His shares closed close to 5% Friday. And unfortunately for Chevron (ticker: CVX), it is likely that investors will continue to avoid equities, at least in the short term.

The agreement, however, is generating new interest for other companies whose inventories have been dormant for months, even as the price of crude oil has risen.

Drillers sitting on oil-rich land and offshore assets are now poised to outperform. This includes the big names in America such as
Diamondback Energy

(CROC)
Concho Resources

(CXO), and
Noble Energy

(NBL). Among them, we are the most optimistic about Diamondback, whose precious land located in the Permian fast growing basin and its intelligent management of capital should interest investors or even a buyer.

Chevron buys Anadarko (APC), a global oil and gas producer, for $ 65 a share, a 39% premium over Thursday's closing price. The transaction values ​​Anadarko's equity at $ 33 billion, or $ 50 billion in enterprise value. Chevron will pay 75% of the cost in stock and 25% in cash.

The logic of the transaction makes sense. This 39% premium may seem relatively steep, but Anadarko was trading above $ 70 last October. By buying Anadarko, Chevron will increase its daily production to 3.6 million barrels, just under
Exxon Mobil
of the
(XOM) 3.8 million barrels. Anadarko's oil assets are in areas where Chevron is already well established, which will allow the company to expand in critical areas.

This agreement makes Chevron the second largest player in the market after the conchos in the Permian Basin, the country's most productive oil field, according to IHS Markit. Chevron will now control a 75-mile land mass in the heart of the basin.

"You plan to drive 100 km / h for an hour and you've been in our business from the beginning," said Chevron CEO Michael Wirth. Barron. "This area is layer by layer, layer by layer, of this shale. And we are currently recovering only 10% of the hydrocarbons in this area. "

Anadarko also holds valuable assets in the Gulf of Mexico. A promising development of Anadarko-controlled natural gas in Mozambique will help Chevron grow further in liquefied natural gas and a much lower cost of capital.

But energy investors have little patience for acquisitions right now. Large oil stocks are considered stable income investments, not growth drivers, and are valued for cash.

Chevron has a dividend yield of 4% and won applause for limiting its spending and not spending a lot of money. This discipline allowed his stock to increase by 16% until Thursday. The last thing Wall Street wants is that the company spends money that could be returned to shareholders. Yet Chevron will partially finance the acquisition by issuing 200 million shares and assuming a net debt of $ 15 billion.

So why do that when investors clearly want the opposite?

CEO Wirth believes the deal will increase the company's annual cash flow, which will allow it to buy even more shares – $ 5 billion a year instead of $ 4 billion.

"We are issuing shares that we have bought back over the last decade at a price of about $ 100 per share, and we are issuing them as money at a much higher price. We benefit, "he says.

"We will have the ability to distribute new distributions to shareholders as a result of this transaction, and we will have the ability to sustain them during the ups and downs of the commodity price cycle."

Even with the return of capital promised, investors might not reward Chevron in the short term. Those who love the Chevron business may be better served to buy Anadarko, which grew by 32% at the announcement of the agreement but which, at $ 61.78, still traded below the price of the operation .

Holders of Anadarko will hold approximately 9% of Chevron's capital if the agreement is concluded. And it is always possible that another buyer is investing to offer a higher bid.

The potential for further trading represents an opportunity for investors.

Other major oil companies might feel compelled to make acquisitions to keep pace with Chevron. And while other deals are not forthcoming, discussions of market acquisitions tend to keep the sector's inventories up for months, said David Heikkinen, CEO of Heikkinen Energy Advisors.

Other shares considered potential acquisition targets advanced on Friday, including Concho, Diamondback and Noble. But even after gains of more than 6% each, they always look cheap.

This is because investors shunned the sector over the last three months despite rising oil prices. the
SPDR S & P Exploration and production of oil and gas

exchange-traded funds (XOP) rose 6.8%, while the West Texas benchmark rose 24% to $ 63.89 per barrel.

Oil analysts say investors do not believe that drilling companies are smart in using their cash and want them to generate more cash. Heikkinen agrees that investors are right to be wary of this cyclical industry.

Nevertheless, the three US companies we have identified are currently in a favorable position. Concho is the largest producer of the Permian and has "significantly underperformed" the market after buying a company called RSP Permian last year. Noble is attractive because its offshore gas field project at Leviathan will help the company become positive in terms of free cash flow by 2020.

And Diamondback has been one of the most conservative companies balancing its expenses while continuing to acquire significant holdings in the oil and gas sectors. Its production is the fifth largest in the Permian, an asset that other companies will clearly pay.

"Diamondback has less risk [of overspending] in the first half, check the box as a take-away candidate, owns mineral resources and intermediate assets, and also has a significant size: a company worth $ 20 billion in terms of value of The business is significant for a major company, "says Heikkinen.

Diamondback is also cheaper. It has an enterprise value of 6.9 times earnings before 2019 estimated before interest, taxes, depreciation and amortization, against 7.2 times for Noble and 8.2 times for Concho. Chevron is rated at 6.2 times.

The deal with Anadarko may take some time to help Chevron's shares, given investors' interest in their expenses. But it gave a shock to the oil drillers, and it could last.

"I think they're going to fill some of the evaluation gap." [of the drillers], Says Heikkinen. "There will be a thesis for at least a few months that [other big oil companies] will be afraid to miss. "

Write to Avi Salzman at [email protected]


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