Last year, oil major Chevron (NYSE:CVX) was a loser.

It had announced in April 2019 that it was buying Permian Basin oil and gas producer Anadarko Petroleum in a $33 billion cash and stock deal. Less than a month later, it abandoned its quest to acquire the company, outbid by rival oil and gas company Occidental Petroleum (NYSE:OXY)

But one year later, Chevron is the undisputed winner in this fight with its purchase of Noble Energy (NASDAQ:NBL). Here's how Chevron turned a loss into a major win. 

A smiling man stands next to an oil barrel from which paper currency erupts.

Image source: Getty Images.

Until the ink's dry

Chevron had been itching to secure additional acreage in the oil- and gas-rich Permian Basin, and buying Anadarko would have scratched that itch in a big way. Among other assets, Anadarko had 240,000 mostly contiguous acres in the Permian, the addition of which would have catapulted Chevron from the world's fourth-largest oil and gas producer to the second-largest, behind only fellow U.S. supermajor ExxonMobil.

Alas, it wasn't meant to be. Although Chevron offered what it considered a "fair price" of $65/share for Anadarko on April 13, it was quickly outbid on April 24 by Occidental Petroleum, which offered $76/share. Despite already being the #1 Permian Basin producer, Occidental wanted to cement its leadership position by adding Anadarko's assets.

Chevron decided that an even higher counteroffer would be too much to pay for Anadarko. Rather than spend too much, it dropped out of the bidding, ceding Anadarko's prized 240,000 Permian acres -- and its $17 billion of debt -- to Occidental, which ended up paying $38 billion in cash plus assuming the debt: $55 billion in total.

However, like in a game show, the loser didn't walk away empty-handed. Chevron's consolation prize was a $1 billion cash breakup fee.

No winners

The Occidental deal was still seen by many as a loss for Chevron. It lost out on a prime Permian position and on Anadarko's offshore assets in the Gulf of Mexico, which would have boosted Chevron's existing presence in both regions. Adding insult to injury, Occidental sold Anadarko's liquefied natural gas (LNG) assets in Mozambique to French oil major Total. Chevron was also making major investments in LNG, so the move bolstered rival Total's LNG position at Chevron's expense.

Despite "winning," Occidental was widely criticized as well... for paying too much. The assumption of Anadarko's debt boosted Occidental's debt load to more than $40 billion. That included $10 billion in financing from Warren Buffett's Berkshire Hathaway, with a high annual payment of 8%. Billionaire investor Carl Icahn compared the deal to Buffett "taking candy from a baby."

Nevertheless, Occidental CEO Vicki Hollub swore that the deal was worth it. "We will make this work," she reportedly told an audience of shareholders. "We will get these synergies."

She did not get those synergies. At least, not before the March 2020 oil price crash upended the oil and gas industry.

After the crash

When it finalized the purchase of Anadarko in August 2019, Occidental's stock was valued at about $45 per share. Today, it's under $14. Meanwhile, its debt load of $38.5 billion is higher than Chevron's $34.1 billion, despite Chevron being more than ten times larger. 

By July 2020, independent oil and gas producer Noble Energy's shares had fallen as well, by about 60% year-to-date to around $10 per share. Noble's Permian position is only about 40% the size of Anadarko's, but it also has some valuable Middle Eastern assets. On July 20, Chevron announced it was buying Noble for just $13 billion, or about $10.38 per share. Chevron was taking on Noble's $8 billion in debt, and issuing $5 billion in stock.

So instead of shelling out more than $55 billion for Anadarko, Chevron gets the additional Permian Basin exposure it was after for less than one quarter of the price. It still has the best balance sheet in Big Oil. And it got to keep the $1 billion breakup fee to boot. 

Meanwhile, Occidental is barely staying afloat. The winner became the loser, and the loser is now the winner.

What it means for investors

Chevron's win was partly luck and partly the result of a good management team that was willing to walk away from a deal rather than overpay. However, as Occidental's and Noble's woes show, the oil patch isn't a friendly place right now. Dividend-focused investors may want to consider Chevron on the relative strength of its balance sheet, but most investors should probably avoid this troubled industry.