“This exciting transaction will create a global energy leader with a world-class portfolio, proven operational capabilities and industry leading free cash flow metrics,” Occidental Chief Executive Vicki Hollub said Thursday in a written statement.

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Chevron Chief Executive Michael Wirth said in an interview that his company could have outbid Occidental, but instead will take a $1 billion termination fee it negotiated as part of its earlier deal with Anadarko and return the cash to shareholders through share repurchases.

“Costs and capital discipline always matter,” Mr. Wirth said. “An increased offer would have eroded value to our shareholders.”

Shares in Chevron rose 3.1% on Thursday. Occidental’s stock fell 6.4%, while Anadarko’s shares declined 3.2%.

Occidental’s increasingly aggressive efforts to win in the contest for Anadarko—including lining up $10 billion in financial backing from Warren Buffett’s Berkshire Hathaway Inc.and a deal to sell Anadarko’s Africa assets for $8.8 billion to French oil giant Total SA —helped Ms. Hollub outduel a much larger rival. Berkshire is set to receive shares of preferred stock in Occidental with a coupon of 8% a year, as well as options to buy additional shares.

Now, Ms. Hollub must work to win over skeptical Occidental shareholders, some of whom have said they plan to vote against the company’s board at its annual meeting on Friday.

Noah Barrett, an analyst at Janus Henderson Investors, which holds positions in all three companies, said he was encouraged by Chevron’s decision to walk away. While the outcome was good for Occidental because it eliminated the possibility of a bidding war, the company still must answer for “very expensive” Berkshire financing and its accounting for cost savings in the deal, he said.

“This really shifts the onus onto management, to Vicki and her team, to prove the merits of this deal to shareholders,” he said.

Anadarko said it has terminated the companies’ merger agreement, and the deal will go ahead as agreed on Sunday. Occidental will pay $59 in cash and 0.2934 a share in its stock to each Anadarko shareholder, for a price of $75.53 a share as of Thursday’s closing price.

Interactions between Anadarko and Occidental have been terse, including most recently on Sunday, when Ms. Hollub said in a letter to Anadarko’s board that she objected to its requests for three board seats.

Occidental must now mend relations with some frustrated shareholders, who were rankled in particular by the company’s decision to raise the cash portion of its offer, thereby avoiding a shareholder vote that would have been triggered by issuing a higher number of shares to pay for Anadarko.

Mutual-fund giant T. Rowe Price Group Inc. has said it would vote against Occidental’s board slate at the company’s annual meeting Friday, citing the cost of the Berkshire financing and Occidental’s move to avoid a shareholder vote on the deal.

Activist investor Carl Icahn also recently took a small stake in Occidental, said people familiar with the matter.

Occidental’s debt will be about two times its earnings after the deal, excluding interest, taxes and other accounting items. The company has said it wants to reduce its debt to lower than one-and-a-half times its earnings. Ms. Hollub said on a call with investors Monday that Occidental could sell pipeline company Western Midstream Partners LP, which Anadarko has a majority stake in.

Mr. Wirth had initially sought out a potential deal to help Chevron maintain its lead overExxon Mobil Corp. and other giant oil companies. He saw the potential to buy a large oil and natural-gas producer and sell off assets in the combined portfolio that were less attractive, creating a company positioned to deliver higher profit, said people familiar with his thinking.

He has even invoked the Golden State Warriors’ moves to sign top players such as Kevin Durant, even after the National Basketball Association team had already won championships, saying that great teams and companies “are always looking to get better.”

Mr. Wirth sounded a more cautious note on Thursday about future deals, saying Chevron would only consider an acquisition if it is “exceptionally good.

Without a deal, the company expects to triple production in the Permian Basin to 900,000 barrels a day of oil and gas in five years. Chevron is now the leading producer in the region, but a combined Occidental-Anadarko would emerge as the top operator postdeal. He declined to comment on negotiations.

“We prefer to do friendly deals and we prefer to negotiate them out of the limelight,” he said. “To the extent this became something other than that, that’s not the way Chevron operates.”

In the past five years, during an oil-price crash, Chevron shares have been the top performer among the biggest oil companies, including Exxon, Total, Royal Dutch Shell PLC and BP PLC, with shares rising by about 17%, including reinvested dividends.

“At the end of the day, it was probably the right decision for Chevron,” said Matthew Portillo, an analyst at Tudor, Pickering, Holt & Co., a Houston investment bank. “Now Chevron can go and look at other assets. The chessboard for M&A activity is now completely reset.”

For Occidental, he said, acquiring Anadarko makes the company more competitive with Chevron and Exxon as they roll out significant expansions in the Permian Basin.

“That’s the door they’ve been able to open,” Mr. Portillo said

From Wall St JournaL