Chevron
made a big move in Colorado on Monday, reaching an agreement to acquire Denver producer
PDC Energy
in an all-stock transaction valued at $6.3 billion, or $72 a share. If approved by PDC shareholders, the deal will make
Chevron
the largest producer in Colorado.
“This adds a billion barrels, or 10%, to our proven reserves at less than $7 a barrel,” said Chevron CEO Mike Wirth in an interview with Barron’s. “They were ready to transact, saw the value proposition. We’ve got shared values, so it’s good for the shareholders of both companies. It’s immediately accretive on all the financials for us, and then there’s a billion dollars of incremental free cash flow we expect to see in 2024.”
Chevron (ticker: CVX) already drills in the area, known as the DJ Basin of Colorado, but the acquisition will make it the dominant player, capable of producing about 400,000 barrels a day. In total, the deal should boost Chevron’s global production by about 8%, according to Jefferies analyst Lloyd Byrne.
The deal received unanimous approval from the boards of both companies. The acquisition is expected to close by the end of 2023.
Chevron expects the transaction to add about $1 billion in annual free cash flow with Brent crude at $70 a barrel. Wirth said the deal is still attractive even if oil prices fall.
“It still works at lower prices,” he said. “There’s a low multiple on the deal. So it’s a modest premium, and that protects the downside.”
Given that Chevron will fund the acquisition by issuing stock to PDC shareholders, the deal is dilutive to Chevron shareholders. That may be why Chevron shares were down 1.1% on Monday. Asked why the company wouldn’t use cash instead, Wirth told Barron’s that using stock should give shareholders less commodity-based risk.
“In a commodity-based industry, it can be volatile, and an all-stock deal structure mitigates that volatility because you’re locked in an exchange ratio that is durable, whether prices move up or move down,” he said.
Wirth added that Chevron should be able to retire all the shares it issues for the deal in less than two quarters at its current rate of share buybacks.
PDC (PDCE) shares climbed 8.1% to $70.37.
Analysts were generally positive on the announcement, arguing that Chevron is paying a relatively modest price.
“We believe the acquisition is very favorable to CVX, as the deal provides a core position in the DJ Basin at a highly attractive valuation,” wrote Gabriele Sorbara, managing director of equity research at Siebert Williams Shank in a report Monday. “Accordingly, there should be additional upside to PDCE’s stock price.”
Sorbara has a Buy rating on
PDC Energy
shares and a target price of $100.
Write to Avi Salzman at [email protected] and Emily Dattilo at [email protected]
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