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That Is A Big Deal

12 April 2019 by jbchevrel

In a decently risk-on session (CDX IG -2.8 CDX HY -8.9 SPX @ 2,900), the CDS of Anadarko Petroleum Corp. (APC) outperformed the broader market, tightening by c65bp. Bonds are also 75-100bp tighter. That is because the oil giant Chevron Corp. (CVX) agreed to buy APC. The equity is valued $33B, which will be paid in stocks and cash (75/25: 0.3869 CVX shares and $16.25 in cash per APC share). That is a 39% premium therefore APC share soared towards the offer price (+23% on day). The transaction is expected to close in 2H19. CVX management doesn’t expect any regulatory issues. From a credit standpoint, CVX will assume $15B net debt from APC, making APC EV c$50B. CVX will issue 200M shares and pay $8B in cash. A very tight name, CVX widened 6bp to 33bp mid, making the APC/CVX spread tighten 71bp, from +70bp to -1bp! CVX is not really a story for credit. Indeed, CVX has c$9.4B cash on hand and past experience proves that it generates $8B+ FCF per year at $50-55/bbl crude (vs now WTI $64), so it looks unlikely that they will fund the non-share cash part (c$8B) with debt. And even in the unlikely event it would do that, the combined leverage would be somewhere around 1x. Adding to this point, the news that 1/ CVX expects to realize $2B synergies (proceeds partly used for debt reduction) 2/ CVX plans to sell $15-20bn of assets in 2020-2022 confirms that CVX credit is not in trouble anytime soon. Therefore the consensus expects CVX to keep its current rating (AA/Aa2), while APC will converge to CVX from its Ba1/BBB, although we don’t know if CVX will explicitly guarantee them. CVX aside, this news dragged all the US/Canada IG energy tighter, with Hess -22 Devon -15 Encana -13, partly because the market knew APC was a target and consolidation was expected. This acquisition shows the importance of size in this business, where the biggest and the most diversified players do well.