Should Occidental Just Try to Give Anadarko Back to Chevron?
There are good mergers, and there are not so good mergers. The reality is that big mergers often take years to unfold before real verdict can be made over whether they were successful or not. Occidental Petroleum Corp. (NYSE: OXY) paid up handily to acquire Anadarko Petroleum in a $55 billion enterprise value merger (or about $38 billion in equity value) which closed in August. There had been criticism about the competing merger over the price, and Occidental’s view that the combined company would drive significant value and returns for shareholders has not so far panned out. To prove the point, after earnings Occidental shares hit a 10-year low during the same week that the Dow and S&P 500 hit all-time highs.
It’s not realistic to think that a merger could be given a child’s “Do-Over!” call, at least not three months into the post-merger period. That said, there has been significant damage to shareholders here even when considering the ongoing woes of the oil and gas sector. The first combined earnings report comes with already dialed-down expectations.
Occidental’s shares the day before the merger closed (August 7) were trading at $45.20 after adjusting for the dividend. Its adjusted share price was $60.30 on the day before the merger was formally announced (April 23); and its dividend-adjusted share price was closer to $65 prior to making counter-offers against the proposed Chevron Corporation (NYSE: CVX) acquisition of Anadarko. While dollars and cents can be played around about when the companies were really in discussions and when the markets were aware of the merger news, Occidental is now trading under $40.00 per share.
Occidental Petroleum reported a net loss of $912 million in the third quarter, down from a profit of $1.87 billion in the third quarter of 2018. While $969 million in merger-related expenses and debt financing fees and an impairment charge, the adjusted earnings of just 11-cents per share was not even one-third of what analysts had expected. It’s hard to fathom that results were that bad considering that revenue of almost $5.7 billion was up 9% form a year earlier.
According to its earnings presentation, the third quarter’s oil and gas pre-tax income fell to $221 million from $726 million for the prior quarter. These results include a $285 million write-off of unproved domestic leases (where Occidental no longer plans to pursue exploration activities) and a $40 million impairment charge related to the mutually agreed-upon early termination of the Idd El Shargi South Dome contract in Qatar. Third-quarter results also include a mark-to-market gain of $75 million on its crude oil hedges, and the drop in third-quarter income reflects lower realized crude oil prices. The report said:
For the third quarter of 2019, average WTI and Brent marker prices were $56.45 per barrel and $62.01 per barrel, respectively. Per barrel average worldwide realized crude oil prices decreased by 4 percent from the second quarter of 2019 to $56.26 for the third quarter of 2019. Per BOE average worldwide realized NGL prices decreased by 17 percent from the prior quarter to $14.96 per BOE for the third quarter of 2019. The increase in average domestic realized gas prices to $1.25 per Mcf during the third quarter of 2019 was due to higher realized prices from legacy Anadarko gas-producing operations.
Total average daily production volume for the third quarter of 2019 was 1,155,000 barrels of oil equivalent. The shocker along with this week’s earnings report was that the outlook for 2020 is down about 40% to a range of $5.4 billion to $5.5 billion. The combined 2019 capital spending target was roughly $9.0 billion.
After a company makes such a large acquisition, does a commitment to de-leverage sound right? The new target for 2020 was barely higher than Occidental’s own $5 billion standalone target had it not acquired Anadarko. The company’s new production growth of 2% is also under its prior target of about 5%, and the newer 2019 to 2021 plan took the production growth down to 5% from a prior 10%.
Maybe cost cuts can save the day. Occidental’s merger synergies are expected to deliver cost savings of just over $600 million in onshore domestic operations, and about $500 million of that alone is from combining its assets in the Permian Basin.
When Occidental closed the merger in August, President and Chief Executive Officer Vicki Hollub said at that time:
We expect to deliver at least $3.5 billion annually in cost and capital spending synergies and the focus of our Board and management team is on execution to achieve the promise of this exciting combination. We look forward to updating the market on our continued progress in the months ahead.
Hollub’s statement along with this week’s earnings report after the combined quarter said:
I’m pleased to report that we are making significant progress with our integration of Anadarko. Our teams are working well together, and we continue to deliver outstanding operational results across our asset portfolio, positioning our company to fully execute on our value-capture initiatives. We remain committed to the strategy we laid out to our investors, which focuses on deleveraging and returning excess free cash flow to shareholders, as evidenced by $4.9 billion of third quarter debt repayments, including all 2020 debt maturities, and returning $600 million to investors.
Dow Jones noted that Occidental’s drop was the lowest close since November of 2008. That put shares down about 35% year-to-date. Meanwhile, Chevron’s shares were up more than 10% year-to-date, and this summer Chevron was paid a $1 billion breakup fee for terminating their planned merger with Anadarko.
Occidental’s shares were last seen trading down about 6% at $39.50 shortly before the close on Wednesday. That’s under its prior 52-week trading range of $39.97 to $75.79.
This may have been the last overly aggressive oil merger for some time. After adding this all up, it might make investors wonder if Chevron will be sending holiday cards out to Occidental’s management for saving them from a serious headache.