May 8, 2019 / 7:54 PM / a year ago

Bankers root for Occidental as end to tug-of-war looms

NEW YORK, May 8 (LPC) - Occidental Petroleum Corp looks to be winning its tug-of-war with Chevron Corp to acquire Anadarko Petroleum Corp, in a turn of events cheered by bankers seeing the prospect of more loan and debt financing tied to the Occidental bid than Chevron’s.

Occidental is planning to increase its revolving credit line and issue term loans and a variety of debt securities, raising fee opportunities for lenders if its deal prevails. Chevron, in contrast, plans to skip loan financing and go straight to the bond market to fund the cash portion of its current offer.

Anadarko late Monday backed a US$38bn bid from Occidental, after Occidental boosted the cash portion of its offer to 78% from 50%, pulled in a US$10bn investment by billionaire Warren Buffet and arranged a deal with French oil company Total SA to pay US$8.8bn for its international assets once the merger goes ahead.

Chevron has four days from Anadarko’s decision to alter its proposal for US$33bn, of which a much lower 25% share would be cash and the rest in stock.

A deal with loan financing is eagerly awaited by a market starved for new opportunities over recent months, after a busy start to the year that ushered in large transactions including drugmaker Bristol-Myers Squibb’s US$33.5bn bridge loan for the acquisition of biotech Celgene and the US$14.6bn term loan backing cigarette manufacturer Altria Group’s purchase of e-cigarette company Juul Labs and its investment in cannabis producer Cronos Group.

“I think another Bristol-Myers’ type of deal would be well received,” a banker said.

Bank of America Merrill Lynch and Citigroup are providing committed financing for the cash component of Occidental’s offer.

US syndicated bank lending volume hit a three-year low in the first quarter and is only gradually ramping up. Fourth-quarter volatility clamped down on deal creation. Now that stocks are hovering near record highs, steep valuations are curbing acquisition demand, bankers said.

“Bankers would prefer whoever would be doing a bridge financing first, but if there isn’t a bridge then we want to see what they will do in bonds and term loans,” said another senior banker.

Regardless of the ultimate victor, banks are optimistic that this deal signals ongoing consolidation in the oil and gas sector that will lead to more merger financings and fee earnings potential.

“This suggests an uptick in targets in the energy space,” another senior banker said. With companies seeking to grow their drilling capacity and assets, “energy should be seen as on the list of sectors ripe for M&A this year.”


The deal with Total to buy Anadarko assets in Africa is also a case of a window opening for bankers to come in and finance spin-offs.

“As with Occidental spinning out African assets to Total, the acquiring company is looking for a core set of properties and the rest they don’t want,” said Buddy Clark, partner at Haynes and Boone in Houston. “Spinning them off increases dealflow.”

That would be a welcome development, with US syndicated loans to oil and gas borrowers, at US$29bn in the first quarter, well off the pace that brought the tally in 2018 to a four-year high of US$237.5bn, based on data from LPC, a unit of Refinitiv.

Occidental, as previously reported by LPC, said it expected to increase its US$3bn five-year revolving credit, issue term loans – easier to prepay than long-term bonds – as well as tap the capital markets for a variety of maturities and types of securities that would fit its debt reduction strategy.

“Banks would like the Occi bid to go through because it has a bank (loan) financing,” another banker said. “We now wait and see.”

That Warren Buffet is also picking sides is encouraging, this banker said.

Another banker who is not a relationship lender to Occidental was favoring a Chevron victory, as that would at least mean bond financing fees his bank could earn.

Though future tie-ups may not all be as large, oil and gas merger activity is expected to gain momentum.

“Scale clearly matters in shale development. With scale you can maximize efficiency and returns, have much more buying power with oilfield services companies, optimize acreage portfolios and drill longer laterals on contiguous acreage, and that leads us to expect consolidation,” said Amol Joshi, vice president and senior credit officer for Moody’s Investor Service’s oil and gas team.

In another example, in a much smaller deal, Oryx Midstream Services is in the market with a US$1.65bn debt facility, comprised of a US$1.5bn term loan and a US$150m revolver, to partially fund the crude oil operator’s acquisition by Stonepeak Infrastructure Partners.

This deal is in the leveraged loan market while the Anadarko deal is investment grade.

“All sorts of funding will be needed,” Joshi said. “If there’s an appetite for loans and pricing is competitive and available for these companies that are consolidating, then why not?” (Reporting by Lynn Adler and Michelle Sierra. Editing by Jon Methven)

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