High margins and a huge footprint were the reasons behind energy giant Chevron (NYSE:CVX) finally pulling the trigger and buying independent rival Anadarko (NYSE:APC) last week. The deal seemed to be a match made in heaven for CVX stock and its investors. It had everything that Chevron could want. And APC stock investors were also smiling after a few years of scraping by. Yep, everything seemed to be going just right for CVX.

That is, until another buyer stepped up to the plate.

It turns out that Anadarko would be a great fit for another integrated oil giant. No, not Exxon (NYSE:XOM). We’re talking about often-forgotten Occidental Petroleum (NYSE:OXY). For OXY, Anadarko represents a chance for it to finally join the supermajors and gain access to even more land in its core areas.

For Chevron, the booming buyout battle represents a major headache as it’ll be forced to step even further up to the plate.

Chevron Gets Overbid

As we said, Anadarko features plenty of assets that fit under Chevron’s umbrella perfectly. The key to CVX’s $33 billion bid and 39% premium is the prolific Permian Basin. The Permian continues to be the hotbed of drilling activity in the U.S. as its geology makes it wonderful for fracking and horizontal drilling. Thanks to its low-costs, high-margins and abundance of oil, the Permian has cemented itself as the place to be in America’s shale.

Both Anadarko and Chevron have been very active in the Permian and the deal would connect their acreage together — with CVX controlling more than 1.4 million net acres. The synergies write themselves.

But Chevron isn’t the only one with massive holdings in the Permian. OXY isn’t no slouch either. The firm is one of the largest acreage owners, holding about 2.7 million net acres in the region. It produces about 10% of the Permian’s total oil production. All in all, the Permian represented about 57% of OXY’s total production last year.

Anadarko would represent a great addition to OXY’s overall system in the area.

For starters, APC’s production would boost Occidental’s overall output to more than 1.5 million barrels per day. This would instantly push OXY to the top chunk of the E&P pack. For example, ConocoPhillips (NYSE:COP) only produces about 1.3 million barrels per day. And there’s an opportunity to boost that further with Occidental’s expertise of enhanced oil recovery/CO2 injection in the area. Analysts peg that OXY could pull a potential to 1 million barrels per day from APC’s assets by the late 2020s.

Secondly, like with Chevron, Anadarko’s assets would represent a chance to pull costs lower and improve margins. This includes APC’s midstream assets — which OXY pays to use already. The cost savings alone would help OXY’s bottom line. Occidental estimates that the buyout can increase free cash flow by $3.5 billion over the next two years through these synergies and CAPEX reductions.

Finally, many of Anadarko’s other assets — such as global deepwater and liquefied natural gas — would represent new areas of operation for Occidental. However, OXY has a rich global portfolio and can spin-off/sell these non-core items to help pay for the deal and bring in extra cash.

All in all, OXY and APC makes as much sense as the combination for Chevron. So, it’s no wonder why OXY topped Chevron’s bid by about $11 per share.

Chevron Will Need To Buckle Down

For Chevron, this poses a big problem. As we said, it takes a take boost in production to move the needle at such a giant energy stock. And with production flatlining for most the majors, CVX has to buy someone the size of Anadarko to make a real dent in its production issues. And the assets here are just perfectly matched to suit CVX’s needs.

That means CVX is going to be forced to up its bid in order to get what it wants.

Chevron has deep pockets, so scoring APC won’t be a problem. But it’s going to have to cough up plenty of extra cash to do so. Analysts estimate that CVX will need to add between $5 to $10 per share to its bid just to have a chance to score Anadarko. But that still might be enough as APC shares have traded above the price OXY is willing to offer. Meanwhile, Occidental has hinted that it will challenge the buyout if Chevron wins and their offer isn’t marginally better.

All of this could hinder the appeal of the deal for Chevron. The original buyout is already large. Tacking on extra cash and shares to sweeten the pot could hurt some of the synergies and benefits as well as stretch out the time until the deal truly pays off. That’s something to consider.

Chevron? OXY? The Real Winner Is Anadarko

Bidding wars like this in the energy sector are very rare. In fact, they never happen. So, it’ll be interesting to see how this plays out. Both OXY and Chevron are moving into unknown territory and the costs to play could be high. The real winner in this situation could be Anadarko.

After suffering for a few years, APC stock is on fire because of the buyout potential. And no matter who buys it out, the premium is certainly nice for shareholders. And we can’t forget about the other majors like Exxon who could make the love triangle a foursome.

In the end, APC stock could be the way to play the most exciting M&A opportunity in the energy patch in a long time. 

Disclosure: At the time of writing, Aaron Levitt did not hold a position in any stock mentioned.