Editor’s note: This is a developing story. Check back for updates.
Chevron Corp. has entered into a definitive agreement with PDC Energy Inc. to acquire the company in an all-stock transaction valued at $6.3 billion, or $72 per share, adding assets complimentary to Chevron's in the Denver-Julesburg (D-J) and Permian Basins, Chevron announced in a May 22 press release.
PDC shareholders will receive 0.4638 shares of Chevron for each PDC share. Including debt, the transaction’s total enterprise value is $7.6 billion.
The deal will add about 275,000 net acres near Chevron’s existing operations in the D-J Basin, boosting the company’s proved reserves by over 1 billion barrels of oil-equivalent (boe).
Scooping up PDC also adds about 25,000 net acres in the Permian’s Delaware Basin, the company said.
Chevron expects the transaction to deliver about $1 billion in annual free cash flow within the first year of closing, based on Brent crude prices of $70/bbl and Henry Hub natural gas prices of $3.50/Mcf.
The company plans to increase capital spending by around $1 billion per year in conjunction with the PDC acquisition. Chevron raised its spending guidance range to between $14 billion and $16 billion through 2027.
Chevron said it expects to realize around $400 million in capital spending efficiencies after the deal closes.
Given Chevron’s recent comments that the D-J Basin contains among their highest well returns, the company’s move to acquire PDC isn’t terribly surprising, Truist Securities Managing Director Neal Dingmann wrote in a May 22 research note.
“What is surprising to us is we do not believe the deal was fully shopped across the industry, which could have potentially enabled an even higher bid for PDCE,” Dingmann wrote.
The $72/share acquisition price equates to a 10.6% premium to PDC’s May 19 closing price of $65.12/share.
Truist estimates PDC’s current production at around 270,000 boe/d. That’s expected to drop to around 260,000 boe/d in the third quarter.
The acquisition is subject to PDC shareholder and regulatory approval, as well as customary closing conditions. It has already been unanimously approved by Chevron’s board of directors and is expected to close by year-end 2023.
Focusing on growing in the D-J Basin likely allows Chevron to acquire undeveloped upside at more favorable pricing, Enverus Director Andrew Dittmar wrote in a May 22 research note.
“The company looks to have paid less than $5,000 per acre with more than 80% of the total deal value allocated to existing production,” Dittmar wrote. “That compares to the Permian Basin, where equity valuations for companies with equivalent inventory tend to be higher and M&A markets more competitive.”
Equivalent quality inventory in the Permian Basin has traded at more than $20,000/acre in recent deals struck in the Midland and Delaware basins, per Enverus data.
Operating in Colorado does pose some increased regulatory risk to E&Ps compared to other geographies, but companies have been able to successfully secure years of drilling permits for future development, Dittmar said.
In prepared remarks, Chevron said PDC has received regulatory approval to enable development at current levels in Weld County, Colorado, into 2028.
However, the combination in Colorado could be subject to scrutiny from antitrust regulators, Dittmar said.
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