In this thesis, I am going to value Anadarko using the Discounted Cash Flow (DCF) method and applying reasonable assumptions for post-merger synergy effects with Chevron. As validation for my forecast assumptions, which are based on predictions and trends from early 2019, I will include a summary of the overall Oil & Gas industry as well Anadarko’s and Chevron’s positioning alongside the different stages of the value chain. To estimate my cost of capital I will apply the WACC method instead of APV, using the cost of equity and cost of debt as input factors, together with a terminal growth rate instead of an approach with exit multiples. In order to determine how sensitive my results are concerning key input variables like the Weighted Average Cost of Capital (WACC) or the terminal growth rate I will also run a sensitivity analysis. Lastly, I will talk about the synergy estimates used in my calculations and bring them into context with my DCF calculations in order to determine if the transaction would create value for shareholders on both sides of the deal.
Although my calculations ultimately lead me to the result that the price originally offered by Chevron was fair, both in regards to Anadarko’s share price prior to the deal announcement as well as the intrinsic value determined by my DCF, the deal would not have benefited shareholders on both sides equally. While Anadarko’s shareholders would have gotten an immediate double-digit price increase, Chevron shareholders would have lost value with the acquisition, despite my calculations including significant synergies of roughly $1bn per year. The goal of my thesis, however, is not only to describe the assumptions, calculations and results of my DCF analysis, but to also bring them into a wider context.
On 12th April 2019 Chevron Corporation announced that they have agreed to acquire all outstanding shares of Anadarko Petroleum Corporation for a total consideration of $65 per share. This marked the first major transaction announcement for quite a while in the Oil & Gas (O&G) industry, which previously saw stock prices near their 10-year lows. Despite a good initial reaction from Anadarko’s shareholders, Chevron ended up missing out on the deal, with Occidental Petroleum Corporation, a close peer of Anadarko, buying the company for $76.67 per share.
Table of Contents
1.0 Introduction
2.0 Industry analysis
2.1 Company and Industry at a glance
2.2 Industry outlook
2.3 Firm Value Drivers
3.0 DCF Valuation
3.1 Forecasts
3.2 Choice of DCF methods
3.3 Leverage and Tax rate
3.4 Cost of Equity
3.5 Cost of Debt
3.6 Valuation results
4.0 Sensitivity analysis
5.0 Synergies
6.0 Value Creation
7.0 Conclusion
Research Objective & Focus Areas
The primary goal of this thesis is to evaluate the fair value of Anadarko Petroleum Corporation using a Discounted Cash Flow (DCF) model and to determine whether the acquisition offer by Chevron Corporation was economically justified for shareholders on both sides. The thesis analyzes if the projected synergies and intrinsic valuation metrics support the acquisition price in the context of the Oil & Gas industry landscape.
- Industry analysis of the Oil & Gas sector and its key firm value drivers.
- Comprehensive DCF valuation including cost of capital and terminal growth assumptions.
- Assessment of potential post-merger synergies and their impact on transaction value.
- Sensitivity analysis of key input variables to validate model robustness.
- Comparison of intrinsic value against the offer price to determine shareholder value creation.
Excerpt from the Book
2.3 Firm Value Drivers
Overall the value drivers of companies engaged in the E&P industry can be narrowed down to three main aspects. The most important one is the oil and also gas price, as it directly impacts all of the firm’s current and near-future revenue positions, which trickles right down to an increased FCF and therefor a higher valuation. Another important variable are the proven reserves, as the company has to be able to supply the market with oil for many years to come. High reserves can lead to a higher perpetual growth rate assumption and would also increase the mid- to longterm revenue forecasts. Lastly technical innovations, like the introduction of oil extraction via Fracking in the past, can have a huge impact on the cost-side of the companies. Cheaper ways to produce oil would further reduce the operating costs and therefore lead to an increased cashflow, but it could also help reduce the massive Capital Expenditure spending that is currently necessary to explore new locations for their potential oil reservoirs. Lower costs would also lead to a lower profitability barrier, reducing the risk of the companies folding under pressure from OPEC price cuts, demand shocks and other external and macroeconomic influences.
Summary of Chapters
1.0 Introduction: This chapter provides an overview of the acquisition context, the research motivation, and the methodology used to assess the transaction fairness.
2.0 Industry analysis: This section explores the positioning of Anadarko within the Oil & Gas value chain and examines the macroeconomic growth drivers and industry-specific risks.
3.0 DCF Valuation: This chapter details the quantitative valuation process, including revenue forecasts, cost of capital calculation (WACC), and the determination of the fair value per share.
4.0 Sensitivity analysis: This part tests the robustness of the DCF model by analyzing how fluctuations in WACC and terminal growth rates affect the overall enterprise value.
5.0 Synergies: This chapter discusses the estimated operational and capital expenditure savings resulting from the potential merger between Chevron and Anadarko.
6.0 Value Creation: This section concludes on whether the transaction effectively generates value for shareholders of both the acquiring and the target company.
7.0 Conclusion: The final chapter summarizes the findings, confirming that while the offer was fair for Anadarko shareholders, it potentially led to value destruction for Chevron.
Keywords
Anadarko, Chevron, DCF Analysis, Valuation, Oil & Gas, E&P, WACC, Cost of Capital, Synergies, Merger and Acquisition, Fracking, Enterprise Value, Sensitivity Analysis, Shareholder Value, Commodity Prices
Frequently Asked Questions
What is the primary focus of this thesis?
The thesis focuses on performing an independent DCF-based valuation of Anadarko Petroleum Corporation to evaluate the fairness of the acquisition offer made by Chevron.
Which valuation methodology is primarily applied?
The author uses the Discounted Cash Flow (DCF) method, specifically employing the WACC (Weighted Average Cost of Capital) approach to discount forecasted free cash flows.
What are the key value drivers identified for the E&P industry?
The key drivers identified are commodity prices (oil and gas), the volume of proven reserves, and technical innovations like fracking that influence the cost structure and capital expenditure requirements.
How is the cost of capital estimated?
The cost of capital is determined using the WACC formula, incorporating the cost of equity (derived via CAPM) and the cost of debt (based on the model of Merton and credit ratings).
Does the author conclude that the transaction creates value?
The author concludes that while the deal is beneficial for Anadarko shareholders due to the high premium, it appears value-destructive for Chevron shareholders.
Why did the author choose a 30-year treasury bond for the risk-free rate?
The author argues that the 30-year bond better aligns with the long-term investment horizon of the company and its terminal growth assumptions compared to the 10-year maturity.
How does the sensitivity analysis influence the final result?
The sensitivity analysis demonstrates that the DCF results are robust, as even with variations in key inputs like WACC, the valuation remains consistent within a reasonable range.
What role do synergies play in the valuation?
Synergies are incorporated to see if operational and capital expenditure reductions can justify the acquisition price, though the author suggests the management's estimates were quite optimistic.
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- Dominik Heller (Autor:in), 2020, The Acquisition of Anadarko by Chevron. Discounted Cash Flow Analysis, München, GRIN Verlag, https://www.grin.com/document/1011639
