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Chevron Acquires PDC Energy in $6.3 Billion, All-stock Deal

Monday morning provided some corporate M&A fireworks as Chevron announced the purchase of Colorado-based PDC Energy. It will acquire all of the outstanding shares of PDC in an all-stock transaction valued at $6.3 billion, or $72 per share.

The deal makes Chevron an even more formidable operator in Colorado by tacking an additional 275,000 net acres in the the Denver-Julesburg (DJ) Basin onto its existing position after acquiring Noble Energy three years ago.

PDC also holds 25,000 net acres in the Permian basin, a prolific oil bas in Texas responsible for America’s surge in oil production. It’s split of assets between the DJ and Permian basins makes Chevron a sensible strategic buyer as it can leverage operational synergies in both area with the company expected to capture about $100 million in annual operational synergies.

“PDC’s attractive and complementary assets strengthen Chevron’s position in key U.S. production basins,” said Chevron Chairman and CEO Mike Wirth. “This transaction is accretive to all important financial measures and enhances Chevron’s objective to safely deliver higher returns and lower carbon. We look forward to welcoming PDC’s team and shareholders to Chevron and continuing both companies’ focus on safe and reliable operations.”

“The combination with Chevron is a great opportunity for PDC to maximize value for our shareholders. It provides a global portfolio of best-in-class assets,” said Bart Brookman, PDC President and CEO. “I look forward to blending our highly complementary organizations, and I’m excited that PDC’s assets will help propel Chevron toward our shared goal for a lower carbon energy future.”
Transaction Benefits

In a news release, Chevron highlighted four key developments about the deal, noting it is:

  • Complementary to Chevron’s operations in important U.S. production basins
  • Adding 10% to oil equivalent proved reserves for under $7 per barrel
  • Accretive to earnings per share and return on capital employed (ROCE)
  • Expected to add $1 billion to annual free cash flow

Shortly after the news broke, Andrew Dittmar of Enverus Intelligence Research, a nationally-recognized oil and gas M&A analyst, offered his in-depth review of the deal.

“The acquisition of PDC provides Chevron with high-quality assets expected to deliver higher returns in lower carbon intensity basins in the United States. PDC brings strong free cash flow, low breakeven production and development opportunities adjacent to Chevron’s position in the DJ Basin, as well as additional acreage to Chevron’s leading position in the Permian Basin.”

Besides favorable ESG metrics and the immediate financial accretion that comes from buying from the smaller-sized E&P peer group that has been discounted by the market, Dittmar pointed out that focusing on the DJ Basin likely allows Chevron to acquire undeveloped upside at more favorable pricing. The company looks to have paid less than $5,000 per acre with more than 80% of the total deal value allocated to existing production. That compares to the Permian Basin where equity valuations for companies with equivalent inventory tend to be higher and M&A markets more competitive. Land containing equivalent quality inventory has priced at north of $20,000 per acre in recent M&A in both the Midland and Delaware basins.

The Colorado assets do come with some increased regulatory risk, but the worst case for stopping permitting feared several years back has largely not come to pass. Companies have successfully been able to secure years of drilling permits and the PDC assets’ location in Weld County helps alleviate future development concerns versus more populated portions of the play.

With its large exposure in the play and position in the market, Chevron is well positioned to be a champion for oil and gas production in Colorado.

Biden is Right About One Thing — Oil and Natural Gas Aren’t Going Anywhere

A funny thing happened when President Biden went off script during his recent State of the Union speech and began jousting with a raucous group of Republican lawmakers.

He told the truth.

Now, that’s not to say the rest of what he said was lies, but in this unscripted moment, which began just as he was talking about climate change, he injected a moment of reality into his speech.

“We’re still going to need oil and gas for a while,” he said, probably to the chagrin of his speech writers.

READ — Understanding ESG & Colorado’s Energy Transformation

He then quickly added, in another off-the-cuff remark, that we’re going to need oil for “at least a decade.” It drew laughs from Republicans because, as conservative Jonah Goldberg tweeted, that’s like saying we’ll need water and oxygen for “at least a decade.”

Even though President Biden has continuously vilified this industry and made it harder to develop our natural resources, beginning with campaign pledges to shut down all drilling to his first few days in office when he shut down the Keystone pipeline and froze federal leasing, his unscripted moment brought a much-needed dose of reality to our national conversation on energy.

We need oil and natural gas to survive. And will, for years to come. Not just a decade.

The federal government, through its Energy Information Administration, projects that by 2050, we will need more oil and natural gas than today, not less. (To be fair, they also expect an even greater share of renewables in our energy mix.)

The global population is growing, and access to efficient, reliable and affordable energy is a human right. We will need all forms of energy to thrive, and attacking domestic production, shutting down infrastructure and making it harder to develop here only means we’ll rely on foreign countries for our energy, which is not an environmental solution and makes our country less secure.

READ — Do Hispanics Bear the Brunt of the Energy Crisis?

Today, oil and natural gas are the primary sources of energy for the global economy, supplying roughly 70 percent of the total global energy demand. In 2021, 81 percent of our primary energy in the United States came from fossil fuels. We will continue to need oil and natural gas for decades to come for many reasons. It is our challenge to produce it cleaner, better and safer here than anywhere on the globe.

But we need realistic conversations about where our energy comes from, and the trade-offs and benefits of all energy sources.

In Colorado, the governor recently renewed his pledge to move our state to 100 percent renewable energy by 2040. But just a few days prior, for nearly three days when the temperature hovered around 0, renewables provided almost no power to our electrical grid as the wind wasn’t blowing and the sun wasn’t shining. Natural gas and coal were the workforces that kept us safe and warm during that cold snap.

Knowing that we need these resources, we need to do a better job of sharing the positive environmental changes we’ve seen in recent years: The new technologies, the lowering of emissions and the promise of innovation and ingenuity.  Our elected leaders need to embrace that as well.

If you’re concerned about climate change, it’s important to note that today we’re powering our electric grid with more natural gas, wind, and solar energy than ever before. The environmental benefits have been, and will continue to be, profound because natural gas, as an energy source, has a low carbon dioxide emissions profile.

But that’s just part of the story. Numerous emissions reductions beyond CO2 have occurred as a result of this trend, with sulfur dioxide down 88 percent and ground-level ozone down 22 percent. The six most common pollutants (PM2.5 and PM10, SO2, NOx, VOCs, CO and Pb) are collectively down 73 percent. That’s a tremendous success story for our environment and our air quality.

In Colorado, we also can be proud that methane emissions from oil and natural gas production are decreasing, and our industry’s volatile organic compound (VOC) emissions have dropped nearly 60 percent since 2011. Technology improvements and regulations that reduce the chance for methane and VOCs to escape into our atmosphere are working.

Our industry continues to make tremendous progress in both the efficiency of energy consumption and in reducing greenhouse gases. However, more work must be done.

We can have the economy we desire and the environment we need, but we need to have realistic conversations about climate, where our energy comes from and what’s feasible. We also need to support policies and infrastructure that allows for continued domestic production, especially here in Colorado where we’re producing some of the cleanest molecules of energy on the planet.

Clean, affordable energy is the key to our world’s future, and oil and natural gas have an important role to play.

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Dan Haley is president and CEO of the Colorado Oil & Gas Association.