The Acquisition of Anadarko by Chevron. Discounted Cash Flow Analysis

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

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.