Even after being outbid by Anadarko Petroleum in 2019, Chevron has expanded its position in the US shale industry beyond the giant Permian Basin, likely at a lower cost than it would have paid for by Anadarko.
First, it was the $5 billion deal in 2020 to acquire Noble Energy; second, on Monday, it announced a $6.3 billion deal to buy PDC Energy. Together, the two relatively small all-stock offers will transform Chevron into the largest oil and gas producer in the so-called Denver-Julesburg shale basin, which stretches across Colorado, Nebraska and Wyoming.
Speaking of Chevron, the DJ Basin announced “another piston” in its already strong shale engine. The location may come as a surprise, because Colorado tends to fall under Wall Street’s radar, and the state is seen as riskier from a regulatory standpoint than Texas or even New Mexico. Dig deeper, though, and the scale of the new business is clear. Almost out of the blue, the DJ Basin will become one of Chevron’s top five assets in terms of production and free cash flow. If the deal closes by the end of the year, as expected, Chevron would pump about 360,000 barrels of oil equivalent per day there, quickly approaching 400,000 barrels per day by 2024. At its much better-known location in the Permian, it is pumping about 800,000 barrels a day.
At first glance, the deal may seem more opportunistic than strategic. Chevron certainly appears to have taken advantage of the fact that any oil company heavily exposed to Colorado tends to trade at a discount due to investor concerns about environmental regulatory risk. PDC was no exception, and Chevron has bought relatively cheap oil and gas reserves, paying around $7 a barrel for the inventory. The company expects the transactions to be immediately accretive to its shareholders, adding about $1 billion to its annual free cash flow, a number that may rise as the synergies could be significantly greater than Chevron indicated. From a business perspective, the question is not why Chevron is buying, but why PDC is selling.
However, there is also a strategic angle. The purchase speaks volumes about the geographic and business shift underway in the U.S. shale industry. Of the five major American shale basins, two – where the revolution largely originated – have already passed their peak: production in the Bakken, North Dakota, and the Eagle Ford, south of Texas, it’s peaked. Another basin, the Anadarko-Woodford in Oklahoma, has probably also peaked. Today’s oil play is all about the Permian and DJ basins. In both, Chevron is now a major producer.
By expanding beyond the Permian into a second U.S. shale basin, Chevron is becoming even more American, quickly reversing its internationalization after its merger with Texaco some two decades ago, when it created powerful business units in places as far away as Australia and Kazakhstan. Next year, about 40% of the company’s operating cash flow would come from pumping oil and gas from onshore and offshore fields in the United States, according to Citigroup. Add in the US refining and marketing business and about half of Chevron’s operating cash flow is made in the US.
