Chevron said Thursday it will not submit a new offer to acquire Anadarko Petroleum, walking away from the deal after Occidental Petroleum pulled ahead in a battle to take control of the driller with prized assets in the top U.S. shale oil field. The decision means Chevron will collect a $1 billion breakup fee, a windfall that it could use to purchase another driller in the Permian Basin, the engine of the American oil drilling boom. Shares of the San Ramon, California-based oil major were up about 3% on Thursday. Anadarko announced on Monday that its board had unanimously decided that Occidental's revised $38 billion bid was superior to a $33 billion Chevron buyout. Anadarko said it intended to break its agreement with Chevron and strike a deal with Occidental if Chevron did not submit a better offer. Occidental, with backing from Warren Buffett's Berkshire Hathaway, offered to pay 78% cash and 22% stock for Anadarko, while the Chevron transaction was structured as a 75% stock and 25% cash deal.

Michael Wirth, CEO of Chevron. Adam Jeffery | CNBC

"Winning in any environment doesn't mean winning at any cost. Cost and capital discipline always matter, and we will not dilute our returns or erode value for our shareholders for the sake of doing a deal," Chevron Chairman and CEO Michael Wirth said in a statement. Chevron surprised the market on Thursday by announcing that it still intends to raise its share buyback program to $5 billion per year. Two weeks ago, Chevron executives told analysts the increase was contingent on the deal closing. By taking control of Anadarko, Chevron stood to acquire the driller's vast acreage in the Permian region stretching from western Texas to southeastern New Mexico. Chevron is a major player in the Permian and plans to double its production from the basin by 2023. The deal also would have combined Chevron and Anadarko's offshore operations in the Gulf of Mexico, a source of precious cash flow. Chevron also prized Anadarko's liquefied natural gas export project in Mozambique, which would have expanded its footprint in the growing LNG market. However, Chevron was outmaneuvered by its much smaller rival. After Occidental put in a higher bid, it secured a $10 billion investment from Berkshire Hathaway and arranged to sell Anadarko's African operations to French oil giant Total for $8.8 billion.