Chevron's Shelf Registration Could Signal Acquisition

In a research note published today, Oppenheimer speculates that a recent shelf registration by Chevron CVX could be a signal the company is ready to make a large acquisition. Due to slowing oil production and a cash hoard that is the industry's largest at $22 billion, Chevron is no stranger to acquisition speculation. "With $22 billion in cash, the largest in the industry--double its debt and 10% of its market value—we are intrigued by the company's recent shelf registration, which leads us to think that CVX may be prepared to make a large acquisition of a highly leveraged company and needs the additional cash to wipe out this high cost debt," said Oppenheimer in the note. The shelf registration does not say exactly how much debt Chevron could sell. Nor does it explicitly say the proceeds from bond sales will be used to fund acquisitions. What is obvious, however, is that Chevron's strong balance sheet combined with a favorable interest rate environment mean the company potentially go after a leveraged rival and erase the target's debt at low rates. Chevron's third-quarter output slid due to a refinery outage in California and the loss of production due to legal woes in Brazil. At this juncture, Chevron does not know for certain when it will be able to operate in Brazil again. With the specter of losing access to South America's second-largest oil market and declining production in other markets, the California-based company may feel compelled to pull the trigger on a large purchase. However, the pool of legitimate candidates is rather slim. No Gas As Oppenheimer notes, "Chevron has the highest exposure to crude oil prices as well as the highest unit profit among its peers of major oil companies." Oil production is more profitable than natural gas production and with Chevron already benefiting from its reduced gas exposure relative to a rival such as Exxon Mobil, there is no need for the former to bolster its gas position. Following comments from CEO Aubrey McClendon that Chesapeake Energy CHK will not be able to pull as much oil from the Utica Shale in Ohio as previously thought, that controversial company is suddenly less alluring as an outright takeover target. Chesapeake, the second-largest U.S. natural gas producer behind Exxon, has been working to boost oil production and the Utica Shale was seen as essential to that plan. Utica still offers plenty of gas opportunities, but that is not what Chevron or any other U.S.-based acquirer will be looking for. To that end, any other gas-rich independent such as Cabot Oil & Gas COG and Range Resources RRC can likely be taken off Chevron's shopping list as well. Chevron recently purchased 246,000 Permian Basin acres from Chesapeake, so it may not see the need to acquire the company outright. Make A Splash Chevron, often admired by peers for its prudence, does not necessarily need to make a splash when it comes acquisitions. The second-largest U.S. oil company has made two new major gas discoveries at crown jewel Gorgon Field in Australia over the past several years. The company also announced new discoveries in Africa. Africa may be a high-risk destination to Western oil producers, but it is also viewed as one of the last great frontiers of untapped oil reserves. However, with $22 billion cash, Chevron has double the cash that it has debt. That enviable cash position implies the company can take some chances when it comes to acquisitions. The shelf registration implies Chevron might be willing to take on a bride with a less than pristine financial situation. Enter Anadarko Petroleum APC. The second-largest U.S. independent oil and natural gas producer has been mentioned as a possible target for Exxon. One analyst has speculated the takeover price for Anadarko could be as high as $52 billion. If Exxon and its $18 billion in cash could move on Anadarko, so could Chevron with $22 billion in cash. Last month, Bloomberg reported Anadarko's reserve replacement ratio last year was 148 percent compared to just 107 percent for Exxon. The company had total reserves of 2.5 billion barrels at the end of 2011 and is targeting 3 billion by the end of 2014. Like Chevron, Anadarko is a major operator in Africa. The company holds a 36.5 percent in a Mozambique gas field that could be worth an added $20 to the stock price, Barron's reported. Anadarko also has significant footprints in the Eagle Ford and Niobrara shales, two of the oilier shale formations. Texas-based Anadarko is not perfect, though. The company's ongoing $25 billion lawsuit with Tronox pertaining to environmental liabilities could keep potential suitors at bay and a recent SEC filing shows the company has no loss-liability contingency for the case. Chevron's own legal woes in Brazil and Ecuador could stretch the bounds of its willingness to take on Anadarko. However, if Chevron does use the shelf registration to pay down any Tronox liabilities for Anadarko and if the latter does not need an acquisition offer north of $50 billion, this marriage is a possibility. Those are two big "if's" though.