In a strategic move to solidify its position and thrive in the ever-evolving landscape of U.S. shale, Chevron Corp. has announced its acquisition of PDC Energy Inc., a prominent oil and gas producer based in Denver. This colossal all-stock deal, valued at a staggering $6.3 billion, marks a significant milestone in Chevron’s ambitious expansion plans amidst a year brimming with mergers and acquisitions.
According to the details unveiled in a statement on Monday, Chevron will offer $72 per share, representing a remarkable 14% premium based on the 10-day average of May 19 closing prices. The transaction not only propels Chevron’s production capacity by nearly 10% but also expands its foothold in the shale basins of Colorado and West Texas. Simultaneously, Exxon Mobil Corp. has struck a separate deal, agreeing to divest assets in the Williston Basin to Chord Energy for $375 million.
While this acquisition may appear modest in scale for a company like Chevron, whose first-quarter cash flow from operations surpasses the deal’s price tag, it seamlessly aligns with the visionary approach of Chevron’s Chief Executive Officer, Mike Wirth. With a strategic focus on prudent growth that harmonizes with existing assets rather than pursuing transformative acquisitions, Chevron earned accolades for its $5 billion purchase of Noble Energy in 2020 amid the pandemic. However, the company has faced recent scrutiny regarding its growth compared to industry giant Exxon Mobil Corp.
Highlighting the significance of this transaction, Chevron CEO Mike Wirth emphasized, “PDC’s attractive and complementary assets strengthen Chevron’s position in key U.S. production basins. This transaction is accretive to all important financial measures and enhances Chevron’s objective to safely deliver higher returns and lower carbon.”
Upon regulatory and PDC shareholder approval, the deal is expected to conclude by the end of the year, unlocking approximately $400 million in cost savings and prompting Chevron to increase its capital expenditure budget by $1 billion annually. As a result, Chevron’s global spending range will stand between $14 billion and $16 billion per year through 2027.
The current landscape of the oil and gas industry presents a ripe opportunity for takeovers, with companies flush with cash following record profits. Consolidation and expansion have become paramount, particularly in the Permian Basin of West Texas and New Mexico, the most prolific shale play in the United States.
In response to this exciting development, PDC shares surged by up to 8.5% ahead of regular trading in New York, while Chevron experienced a slight decline of 0.7% in its share value.
It’s worth noting that the total enterprise value of the deal, inclusive of debt, amounts to a staggering $7.6 billion. PDC shareholders will receive 0.4638 shares of Chevron for each PDC share.
Chevron predicts that this strategic partnership will generate approximately $1 billion in annual free cash flow, assuming Brent oil prices at $70 per barrel and Henry Hub’s natural gas prices at $3.50 per thousand cubic feet. Morgan Stanley and Evercore served as advisors to Chevron, while JPMorgan advised PDC in this groundbreaking transaction.
Chevron’s pursuit of acquisitions in the United States has been well-documented, with the company signaling its intention to reduce its cash stockpile in a manner that enhances shareholder profitability.
CEO Wirth confirmed that Chevron’s buyback guidance remains unchanged.
As Chevron seeks to maintain its production growth beyond 2027, the pressure from Wall Street intensifies. With its primary shale holdings in the Permian Basin nearing peak output, this deal will elevate Chevron’s capital spending by approximately $1 billion per year, expanding its capital expenditure range to $14 billion to $16 billion through 2027, as revealed by the company.
This groundbreaking acquisition signifies Chevron’s unwavering commitment to securing a prosperous future in the energy industry. By strategically aligning its assets with PDC Energy’s valuable resources, Chevron is poised to unleash a new era of growth, profitability, and environmental stewardship. As the energy landscape continues to evolve, Chevron’s visionary leadership and bold moves will undoubtedly shape the trajectory of the industry, cementing its position as a trailblazer in the realm of U.S. shale.
With regulatory approvals and shareholder consent pending, all eyes are eagerly awaiting the conclusion of this transformative deal, scheduled to be finalized by the end of the year. As the energy sector braces for the ripple effects of Chevron’s strategic acquisition, one thing is certain: the stage is set for a new era of innovation, consolidation, and prosperity in the realm of U.S. shale.