May 22 (Reuters) – Chevron Corp (CVX.N) said on Monday it is increasing its U.S. oil and gas footprint by acquiring shale producer PDC Energy Inc (PDCE.O) in a stock-and-debt transaction worth $7.6 billion.
For Chevron, the second-largest U.S. oil firm, the deal will increase its production, capital expenditures and cash flow in the United States amid geopolitical tensions following Russia’s invasion of Ukraine last year.
The deal values Denver-based PDC at $72 per share, about a 14% premium to its 10-day average ending Friday. It is expected to close by year-end, the companies said.
“It’s a strong investment in our business in the U.S.,” Chief Executive Michael Wirth told Reuters in an interview.
The company and rivals were criticized last year by U.S. President Joe Biden for not increasing output as fuel prices spiked.
Analysts in recent months have been questioning management’s ability to counter worries that the company’s core U.S. shale properties are in decline following poor performance in the Permian basin of West Texas and New Mexico last year.
“We expect these concerns on the Permian may linger,” said Biraj Borkhataria, research analyst with RBC Europe.
The acquisition will add 10% to Chevron’s reserves and lift its capital expenditures and free cash flow by about $1 billion within a year of the deal closing.
In morning trading, Chevron lost 1%, while PDC Energy rose 8%.
The acquisition will add 260,000 barrels of oil and gas production per day (boed) combined to Chevron’s output in the Permian and in the DJ basin that spans Colorado and Wyoming.
The properties it is acquiring are “high-quality inventory,” said Andrew Dittmar, who specializes in M&A at researcher Enverus. The price values PDC at about its current production rate, Dittmar said, describing the untapped reserves that come with it as “essentially free.”
Executives at San Ramon, California-based Chevron have been saying since last year that the company was looking for U.S. acquisitions. The company also recently flagged it wanted to reduce its cash stockpile in a way that would enhance shareholder profitability.
“We’re repurchasing shares at a rate of $17.5 billion per year,” Wirth said, adding that the shares exchanged for the properties represent less than two quarters of share repurchases. “So we’d buy those shares back very quickly.”
The company has been under pressure on Wall Street to show it can keep expanding production after 2027 at its main shale holdings in the Permian Basin of West Texas and New Mexico.
The deal will hike Chevron’s capital spending by about $1 billion per year, raising its annual range to $14 billion to $16 billion through 2027, the company said.
The PDC Energy deal is Chevron’s second in three years to bulk up operations in Colorado and Wyoming.
Chevron is one of the top producers in the Denver-Julesburg Basin after its $13 billion acquisition of Noble Energy in 2020.
With the acquisition of PDC, Chevron will add 10% to its proved reserves at a projected cost of less than $7 per barrel, the company said in a statement.
The oil major has minted cash from last year’s sky-high crude prices and held $15.7 billion in cash and equivalents at the end of the first quarter, about triple what it needs for operating activity.
Reporting by Arunima Kumar in Bengaluru; Editing by Krishna Chandra Eluri
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