The first major bidding war has broken out in the Permian.

After being rebuffed several times, Occidental Petroleum Corp. on Wednesday made public a US$38 billion offer to buy Anadarko Petroleum Corp., seeking to break up a proposed takeover by Chevron Corp. The US$76 per share cash-and-stock bid for The Woodlands, Texas-based oil and natural gas producer is 20 per cent more than Chevron’s US$33 billion April 12 agreement.

The acquisition would be the largest ever proposed by Occidental, which has a market value of US$46.6 billion, and would be the biggest purchase of an oil producer in at least four years. It would require Anadarko to pay a US$1 billion breakup fee to Chevron. Occidental’s offer would pull together two second-tier oil and natural gas producers, as opposed to Chevron’s bid to create another "ultramajor" to rival Exxon Mobil Corp.

"This highlights the potential value of the Permian," said Rob Thummel, managing director at Tortoise, which manages energy-related assets. "Chevron will fight because acreage in Permian fits so well with its existing acreage, increasing the potential for better-than-expected operational synergies."

The acquisition would bolster Occidental’s leading position in the Permian Basin in West Texas and New Mexico. The Permian is the world’s fast-growing oil major patch and has helped to turn the U.S. into a net exporter, also making it a bigger producer than Saudi Arabia. Chevron earlier this year unveiled ambitious growth plans for the basin.

Anadarko said in a statement it will review Occidental’s proposal and reaffirmed its recommendation of Chevron’s offer. Chevron didn’t immediately respond to requests for comment.

Chief Executive Officer Vicki Hollub said in a Bloomberg Television interview that the offer is the same it made to Anadarko in January 2018. The company has also made three bids since late March, she said Wednesday in a letter to Anadarko’s board of directors. Occidental said it has completed its due diligence on the deal and has financing lined up with Bank of America Merrill Lynch and Citigroup Inc.

“Size is not what we’re going after, it’s really value,” Hollub said in the interview. “There are some producers in the Permian where it would be really difficult to pay the purchase price and get any synergies at all.”

Anadarko’s shares jumped as much as 13 per cent and traded at US$71.52 at 1:57 p.m. in New York while Occidental fell as much as 4.2 per cent. Bonds of both companies traded lower.

Details of the deal: Occidental is offering 50 per cent cash and 50 per cent stock. Chevron’s proposal is 25 per cent cash and 75 per cent stock. Occidental is proposing US$10 billion to US$15 billion of asset disposals as part of the deal. That compares with the US$15 billion to US$20 billion Chevron said it would sell between 2020 and 2022. Occidental said it identified US$3.5 billion in annual free cash flow improvements that it can implement by 2021, comprising of US$2 billion in annual pretax cost cuts and US$1.5 billion of capital reduction.

The latest offer may not be as appealing as Chevron’s to Anadarko shareholders despite the higher price. Occidental’s smaller size and balance sheet relative to Chevron mean there may be more uncertainty over its prospects of completing a deal. And it’s not immediately obvious how Occidental would fund Anadarko’s giant liquefied natural gas plant that’s being developed in Mozambique, although Hollub said Wednesday on a conference call with analysts that her company is capable of handing the project.

What Bloomberg Intelligence Says

"Occidental’s capital structure and debt would shift more significantly than Chevron’s, which has a sizable balance sheet and better-fitting assets. Occidental would need to sell assets to fund a deal."

"We’re uncertain how Anadarko’s Gulf of Mexico assets or its LNG project are corporate fits, though the bid extends the acquisition drama and puts the ball in Chevron’s court to woo shareholders."

-- Vincent G. Piazza, senior industry analyst