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Chevron (CVX) to Acquire PDC Energy for $6.3B, Expand Acreage

Chevron Corporation CVX revealed its plan to acquire PDC Energy, Inc. (PDCE) in a transformative all-stock transaction, valued at $6.3 billion. According to the terms of the agreement, PDC stockholders will receive 0.4638 Chevron shares for every PDCE share, for a total enterprise value of $7.6 billion, including debt.

This strategic move is expected to unlock new opportunities, strengthen CVX's position in key U.S. production basins and drive higher returns.

Advantages and Synergies

PDC Energy offers several benefits for Chevron in the Denver-Julesburg (DJ) Basin, including strong free cash flow, low breakeven production and development potential close to the former's current operations.

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The acquisition will provide CVX with additional acreage in the Permian Basin, strengthening its position in one of the world's most productive oil and gas regions.

The transaction is also expected to yield several benefits for Chevron, such as higher earnings, free cash flow and return on capital employed. The company anticipates the acquisition to be accretive to all key financial measures within the first year of closing.

It expects to generate approximately $1 billion in annual free cash flow, based on future prices.

Strategic Objectives

Strategically, the acquisition aligns well with Chevron's objectives. It will boost the company's proved reserves by 10% at an acquisition cost of under $7 per barrel of oil equivalent (BOE).

CVX will gain 275,000 net acres in the DJ Basin, contributing more than 1 billion BOE of proved reserves in economically favorable locations. The expansion is expected to facilitate capital and operational synergies, as Chevron integrates PDC's assets into its existing operations.

In the Permian Basin, CVX will incorporate an additional 25,000 net acres held by production. These acres, known for their operational efficiency, are anticipated to further strengthen the company's regional development operations.

Financial and Operational Efficiency

Capital Expenditure and Cost Synergies

The transaction is expected to benefit Chevron with capital and cost efficiency. With an approximate $1 billion per year increase in capital expenditures, the company's revised guided range for the same stands at $14-$16 billion through 2027.

CVX expects to achieve approximately $400 million in capital expenditure efficiencies following the closure of the transaction. It also anticipates around $100 million in run-rate cost synergies before tax within a year of closing. These synergies are likely to further boost the combined entity’s operational efficiency and financial strength.

Transaction Approvals and Details

Per the agreement, Chevron will issue approximately 41 million shares of common stock upon closing. The acquisition received unanimous approval from both CVX and PDC Energy’s board of directors.

The deal is expected to close by the end of 2023, subject to PDCE shareholders’ approval, regulatory approvals and other customary closing conditions. This buyout consolidates Chevron's foothold in key U.S. production basins. It also underscores the company's commitment to delivering higher returns and reducing carbon emissions.

The transaction price reflects a 14% premium based on the 10-day average of closing stock prices as of May 19, 2023.

Conclusion

Chevron’s acquisition of PDC Energy presents a remarkable opportunity to expand its asset portfolio, bolster financial performance and strengthen its commitment to sustainability. This transformative deal is expected to boost CVX’s future growth, leveraging PDCE's synergies in high-potential basins with low carbon intensity.

The acquisition marks a milestone in Chevron's journey toward delivering higher returns while reducing environmental impact.

CVX, one of the largest publicly traded oil and gas companies in the world, operates under two segments — Upstream and Downstream.

PDCE is an independent exploration and production company that acquires, explores, develops and produces crude oil, natural gas and natural gas liquids in the United States. Founded in 1969, the company has its headquarters in Denver, CO.

Zacks Rank and Key Picks

Currently, both Chevron and PDC Energy carry a Zacks Rank #3 (Hold).

Some better-ranked stocks for investors interested in the energy sector are Evolution Petroleum EPM, sporting a Zacks Rank #1 (Strong Buy), and Archrock AROC and Ranger Energy Services RNGR, each holding a Zacks Rank #2 (Buy) at present. You can see the complete list of today’s Zacks #1 Rank stocks here.

Evolution Petroleum: EPM is worth approximately $219.16 million. EPM currently pays investors $0.48 per share, or 7.38% on an annual basis.

The company currently has a forward P/E ratio of 6.07. In comparison, its industry has an average forward P/E of 7.50, which means EPM is trading at a discount to the group.

Archrock: AROC is valued at around $1.55 billion. It delivered an average earnings surprise of 26.27% for the last four quarters and its current dividend yield is 6.06%.

Archrock is a provider of natural gas contract compression services and aftermarket services of compression equipment.

Ranger Energy Services: RNGR is valued at around $183.61 million. In the past year, its shares have gained 13.8%.

Ranger Energy Services currently has a forward P/E ratio of 5.30. In comparison, its industry has an average forward P/E of 11.60, which means RNGR is trading at a discount to the group.

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Chevron Corporation (CVX) : Free Stock Analysis Report

Evolution Petroleum Corporation, Inc. (EPM) : Free Stock Analysis Report

Archrock, Inc. (AROC) : Free Stock Analysis Report

Ranger Energy Services, Inc. (RNGR) : Free Stock Analysis Report

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