On Monday, Chevron Corp (CVX.N), one of the largest oil companies in the U.S., announced it would be expanding its American oil and gas operations by purchasing PDC Energy Inc (PDCE.O), a shale producer, in a deal comprised of both stock and debt, worth approximately $7.6 billion.
This acquisition comes at a time of global geopolitical tensions following Russia’s invasion of Ukraine last year, which has stirred uncertainty over the energy supply. The move is anticipated to augment Chevron’s production, capital outlay, and cash flow within the United States.
Michael Wirth, Chevron’s Chief Executive, emphasized the deal as a robust investment in the company’s U.S. business in a conversation with Reuters. This action aligns with President Joe Biden’s critique of American oil giants for not ramping up production domestically during last year’s fuel price surge. Wirth indicated the transaction adds value for shareholders while addressing these calls.
However, over the past months, Chevron’s capacity to quell concerns over the potential decline of its central U.S. shale assets following a subpar performance in the West Texas and New Mexico’s Permian basin last year has been a subject of analysts’ scrutiny. RBC Europe’s research analyst, Biraj Borkhataria, predicts these concerns may persist.
PDC, based in Denver, is valued at $72 per share in this transaction, a 14% premium to its 10-day average leading up to Friday. The companies anticipate the deal will close by the end of the year.
The acquisition is expected to increase Chevron’s reserves by 10%, and elevate its capital expenditure and free cash flow by approximately $1 billion within a year of completion.
In the day’s early trading, Chevron’s stock slipped less than 1% while PDC Energy’s rose by 9%. The deal will augment Chevron’s output in the DJ basin with an additional 260,000 barrels of oil and gas production per day (boed), ranking its Colorado operations among the company’s top five production assets, according to Wirth.
PDC Energy contributes about 25,000 barrels per day in the Permian basin, where Chevron’s production stands at 700,000 boed. Andrew Dittmar, an M&A specialist at researcher Enverus, describes the properties Chevron is set to acquire as “high-quality inventory.”
Chevron, based in San Ramon, California, hinted last year at a possible U.S. acquisition and expressed its intent to trim its cash reserves to bolster shareholder profitability. Despite the deal, the buyback guidance remained unaltered.
Wirth underlined that the company is repurchasing shares at an annual rate of $17.5 billion. The shares exchanged for the properties represent less than two-quarters of share repurchases, implying a quick buyback.
This transaction will boost Chevron’s capital expenditure by about $1 billion per year, raising its annual spending range to $14 billion to $16 billion through 2027.
Following its $13 billion acquisition of Noble Energy in 2020, Chevron is among the top producers in the Denver-Julesburg Basin. With PDC’s acquisition, Chevron anticipates adding 10% to its proven reserves at an estimated cost of less than $7 per barrel.
Wirth made it clear that this acquisition would not preclude the company from considering other potential acquisitions, saying, “We never stopped looking. We look for things that have a strategic fit with our portfolio that create value for shareholders.”
