M&A: PDCE is being sold to Chevron

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dan_s
Posts: 34463
Joined: Fri Apr 23, 2010 8:22 am

M&A: PDCE is being sold to Chevron

Post by dan_s »

PDC Energy is one of the companies in our High Yield Income Portfolio. PDCE spiked up to $70 on the news. My current valuation is $103, so Chevron got a very good company for a bargain price.
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(Bloomberg) -- Chevron Corp. said it will buy driller PDC Energy Inc. in a $6.3 billion all-stock deal, allowing Chevron
to expand its holdings in shale basins in Colorado and West Texas. < Over 80% of PDC's value is in the DJ Basin.

Chevron will pay $72 a share, a roughly 14% premium on a 10-day average based on May 19 closing prices, according to a
statement Monday. PDC shareholders will receive 0.4638 shares of Chevron for each PDC share. The deal is expected to close by
year-end, pending regulatory approval and PDC shareholder approval.

“PDC’s attractive and complementary assets strengthen Chevron’s position in key U.S. production basins,” Chevron CEO
Mike Wirth said in the statement. “This transaction is accretive to all important financial measures and enhances Chevron’s
objective to safely deliver higher returns and lower carbon.

Drillers Seek New Land

Oil and gas producers are flush with cash after raking in record profits over the past two years, leaving the US energy
patch ripe for a takeover boom. Companies are looking to bulk up and consolidate, particularly in the Permian Basin of West Texas
and New Mexico, the most prolific US shale play.

The total enterprise value of the Chevron-PDC deal including debt is $7.6 billion. Chevron said it expects the tie-
up to add about $1 billion in annual free cash flow at $70 per barrel Brent oil and Henry Hub natural gas at $3.50 per thousand
cubic feet. Morgan Stanley and Evercore advised Chevron, while JPMorgan advised PDC.
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IMO the other four large-cap upstream companies in our High Yield Income Portfolio (CTRA, DVN, FANG and PXD) are possible takeover targets because of how much free cash flow they are generating and they all have very clean balance sheets.
Dan Steffens
Energy Prospectus Group
dan_s
Posts: 34463
Joined: Fri Apr 23, 2010 8:22 am

Re: M&A: PDCE is being sold to Chevron

Post by dan_s »

We will be publishing an updated profile on Permian Resources (PR) today. It is another takeover target at today's share price and it is a pure play on the Delaware Basin.
PR has a clear path to production of more than 170,000 BOE per day, which compares to PDC's current production of ~265,000 BOE per day. Both companies have about the same amount of oil production.
Dan Steffens
Energy Prospectus Group
ChuckGeb
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Joined: Thu Nov 21, 2013 2:46 pm

Re: M&A: PDCE is being sold to Chevron

Post by ChuckGeb »

Watch for JJ to tender for CRK at $12 per share.
aja57
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Joined: Sun May 29, 2022 10:35 pm

Re: M&A: PDCE is being sold to Chevron

Post by aja57 »

Dan,
Perhaps you could enlighten some of us oil and gas neophytes as to what goes into the mix to define fair value. I'm looking at the PV 10 NAV of PCE as of 12/31/2022 of $129/share with the likelihood that oil prices will rise and ponder whether a "fair price" of 72/share was good for shareholders.
ChuckGeb
Posts: 945
Joined: Thu Nov 21, 2013 2:46 pm

Re: M&A: PDCE is being sold to Chevron

Post by ChuckGeb »

WSJ:

"Chevron is paying a 14% premium to PDC Energy’s PDCE 7.95%increase; green up pointing triangle 10-day average price ended May 19. For context, back in the depths of the pandemic in mid- 2020, when oil prices were in the $40-a-barrel range, the oil major paid a 12% premium for Noble Energy. What the deal terms highlight is the potential value that energy companies might find in smaller operators.

PDC’s valuation had been lagging historical multiples and those of the broader energy industry. Its enterprise value was roughly 2.8 times forward earnings before interest, tax, depreciation and amortization—29% cheaper than a broad basket of exploration and production companies and about half of Chevron’s valuation on the same measure. Pioneer Natural Resources, a much larger producer that Exxon Mobil is said to be eyeing for purchase, trades at a multiple similar to the supermajors. The deal terms are a stark reminder of how investor priorities have shifted since the shale boom a decade ago, when investors valued shale operators with fast growth prospects. Between 2010 and 2014, PDC Energy actually commanded a 50% premium over Chevron on average.

On a call discussing the transaction Monday, Chevron Chief Executive Officer Mike Wirth said the market seems to be assigning a discount to companies with concentration risk. PDC Energy CEO Bart Brookman said on the call that the discount is a “chronic problem,” adding that there has been a “compression” in multiples for pretty much all PDC’s small-to-mid-cap energy peers."
dan_s
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Joined: Fri Apr 23, 2010 8:22 am

Re: M&A: PDCE is being sold to Chevron

Post by dan_s »

Keep in mind that most of these deals are a combination of cash and stock in the Buyer. In this case, it is a pure stock-for-stock deal, so no taxable income for the seller. I am sure that some of PDC's largest shareholders are happy to get stock in Chevron tax free with a low basis. Chevron is a super high-quality company whose stock also has a lot of upside. IMO PDC has never gotten the stock price it deserves because of the perception that Colorado has "political risk". IMO Colorado has always been supportive of the oil industry because it generates so much revenue for the state.

CVX is a lot more "liquid" than PDCE, which is also attractive to large shareholders.

"Fair Value" is in the eye of the beholder. In this business good takeover targets have solid production, clean balance sheets and lots of high-quality running room. For majors like Chevron, they are always needing to add quality drilling inventory. Plus, they have much lower cost of capital than most mid-caps like PDC. Chevron can payoff PDC's debt quickly or refinance at a lower interest rate.

This deal is immediately accretive for Chevron and they will quickly eliminate a lot of PDC's G&A expenses. It will take several months to close, so the PDC employees that lose their jobs should get nice severance packages and time to find new jobs.

IMO no upstream company should ever trade for less than PV10 Net Asset Value based on their Proved Reserve (P1). Some of our small-caps (i.e. - Hemisphere Energy) trade for under the PV10 NAV of just their proved developed (PDP) reserves. That is insane.

My "current valuations" are based on the companies being "going concerns".

If you own PDCE, just take the money and roll it into another under-valued company. We have many to choose from. PR and ESTE look very promising to me.
Dan Steffens
Energy Prospectus Group
Fraser921
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Joined: Mon Mar 22, 2021 11:48 am

Re: M&A: PDCE is being sold to Chevron

Post by Fraser921 »

Fair points

They might have to up the price and it will be interesting to see if Biden holds this one up too
KGardiner
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Re: M&A: PDCE is being sold to Chevron

Post by KGardiner »

Any idea what the soonest the deal will close? Before the ex dividend date of June 23?
dan_s
Posts: 34463
Joined: Fri Apr 23, 2010 8:22 am

Re: M&A: PDCE is being sold to Chevron

Post by dan_s »

I think they expect it to close mid-Q4.
Dan Steffens
Energy Prospectus Group
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