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Anadarko’s $24.3 billion blockbuster Kerr-McGee, Western Gas acquisitions would turn Anadarko into the largest U.S.-based exploration and production independent Ray Tyson For Petroleum News
Anadarko Petroleum’s pending $24.3 billion takeover of fellow exploration and production independents Kerr-McGee and Western Gas Resources left industry observers wondering whether Anadarko is biting off more than it can chew.
The all-cash offers, coming on the heels of other high-profile mergers, including ConocoPhillips’ $35.6 billion takeover of U.S. gas producer Burlington Resources, would more than double Anadarko’s market value and replace Oklahoma’s Devon Energy as the largest U.S.-based E&P independent.
The agreement includes a right to match competing offers and a break-up fee of $493 million “to be paid under certain circumstances,” Anadarko said without elaborating, adding that it expects the mergers to close in this year’s third quarter.
“We are creating a combined company with industry-leading positions in the deepwater Gulf of Mexico and the Rockies, two of the fastest-growing oil and natural gas producing regions in North America,” Jim Hackett, Anadarko’s chairman and chief executive officer, touted in a June 23 statement announcing the blockbuster deal.
However, if the transactions are approved by shareholders and government regulators, Anadarko’s debt would rocket to around 67 percent of its market capitalization, an uncomfortable financial position even in today’s robust oil and gas price environment. Hackett attempted to calm investor jitters.
“We are committed to maintaining our financial discipline and returning to our target debt ratio of 40 percent or less,” he said during an analysts’ conference call explaining the deal. To protect its investment against commodity price volatility, he added, Anadarko plans to hedge up to 75 percent of its acquired production through late 2008.
Anadarko said it would finance the acquisitions through a $24 billion, 364-day credit facility provided by UBS, Credit Suisse and Citigroup. Anadarko said it would pay down the debt over an 18 to 24 month period through a combination of equity issuance, cash flow and proceeds from the sale of non-core properties inherited from Kerr-McGee and Western. Anadarko said some of its own properties could be included in the property divestiture program.
“There are no sacred cows,” Hackett said.
Canadian assets on the block Just five days after Hackett’s “no-sacred-cows” remark, Anadarko said it was putting all of its Canadian assets up for sale, using proceeds from the this sale to help pay down debt incurred from the Kerr-McGee and Western acquisitions.
Anadarko said it expected the Canadian divestiture to proceed quickly, because the company had already “received unsolicited expressions of interest from multiple parties.” Anadarko Canada produces about 340 million cubic feet of gas equivalent per day, roughly 85 percent of which is natural gas. Year-end 2005 proved reserves totaled nearly 1.6 trillion cubic feet of gas equivalent.
“Properties like ours are in high demand in Canada right now, attracting valuations significantly above those reflected in our stock price,” Hackett said in a June 28 statement.
He added that Anadarko decided not to wait until after the Kerr-McGee and Western acquisitions to close before launching its divestiture program, “since we expect to divest certain assets that are part of the current Anadarko portfolio.”
Still, Anadarko has provided little information about the remaining assets to be sold, leaving investors in a financial lurch over a critical element of the deal. Anadarko is a major leaseholder on Alaska’s North Slope, where relative newcomer Kerr-McGee was expected to sanction development of its offshore Nikaitchuq oil discovery northeast of Prudhoe Bay. Bill Van Dyke, acting director of the Alaska Division of Oil & Gas, is concerned the pending mergers might delay Anadarko-Kerr-McGee projects on the slope. (See story with map, page 1.)
$70.50 per Kerr-McGee share Under terms of one transaction, Anadarko agreed to acquire Kerr-McGee for $16.4 billion in cash or $70.50 per Kerr-McGee share, plus the assumption of net debt and other liabilities estimated at $1.6 billion. This transaction represented a highly attractive 40 percent premium to the price of Kerr-McGee shares prior to announcing the deal on June 23.
“This compelling offer ... immediately recognizes the value of Kerr-McGee’s strategy and assets for our shareholders,” said Luke R. Corbett, Kerr-McGee’s chairman and chief executive officer. “The merger with Anadarko combines two companies with similar strategies.”
Anadarko also agreed to acquire Western for $4.7 billion, or $61 per Western share, plus the assumption of debt and other liabilities estimated at $600 million. This deal represents an even more attractive 49 percent premium to the price of Western shares prior to the announcement.
“This transaction allows Western’s stockholders to realize substantial and immediate value at an attractive premium,” said Peter Dea, Western’s president and chief executive officer. “The board of directors and Western’s entire management team … believe that Anadarko’s offer is indicative of our success.”
Analysts see good fit Despite Anadarko’s colossal debt and lack of key information about the company’s planned asset sales, industry analysts generally hailed the acquisitions as a good fit with Anadarko operations, particularly in the Gulf of Mexico and the gas-rich Rocky Mountain region.
Kerr-McGee is among the more successful deepwater players in the U.S. Gulf when it comes to finding oil and gas and developing ground-breaking technologies in offshore platform design. One-third or 269 million barrels of the company’s 2005 year-end oil-equivalent proved reserves are located in deepwater Gulf.
“We will clearly be the premier independent operator in the Gulf of Mexico, and we’ll rival the majors in terms of acreage, skills and commercial results,” Anadarko’s Hackett claimed, noting that Kerr-McGee’s resource potential in the region is “closer” to 650 million barrels of oil equivalent.
“Many of these projects are in the process of ramping up or coming on production, so they represent very substantial near-term volume growth,” he said, adding that Anadarko and Kerr-McGee natural gas production to be funneled through the future Anadarko-operated Independents Hub alone would amount to 500 million cubic feet per day by year-end 2007.
Kerr-McGee has 504 deepwater blocks Kerr-McGee’s Gulf assets include 504 deepwater blocks, encompassing seven operated and three non-operated producing fields, three operated and five non-operated discoveries in varying stages of development, and four additional prospects that were scheduled to be drilled this year.
Similarly, Kerr-McGee’s long-lived natural gas resource plays in Colorado and Utah, along with Western’s position in Wyoming, would combine with Anadarko’s assets “to make us one of the largest producers in several of the most prolific basins in the Rockies,” Hackett said.
In addition to its extensive U.S. portfolio, Kerr-McGee produces oil and is continuing to develop and explore offshore China, has made discoveries and is pursuing the development of fields offshore Brazil, and is exploring offshore Australia, West Africa and the islands of Trinidad and Tobago.
Kerr-McGee’s total resource contribution to the new Anadarko, excluding divestitures on the Gulf’s continental shelf, amounted to year-end 2005 proved reserves of 898 million barrels of oil equivalent, of which about 62 percent was natural gas. Proven undeveloped reserves represented 30 percent of the total. The company’s 2006 production is expected to be about 92 million barrels of oil equivalent.
Western’s year-end 2005 proven reserves totaled 153 million barrels of oil equivalent, with proved undeveloped reserves representing 57 percent of the total, while 2006 production is expected to total about 12.5 million barrels of oil equivalent. Essentially all of Western’s reserves and production are natural gas. Anadarko said it expects to ultimately recover about 705 million barrels of oil equivalent production on the Western properties.
Including the acquisition and future development costs, Anadarko said it expects to ultimately recover 3.8 billion barrels of oil equivalent from the Kerr-McGee and Western properties at less than $12 per barrel, another noteworthy achievement in today’s high price environment.
As of year-end 2005, Anadarko had proved reserves totaling 2.45 billion barrels of oil equivalent. The company’s operational focus in North America extends from deepwater Gulf, up through the western United States and Canadian regions and into Alaska. Its international activities are focused on major positions in North Africa, the Middle East and Indonesia, as well as exploration or production operations in several other countries.
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