CVX announced an acquisition of APC last Friday, and media reports have indicated OXY was also a bidder – driving substantial investor interest in the company’s strategy. We have spoken with OXY’s management, and highlight our key takeaways and view on the situation.
Last Friday morning, CVX announced an agreement to acquire APC at $65/share (details here). Within a few hours, CNBC issued an unconfirmed report that OXY had also bid, at a higher price. Subsequent headlines have indicated that the reported offer was in the mid-$70 range with 40% cash. In response, we have received numerous investor questions on OXY’s strategy – both in this deal, and more broadly. The companies expect the CVX/APC transaction will close in 2H19 with the announced terms, and we continue to believe that new competing bids (from OXY or others) will not materialize. We spoke with OXY’s CFO, Cedric Burgher, this past Monday, and highlight four key takeaways:
- Unchanged corporate strategy. Oxy remains focused on high return organic investments with the goal of delivering industry leading returns to investors (both on and of capital) and sustainably growing the dividend. Given a robust set of organic opportunities, the company does not need M&A to accomplish this core strategy. That said, management will be opportunistic, and may pursue acquisitions that would further these goals through attractive assets and clear synergies.
- Attractive organic growth opportunities. OXY’s existing portfolio offers attractive growth opportunities anchored by its large Permian position, supplemented by low-decline investments in enhanced oil recovery and international assets, such as its position in Oman. Longer term, OXY’s Low Carbon Ventures unit could drive some growth, while also providing the company with a differentiated sustainability focus.
- Committed to sustainable dividend growth. Management remains committed to supporting its dividend, and reiterated that it can be organically funded within operating cash flow down to $40/bbl WTI by reducing growth capex. OXY’s target is to sustainably grow this dividend over time, and any acquisition opportunity would need to support this goal.
- Strong capabilities in shale & large capital projects. Management believes the company is a leader in shale and subsurface characterization, as can be seen in its industry leading well productivity in the Permian. While OXY does not have a desire to get into the LNG (liquefied natural gas) business, it does have a strong track record in large capital projects (such as chemicals investments and gas processing). Lastly, OXY currently has limited offshore exposure, but management highlighted that the company has been in the deepwater Gulf of Mexico in the past and retains the capabilities to manage offshore investments. These strong capabilities could all be leveraged to add value in any potential acquisition.
How would APC fit with this strategy? Management has not commented on media rumors around its involvement in the APC sale process. That said, APC does offer some characteristics that would line up with OXY’s goals: high quality assets with a core focus in shale plus strong free cash flow that would support the dividend. On our estimates, organic dividend coverage is tight over the next few years. A hypothetical deal at the rumored price (mid-$70s with 40% cash) would be accretive to dividend cover at $65/bbl Brent, on our math, but push leverage to relatively high levels if no assets are sold as part of the process. There are few companies that offer similar characteristics to APC (shale + cash flow), but NBL stands out within our coverage as one that does. We evaluate hypothetical accretion of potential combinations in this note, but as we stated above – OXY does not need to engage in M&A.
We do not expect new competing bids for APC to materialize, from OXY or others. Strategically, CVX is the most logical acquirer, in our view, with the stock portion of the consideration allowing APC shareholders to participate in future upside. Similarly, investor feedback on the announced transaction has been broadly positive. Furthermore, APC’s board has already approved the terms of the deal, and the associated $1 B breakup fee adds an incremental headwind for any other interested parties. We see limited ability for OXY to offer a price much above $75/share without needing more than 60% equity or material asset sales.