In an April 24 research note, Raymond James analyst Pavel Molchanov reported that in fact Occidental Petroleum Corp. (OXY:NYSE) has entered into a bidding war against Chevron Corp. (CVX:NYSE) for Anadarko Petroleum Corp. (APC:NYSE), a move that Raymond James describes "ill advised" but not a reason for investors to sell their shares now. That window has passed.
"We are emphatically not fans of this decision, but at the same time we do not envision risk to Occidental's dividend or its investment-grade status," Molchanov commented.
The analyst gave three reasons why Occidental's move is "not what we would have advised." First, the energy company doesn't need to acquire any entity of this size. Two, the two companies have few assets that overlap, though some cost synergies could be realized. Three, it is difficult for a company to wage a bidding war against a supermajor that is four times as large.
Molchanov noted, rated and played out the three possible scenarios going forward, that Occidental, Chevron or a possible unknown third party comes out on top.
The most likely scenario, with a 60% probability of happening, he indicated, is that Chevron winds up acquiring Anadarko. It makes sense because Chevron, versus Occidental, has a bigger balance sheet, can take on more debt and has more similar assets to Anadarko's. "We estimate that Chevron could sweeten its bid to as much as $78 per Anadarko share, which is $2 ahead of Occidental's bid, and still have it be earnings per share (EPS) accretive in 2020," Molchanov added.
Less likely, with a 30% chance, is that Occidental prevails. For one, its bid is hostile. However, Anadarko has shown that it is not just looking for the highest bid. Were this scenario to play out, it could have the following impact on Occidental, per Molchanov's calculations. "On our far above consensus 2020 price deck, we estimate EPS accretion near 20%," he noted. "At strip pricing, the picture is mixed: EPS dilution near 10%, albeit the cash flow per share comp would still be positive."
The least expected and far-fetched scenario, with 10% odds, is that a third player, most likely another supermajor, enters the battle and comes through victorious.
Regardless of the outcome, wrote Molchanov, "we think Occidental is oversold." Year to date, it is down whereas the index is up, 22%.
To reflect the "potential for near-term equity pressure and increased leverage," Raymond James lowered its target price on Occidental to $80 per share from $85 (current share price is around $61.84) but maintained its Strong Buy rating.
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Disclosures from Raymond James, Occidental Petroleum Corp., April 24, 2019
ANALYST INFORMATION
Analysts Holdings and Compensation: Equity analysts and their staffs at Raymond James are compensated based on a salary and bonus system. Several factors enter into the bonus determination, including quality and performance of research product, the analyst's success in rating stocks versus an industry index, and support effectiveness to trading and the retail and institutional sales forces. Other factors may include but are not limited to: overall ratings from internal (other than investment banking) or external parties and the general productivity and revenue generated in covered stocks.
The covering analyst and/or research associate owns shares of the common stock of Chevron Corporation.
The analyst Pavel Molchanov, primarily responsible for the preparation of this research report, attests to the following: (1) that the views and opinions rendered in this research report reflect his or her personal views about the subject companies or issuers and (2) that no part of the research analyst's compensation was, is, or will be directly or indirectly related to the specific recommendations or views in this research report. In addition, said analyst(s) has not received compensation from any subject company in the last 12 months.
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Certain affiliates of the RJ Group expect to receive or intend to seek compensation for investment banking services from all companies under
research coverage within the next three months.
Raymond James & Associates, Inc. makes a market in the shares of Occidental Petroleum Corporation, Anadarko Petroleum Corporation and Chevron Corporation.
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