Anadarko Petroleum (APC) is a hot commodity these days. The oil and gas producer has already accepted a merger offer from oil giant Chevron (CVX -0.40%) valuing it at $55 billion. That didn't stop Occidental Petroleum (OXY -1.12%) from announcing its desire to acquire the oil company at an even higher price.

One of the reasons Anadarko is in high demand is the strength of its portfolio, which was on full display during the first quarter. Here's a closer look at how Anadarko performed and what lies ahead as the battle for the company heats up.

Two oil pumps

Image source: Getty Images.

Drilling down into the numbers

Anadarko Petroleum generated $259 million, or $0.53 per share, of adjusted net income during the first quarter, which crushed analysts' expectations by $0.28 per share. Several factors helped fuel that expectation-beating result.

Topping the list was its production, which came in strong at 715,000 barrels of oil equivalent per day (BOE/D), including 412,000 barrels of oil per day (BPD). That's up 11% year over year. The company's U.S. onshore assets (Delaware Basin, Permian Basin, and Powder River Basin) supplied the bulk of that output at 465,000 BOE/D. The company also enjoyed a record quarter in the Gulf of Mexico, where output averaged 166,000 BOE/D. Overall, the company's higher margin U.S. oil volumes surged 15.6% to 333,000 BPD.

The company complemented that high-margin oil growth by keeping a lid on costs. Overall, total expenses fell 4.4% year over year, which helped offset a lower average oil price during the quarter versus the year-ago period.

Those factors enabled Anadarko Petroleum to generate $1.54 billion of cash flow during the quarter. After spending $1.03 billion on capital projects to grow production, Anadarko produced $381 million in free cash flow after other adjustments.

An offshore drilling rig with the sun rising behind it.

Image source: Getty Images.

A look at what's ahead for Anadarko

Anadarko accepted Chevron's $65 per share merger offer earlier this month. However, Occidental Petroleum recently threw a wrench into that deal by going hostile with a $76 per share proposal. Anadarko said its board would review it to determine whether it's a superior offer.

While Occidental believes it's the better match for Anadarko, analysts don't agree. They think that Anadarko's portfolio -- which not only includes operations in the Delaware Basin (Occidental's primary target) but the Gulf of Mexico and offshore Africa -- is a better fit with Chevron.

They're also concerned with the amount of debt Occidental would need to take on to complete the transaction. "The deal would be a big [financial] stretch" for Occidental, according to an analyst at Wood Mackenzie, who also noted that "a potential transaction would materially increase the company's leverage ratios and stretch its balance sheet." An analyst at Bloomberg, meanwhile, noted that Occidental's leverage ratio would zoom to 2.4 times next year's EBITDA, compared with its current level of less than 1. While Occidental says it plans to sell $10 billion to $15 billion in assets to address this problem, the deal could weigh on the company until it completes those sales.

Because of those factors, most analysts see Chevron winning this battle, though at a higher price than its initial offer. Several believe that it could seal the deal even if it offered less than the $76 Occidental is willing to pay because Anadarko's investors would rather have Chevron's stock.

This battle isn't over

Anadarko has built a highly prized oil and gas business that's growing at a fast pace and generating lots of cash. While it has already accepted an offer from Chevron, that's not a done deal given that Occidental has gone hostile with a competing bid. The likely next move is a revised offer by Chevron, because that combination seems to make the most sense on paper -- though it's possible that the oil giant will walk away since there are plenty of other opportunities it could consider.