Chevron boosts US shale footprint with $6.3bn deal

Adds details from conference call, analyst comment starting in seventh paragraph.

Chevron has agreed to buy Denver-based PDC Energy for $6.3bn in stock, doubling down on its Colorado shale business to make it one of the oil major's top five assets for production and free cash flow.

The oil major agreed to pay $72/share for the US oil and gas independent, representing a 14pc premium to PDC's prior 10-day average closing stock price.

The takeover of PDC would increase Chevron's proved reserves by 10pc at an acquisition cost of under $7/bl of oil equivalent (boe). Chevron would gain 275,000 net acres in the DJ basin of Colorado and Wyoming, as well as 25,000 net acres in the Permian basin of west Texas and eastern New Mexico.

"PDC's attractive and complementary assets strengthen Chevron's position in key US production basins," chief executive officer Mike Wirth said.

Flush with near-record cash flow after last year's run-up in oil prices, producers are stepping up mergers and acquisitions in the shale patch, with the top-performing Permian basin likely to attract the most interest. In a separate announcement today, Chord Energy agreed to snap up assets in the Williston basin from ExxonMobil for $375mn in cash.

Chevron produced just over 140,000 boe/d from the DJ Basin in 2022. With the acquisition, its output from the basin is poised to increase to about 400,000 boe/d in 2024 and move slightly higher in 2027.

"You can think of it as plateauing in that range - which is a way for us to generate strong cash flow, high efficiency and strong returns," Wirth said today on an investor conference call.

Chevron had previously said it would be hesitant to engage in deals while oil prices were at the upper end of the commodity cycle.

"When prices were in the 80s and 90s and higher, it felt like we were certainly at the top end of the market," Wirth said. "We're down at a different point in the market right now."

The transaction, which has been approved by the boards of both companies, would add about $1bn to annual free cash flow for Chevron.

"Focusing on the DJ basin likely allows Chevron to acquire undeveloped upside at more favorable pricing," said Andrew Dittmar, director at Enverus Intelligence Research.

Chevron looks to have paid less than $5,000/acre, with more than 80pc of the total deal value allocated to existing production, which compares favorably to the higher valuations in the Permian basin, he said.

As a result of the acquisition, Chevron expects to boost capital expenditures by around $1bn a year, raising its annual guidance range to $14bn-$16bn through 2027. It anticipates savings from the combination of about $400mn.

The deal, which is expected to close before the end of the year, is valued at $7.6bn including debt.

Chevron was the first to make a major acquisition coming out of the pandemic, with the $5bn purchase of Noble Energy in July 2020.

By Stephen Cunningham

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