- Agreement to increase production of Chevron DJ basins by 260,000 b/d
- The company raises its investment expectations upon purchase
- Chevron shares fall less than 1% and PDC Energy gains 9%
May 22 (Reuters) – Chevron Corp (CVX.N) said Monday it is increasing its presence in the US oil and gas industry by acquiring shale producer PDC Energy Inc in a $7.6 billion equity and debt deal.
For Chevron, the second-largest U.S. oil company, the deal will boost its production, capital expenditures and cash flow in the United States amid global geopolitical tensions over energy supply after Russia’s invasion of Ukraine last year.
“It’s a solid investment in our US business,” CEO Michael Wirth said in an interview with Reuters.
Major US oil companies have come under fire from President Joe Biden for failing to increase production in the US as consumer fuel prices rose last year. Wirth said the deal is consistent with those calls while adding shareholder value.
Analysts in recent months have questioned Chevron’s ability to allay concerns that the company’s key U.S. shale properties are declining after poor performance in the Permian Basin of West Texas and New Mexico last year.
“We expect these concerns about the Permian to persist,” said Biraj Purkhataria, research analyst at RBC Europe.
The deal values the Denver-based PDC at $72 per share, about a 14% premium over the 10-day average ending Friday. Both companies said it is expected to close by the end of the year.
The acquisition would add 10% to Chevron’s reserves and increase capital expenditures and free cash flow by approximately $1 billion within a year of closing the deal.
In morning trading, Chevron was down less than 1%, while PDC Energy was up 9%.
The acquisition will add 260,000 barrels of oil and gas production per day (boed) to Chevron’s production in the DJ basin, Wirth said, making the Colorado operations one of the company’s top five assets by production.
PDC Energy produces about 25,000 barrels per day in the Permian Basin, with Chevron supplying 700,000 barrels of oil.
The properties it acquires are “high quality stocks,” said Andrew Dittmar, a mergers and acquisitions specialist at researcher Envirus. Price values PDC at its current rate of production, Dittmar said, describing the untapped reserves that come with it as “essentially free.”
Chevron’s executives of San Ramon, California, say the company has been seeking acquisitions in the US since last year. The company also recently indicated that it wants to reduce its cash inventory in a way that will improve shareholder profitability. The purchasing guidelines have remained unchanged.
“We repurchase $17.5 billion of shares annually,” Werth said, adding that real estate-traded stocks account for less than two-quarters of share repurchases. “So we are going to buy back those shares very quickly.”
The company is under pressure on Wall Street to show it can continue to expand production beyond 2027 at its large shale holdings in the Permian Basin of western Texas and New Mexico.
The company said the deal would increase Chevron’s capital expenditures by about $1 billion per year, increasing its annual range to $14 billion to $16 billion through 2027.
Chevron is one of the largest producers in the Denver-Jolesburg basin after acquiring Noble Energy for $13 billion in 2020.
The company said in a statement that with the acquisition of PDC, Chevron will add 10% to its proven reserves at an expected cost of less than $7 a barrel.
Wirth said the deal does not prevent the company from evaluating other potential acquisitions.
“We never stopped looking,” With said. “We look for things that fit strategically into our portfolio and create shareholder value.”
Additional reporting by Arunima Kumar in Bengaluru; Edited by Krishna Chandra Elori
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