PDC Energy Deal Makes Chevron Even More Formidable in Colorado

Monday morning provided some corporate M&A fireworks as Chevron announced the purchase of PDC Energy for nearly $8 billion.

That’s what Enverus Director Andrew Dittmar told Rigzone, adding that the deal makes Chevron an even more formidable operator in Colorado “by tacking an additional 275,000 net acres onto the significant DJ position the company acquired in 2020 with its purchase of Noble Energy”.

Dittmar, who highlighted that PDC also holds 25,000 net acres in the Delaware position, said the company’s split of assets between those two plays makes Chevron a sensible strategic buyer as it can leverage operational synergies in both plays “with the company expected to capture about $100 million in annual operational synergies”.

“Another key fact, although one not unique to Chevron, is the much higher multiple its equity trade at, versus SMID-cap operators like PDC, with Chevron trading at 5.6x 2023E EBITDA versus PDC at 3.3x,” Dittmar noted.

“That allows the company to pay a modest premium for PDC, 14 percent based on a 10-day volume weighted average and 10.5 percent based on a prior-day close while maintaining financial accretion,” he added.

“Chevron says the deal will drive accretion to EPS, CFPS, FCFPS and ROCE with about $1 billion in incremental annual free cash flow. The company also noted the combination would lower its carbon intensity with no routine flaring in the DJ Basin,” Dittmar continued.

While using all equity in the deal from Chevron does cut into financial accretion a bit, it also helps mitigate commodity price risk and has been used in the past by buyers and sellers at uncertain points in the commodity market price cycle, the Enverus Director stated.

“Chevron management noted that at its current share buyback pace the company is on track to buy back all the shares issued in this transaction in two quarters,” he highlighted.

Undeveloped Upside

Besides favorable ESG metrics and the immediate financial accretion that comes from buying from the smaller sized E&P peer group that has been discounted by the market, focusing on the DJ Basin likely allows Chevron to acquire undeveloped upside at more favorable pricing, Dittmar said.

“The company looks to have paid less than $5,000 per acre with more than 80 percent of the total deal value allocated to existing production,” he added.

“That compares to the Permian Basin where equity valuations for companies with equivalent inventory tend to be higher and M&A markets more competitive,” Dittmar continued.

“Land containing equivalent quality inventory has priced at north of $20,000 per acre in recent M&A in both the Midland and Delaware basins,” Dittmar went on to state.

The Colorado assets do come with some increased regulatory risk, Dittmar warned, but added that the “worst case for stopping permitting feared several years back has largely not come to pass”.

“Companies have successfully been able to secure years of drilling permits and the PDC assets’ location in Weld County helps alleviate future development concerns versus more populated portions of the play,” he said.

“With its large exposure in the play and position in the market, Chevron is well positioned to be a champion for oil and gas production in Colorado,” he added.

“As one potential concern given its positioning though, the company will need to negotiate any anti-trust pushback from as the DJ is relatively consolidated and the regulatory body recently seems to have been applying higher scrutiny to M&A,” Dittmar concluded.

Chevron-PDC

On Monday, Chevron announced that it had entered into a definitive agreement with PDC Energy to acquire all of the outstanding shares of PDC in an all-stock transaction valued at $6.3 billion, or $72 per share.

Based on Chevron’s closing price on May 19, 2023, and under the terms of the agreement, PDC shareholders will receive 0.4638 shares of Chevron for each PDC share, Chevron noted, adding that the total enterprise value, including debt, of the transaction is $7.6 billion.

In a statement posted on its website, Chevron said the acquisition of PDC provides it with high-quality assets expected to deliver higher returns in lower carbon intensity basins in the United States. PDC brings strong free cash flow, low breakeven production and development opportunities adjacent to Chevron’s position in the DJ Basin, as well as additional acreage to Chevron’s leading position in the Permian Basin, the company stated.

“PDC’s attractive and complementary assets strengthen Chevron’s position in key U.S. production basins,” Chevron Chairman and CEO Mike Wirth said in a company statement.

“This transaction is accretive to all important financial measures and enhances Chevron’s objective to safely deliver higher returns and lower carbon. We look forward to welcoming PDC’s team and shareholders to Chevron and continuing both companies’ focus on safe and reliable operations,” he added.

Also commenting on the deal, Bart Brookman, PDC President and CEO, said, “the combination with Chevron is a great opportunity for PDC to maximize value for our shareholders”.

“It provides a global portfolio of best-in-class assets,” he added.

“I look forward to blending our highly complementary organizations, and I’m excited that PDC’s assets will help propel Chevron toward our shared goal for a lower carbon energy future,” Brookman continued.

To contact the author, email andreas.exarheas@rigzone.com