On May 22, 2023, Chevron announced that it had entered into a definitive agreement with PDC Energy, Inc. Chevron will acquire all of the outstanding shares of PDC in an all-stock transaction valued at $6.3 billion, or $72 per share. The acquisition is expected to close in the second half of 2023.
PDC Energy is an independent oil and natural gas company with operations in the Rocky Mountains and Permian Basin. The company has a strong balance sheet and a history of generating strong cash flow.
Chevron is one of the world’s largest integrated supermajor energy companies. The company has operations in more than 180 countries and produces oil and natural gas, refined products, chemicals, and other energy-related products.
The acquisition of PDC Energy is a strategic move for Chevron. The deal will give Chevron access to PDC Energy’s assets in the Rocky Mountains and Permian Basin, two of the most prolific oil and natural gas producing regions in the United States.
Chevron anticipates the transaction to be accretive to all key financial measures within the first year after closing and to add about $1 billion in annual free cash flow at $70 per barrel Brent and $3.50 per Mcf Henry Hub.
All the Right Moves
Recall that in 2019, Chevron tried to acquire Anadarko in the sixth-largest oil and gas deal in history. The deal would have given Anadarko $33 billion, and it would have assumed Anadarko’s $17 billion debt for a total cost to Chevron of $50 billion.
Occidental then entered the bidding, ultimately offering to pay 78% in cash and 22% in stock in a transaction valued at $57 billion. This price would have destroyed the cost synergies Chevron had targeted with their original offer, so I wrote an article outlining why Chevron should walk away from the deal. They ultimately did, collecting a $1 billion breakup fee from Anadarko in the process.
Anadarko accepted the offer from Occidental, and the share prices of the two companies have diverged since. According to data extracted from market data provider FactSet, since the beginning of 2019, Chevron has a total return (including dividends) of 74%. Occidental’s performance over that time frame is a total return of 7%. This is a testament to Chevron’s financial discipline.
Looking back even further, Chevron is by far the best-performing supermajor this century. Again, according to FactSet data, the total returns of the supermajor oil and gas companies this century are:
- Chevron: +774%
- ExxonMobil: +446%
- Shell: +150%
- BP: +75%
Each of these companies (except Chevron) had major financial miscues this century. BP’s Deepwater Horizon disaster in 2010 is the highest-profile (and costliest) event of the three, but ExxonMobil and Shell both made major decisions that they regretted in hindsight.
The PDC acquisition looks like another savvy move for Chevron. With this deal, Chevron increases its proved reserves by 10% at an acquisition cost under $7 per barrel of oil equivalent (BOE).
The company also adds 275,000 net acres adjacent to Chevron’s existing operations in the DG Basin that add over 1 billion BOE of proved reserves in highly economic locations. Chevron also adds 25,000 net acres in the Permian Basin that will be integrated into Chevron’s existing capital efficient development operations.