Leveraging the Best Deal for a Shale Oil and Gas Acquisition

Oil prices have been on the defensive, and some of the news that is priced into the potential increase in the Permian basin by either Occidental Petroleum or Chevron. These are large commodity trading opportunities. Currently, Anardo has a huge presence in that area of the United States, but its leverage to shale oil and gas is nowhere near the size of either Occidental or Chevron. This is why it makes sense for Anadark to sell itself, and why it also makes sense for one of the larger players to purchase them, at the right price.

Adding Partners

Occidental was pushed aside by Chevron after the oil major made a competing bid, which was accepted by Anadarko. To fend off the potential loss of a great asset, Occidental has reached a deal to sell Anadarko Petroleum’s oil and gas assets in Africa to French oil major Total for $8.8 billion. This is a contingent agreement based on Occidental first reaching an agreement to buy Anadarko and closing the deal. The announcement offers some clarity on how Occidental would fund its cash and stock purchase of Anadarko. Occidental had said it would seek to sell $10 billion to $15 billion worth of assets to underwrite the $38 billion proposed takeover of Anadarko.

Occidental is not fooling around and this is not a theoretical deal. According to sources, the deal with Total is a binding agreement, and the divestment of the African assets would happen at the same time Occidental closes a deal to purchase Anadarko.

Occidental is also lining-up some powerful partners. The company now has a commitment from Berkshire Hathaway to put up 10-billion in cash to bid for Anadarko Petroleum. The deal has some key terms that will provide very positive upside for Berkshire, but with this expensive cash, comes the cash of Warren Buffet and Charly Munger. Having this tag team on your side is a serious advantage. While the company will not overpay for the right to purchase Anadarko, Buffet and Munger have some deep pocket and current estimates show the company is looking to deploy more than 100-billion dollars that they are currently holding in cash.

The Permian Basin is the Key to the Investment

Occidental CEO Vicki Hollub has made no secret that the key to the purchase of Anadarko is the huge holdings in the Permian Basin. This is the main driver behind her company’s intense interest in making this acquisition. Most of Anadarko’s shale assets lie in the Permian’s western Delaware Basin. Given Hollub’s micro-focus on the shale, its unlikely that Anadarko’s significant Gulf of Mexico holdings will remain in the portfolio following a final deal.

What Does a More Efficient Shale Mean for Oil Prices?

Shale production has dominated US production, pushing daily volumes above 12.2-million barrels a day. These production levels would likely surge higher if either Occidental or Chevron, closed on a deal with Anadarko. This would likely generate higher volumes, which could put further downward pressure on West Texas Intermediate crude oil.