Chevron PDC Deal About Addition, Not Substitution

Oil and gas acquisitions in the era of capital discipline have often been a matter of “high-grading” portfolios by pushing out lower-return, more carbon-intensive assets. But Chevron CEO Mike Wirth tells Energy Intelligence that his firm’s agreed takeover of PDC Energy is an opportunity to do more without compromising returns or emissions objectives.

“I want to be very clear: this is not a transaction that is designed to ensure that we deliver the guidance that we have [already] laid out,” Wirth said. “We’re going to reset the baseline now. So we’ll deliver a 3% compound annual growth rate from a higher [production] base over five years … [and a] 10% average compound annual growth rate in free cash flow from a higher free cash flow base. So it’s important for shareholders to understand that this is not dilutive or, you know, a way to kind of ladder into delivering on those [previous objectives].”

The transaction in question is a $7.6 billion all-stock takeover of Denver-Julesburg (DJ) Basin specialist PDC, announced Monday.

The agreed deal will literally double Chevron’s exposure to the Colorado shale play, making it a top-five asset in the major’s global portfolio.

Wirth told Energy Intelligence that Chevron’s acreage in the DJ Basin will double to around 600,000 net acres, while its production in the play will rise from around 140,000 barrels of oil equivalent per day last year to around 400,000 boe/d in 2024 if the deal is completed by end-2023 as expected.

It will also give the Permian behemoth another 25,000 net acres to play with in the Delaware Basin as Chevron looks to optimize its path to 1 million boe/d of Permian output by 2025.

The PDC acquisition marks the largest deal in the US shale patch since ConocoPhillips bought Shell’s portfolio in September 2021, and the largest corporate shale transaction in two years.

Gunning on Growth 

Chevron’s plans to use PDC as a platform for higher oil and gas production reinforces the US major’s intentions to shirk any calls on the company — and industry more widely — to shrink in the coming years.

“We’re likely to see all-time record [oil] demand in 2023, and that demand continues to move upward,” Wirth told Energy Intelligence. “So it’s important that responsible companies continue to provide the energy the world needs.”

That confidence already underpinned Chevron’s plans to grow global oil and gas output from around 3 million boe/d last year to “well over” 3.5 million boe/d by 2026 and continue averaging at least 3% annual growth from there.

Back-of-the-envelope math suggests the addition of PDC has the potential to bring that 3.5 million boe/d forward by two years. If that proves the case, Chevron will have added roughly 1 million boe/d to its production profile over the past decade — with new heights to follow, routine divestments notwithstanding.

Further speaking to Chevron’s views of oil and gas’ likely longevity, the US major intends to fully replace the reserves it produces over time, even as it does so at a larger clip. Chevron noted Monday that PDC provides over 1 billion boe of fresh proved reserves at an acquisition cost below $7/boe, bumping up its reserves by about 10%.

The company also increased its annual capital expenditure guidance by $1 billion with the deal, to $14 billion-$16 billion.

‘Really Pleased’ in the DJ 

The Permian often takes the spotlight in Chevron’s shale portfolio, and the firm has been less forthcoming about its plans in the DJ Basin with regard to rig counts, production trajectories and the like. But Chevron management has always spoken highly of the play since entering it via its 2020 acquisition of Noble Energy, and Monday was no different.

“We’ve been really pleased with the way the DJ has performed,” Wirth told Energy Intelligence.

Prior to PDC, Chevron planned to put 70% more wells on production in the DJ Basin this year than it did in 2022, boosting growth as the company finds its groove navigating Colorado’s challenging regulatory environment. It is that growth alongside PDC’s plans that will help lift combined output above the 400,000 boe/d mark next year.

Also among the DJ Basin’s merits is an operational carbon intensity profile that would be enviable to just about any upstream portfolio. A Chevron analyst presentation on the deal showed that PDC’s portfolio carries a carbon intensity more than 60% below Chevron’s 2028 upstream targets, which themselves are a fraction of the global industry’s current average.

While US and European majors may differ substantially in their respective long-term strategies on many fronts, the group sits united in the view that resource additions and new project sanctions must support reduced emissions intensity so that global oil and gas consumption at least carries a shrinking carbon footprint over time.

Shares Over Cash 

Chevron is sitting on an ultra-low net-debt ratio of just 4% and more than $15.6 billion in cash, but the major opted to bid for PDC with 41 million newly issued shares.

Wirth told Energy Intelligence that the consideration came down to ensuring the deal’s resiliency — particularly amid volatile commodity prices.

“[Using equity] takes that commodity price risk out of a transaction that you could think looks fair today, but then six months from now, it looks like there’s a winner and a loser” if oil and gas prices — and the share price of the targeted company — have moved considerably, he explained.

Benchmark West Texas Intermediate oil prices have indeed fallen by more than 20% over the past six months to around $70 per barrel, and are now 40% below year-ago levels. US natural gas prices are meanwhile holding near multiyear lows.

Wirth acknowledged on a call with analysts that softer prices had improved the prospects for M&A compared to when oil was in the $80s and above — a level Chevron felt was the “top end” of the market.

At the same time, PDC management noted that an equity deal was attractive to their board since the E&P has been trading at less than half the valuation multiples of Chevron, meaning shareholders now have entry into a higher-valued company.

Wirth added that Chevron’s massive buyback program is repurchasing shares at a fast enough rate that the newly issued shares will be retired in less than two quarters.