Monday morning provided some corporate M&A fireworks when 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 adding an additional 275,000 net acres to DJ’s significant position that the company acquired in 2020 with its purchase of Noble Energy.”
Dittmar, who noted that PDC also has 25,000 net acres in the Delaware position, said the company’s asset allocation between these two plays makes Chevron a savvy strategic buyer because it can take advantage of operational synergies in both plays “with which the company is expected to capture about $100. million in annual operating synergies”.
“Another key fact, although not unique to Chevron, is the much higher multiple that its equity business has, compared to SMID-head operators such as PDC, with Chevron trading at 5.6x l ‘EBITDA 2023E vs PDC at 3.3x,’ Dittmar noted.
“This allows the company to pay a modest premium per PDC, 14 percent based on a 10-day volume weighted average and 10.5 percent based on a previous day’s close, while maintaining financial accretion,” added.
“Chevron says the deal will increase EPS, CFPS, FCFPS and ROCE by about $1 billion in annual incremental free cash flow. The company also noted that the combination would reduce its carbon intensity without turning on routine in the DJ basin,” Dittmar continued.
While the use of all equity in the Chevron deal reduces financial accretion somewhat, it also helps mitigate commodity price risk and has been used in the past by buyers and sellers at uncertain points of the commodity market price cycle, said the director of Enverus.
“Chevron’s management noted that at its current pace of share repurchases, the company is on track to purchase all of the shares issued in this transaction within two quarters,” he noted.
On the rise without development
In addition to the favorable ESG metrics and immediate financial accretion that comes from buying into the smaller E&P equipment group that has been discounted by the market, focusing on the DJ Basin likely allows Chevron to acquire a undeveloped increase at more favorable prices, Dittmar said.
“The company appears to have paid less than $5,000 per acre with more than 80 percent of the total bid value allocated to existing production,” he added.
“This 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 been priced north of $20,000 per acre in recent M&A in both the Midland and Delaware basins,” Dittmar said.
Dittmar warned that the Colorado assets are at increased regulatory risk, but added that the “worst case for de-permitting that was feared a few years ago has not happened.”
“Companies have successfully secured years of drilling permits, and the location of PDC’s assets in Weld County helps alleviate future development issues compared to more populated parts of the play,” he said.
“With its large exposure to the play and its market position, Chevron is well positioned to be a champion of oil and gas production in Colorado,” he added.
“As a potential concern given its positioning, however, the company will have to negotiate any antitrust pushback as the DJ is relatively established and the regulator recently appears to have been applying greater scrutiny to mergers and acquisitions,” Dittmar concluded.
Chevron-PDC
On Monday, Chevron announced that it had entered into a definitive agreement with PDC Energy to acquire all of PDC’s outstanding shares 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 deal, PDC shareholders will receive 0.4638 Chevron shares for each PDC share, Chevron said, adding that the total value of the company, 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 that are expected to provide higher returns in less carbon-intensive basins in the United States. PDC brings strong free cash flow, low production and development opportunities alongside Chevron’s position in the DJ Basin, as well as additional acreage to Chevron’s leading position in the Permian Basin, said the company
“PDC’s attractive and complementary assets strengthen Chevron’s position in key U.S. producing basins,” Chevron President and CEO Mike Wirth said in a company statement.
“This transaction contributes to all important financial measures and enhances Chevron’s goal of delivering higher returns and lower carbon safely. We look forward to welcoming the PDC team and shareholders to Chevron and continuing to focus both companies in safe and reliable operations,” he added.
Also commenting on the deal, Bart Brookman, president and CEO of PDC, said, “The combination with Chevron is a great opportunity for PDC to maximize value for our shareholders.”
“It offers a global portfolio of best-in-class assets,” he added.
“I look forward to combining our highly complementary organizations and am excited that PDC’s assets will help propel Chevron toward our shared goal of a lower carbon energy future,” Brookman continued.
To contact the author, please send an email andreas.exarcheas@rigzone.com
