With a financing assist from billionaire investor Warren Buffett, Occidental, which is one-quarter the size of Chevron, is the likely victor in a contest that again proved the allure of U.S. shale.
Occidental has said it plans to shed most of Anadarko's non-shale properties in a deal that would cement its position in the Permian Basin of West Texas and New Mexico, the top U.S. shale field.
Chevron declined to raise its initial offer after Occidental boosted the cash portion of its $76 per share bid and Anadarko's board deemed it a superior offer. Chevron, the No. 2 U.S. oil producer, received a $1 billion breakup fee, which it has said it will apply to a $5 billion share repurchase program.
Chevron shares closed 3.1 percent higher on Thursday at $121.19 while shares of Occidental fell 6.4 percent to $56.33, the lowest in a decade.
Anadarko shares fell 3.3 percent to $73.39.
Chevron Chief Executive Officer Mike Wirth said the company decided at a board meeting on Wednesday to walk away from the takeover battle, even though it could have matched or beaten Occidental's offer and saw Anadarko as a strategic fit.
"Make no mistake. We have the financial capacity to outbid Occidental, but we concluded that an increased offer would have eroded value to our shareholders, and it would have diminished returns on capital," Wirth said. "The bar is high. We don't have a need to do anything. We are not desperate to do a deal."
Chevron's decision demonstrated strong capital discipline, said Jennifer Rowland, analyst with Edward Jones.
"I am a bit surprised that they walked, but am pleased that they didn’t get caught up in a bidding war with Oxy, who comes across as willing to fight to win at all costs," Rowland said. "Anadarko was a unique fit for Chevron, so I don’t expect them to go on a shopping spree in the Permian."
Anadarko's major assets - in U.S. shale, the Gulf of Mexico and an liquefied natural gas project in Mozambique - were seen as a logical fit for Chevron, but not something the company needed. "Chevron has no objective need to acquire Anadarko - or, for that matter, engage in any other large-scale (mergers and acquisitions)," said Pavel Molchanov, an analyst with Raymond James.
Analysts said they do not expect another bidder for Anadarko to emerge.
"The industry is trying to show investors more capital discipline and if another suitor comes in that would be significantly counter to most companies' strategies," analysts at RBC Capital Markets said in a note on Thursday.
Investors have sold off shares of oil companies that increased spending on drilling instead of returning cash to shareholders. They have called for capital discipline, defined as increasing production by 4 percent a year and maintaining a 4 percent dividend.
One result: The value of U.S. oil and gas mergers and acquisitions fell to a 10-year low in the first quarter as investors sold shares of companies that spent more on drilling than on buybacks and dividends.
The contest for Anadarko underscored the value of its assets in the Permian Basin, the vast shale field with oil and gas deposits that can produce supplies for decades using low-cost drilling techniques.
The region's soaring production has propelled U.S. oil production to 12 million barrels per day (bpd), more than that of Russia or Saudi Arabia.
Anadarko said on Thursday it had signed a definitive agreement with Occidental and expects the merger to be completed in the second half of the year. The deal still faces antitrust reviews.
Chevron holds 2.3 million acres in the Permian Basin and has vast mineral ownership there, which reduces its royalty rate. It expects shale production from the basin to reach 600,000 bpd by the end of next year, and 900,000 bpd by the end of 2023.
Occidental outmaneuvered Chevron by gaining cash and allies.
It got a $10 billion investment from Warren Buffett's Berkshire Hathaway Inc and struck a deal with French oil giant Total SA to take most of Anadarko's international assets, including a liquefied natural gas project in Mozambique. Total agreed to pay $8.8 billion for the assets once the merger goes ahead.
Several Occidental investors oppose the deal, including its sixth-largest shareholder, T. Rowe Price Group Inc, because they consider it too large a risk if oil prices falter, or if Occidental cannot produce the $3.5 billion a year in cost savings it has promised.
Ratings agency Moody's Investors Service said on Wednesday it likely would downgrade Occidental if it prevailed in the takeover, noting the deal would add $46 billion of debt before any sale of assets.
Several investors also have criticized Occidental's decision this week to secure Anadarko's endorsement by excluding a shareholder vote on the deal.
(Reporting by Shanti S Nair in Bengaluru and Jennifer Hiller in Houston; eriting by Gary McWilliams; editing by David Gregorio and G Crosse)
By Jennifer Hiller