Chevron Deal Could Kick Off Another Round Of U.S. Shale Consolidation

In early May, I wrote a piece here detailing the fact that the first quarter of 2023 was the slowest quarter for mergers and acquisitions (M&A) activity in the oil and gas upstream sector in a decade. That was according to the findings of a report published by energy intelligence and analytics firm Enverus, which was able to detail just 16 significant upstream transactions with a total value of $8.6 billion for the quarter.

By the end of last week, the slow pace of deal-making had extended well into May. But Monday, California-based Chevron
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shifted the narrative somewhat with the announcement of an all-stock buyout of Denver upstream company PDC Energy in an acquisition valued at $7.6 billion including assumed debt. It is a transaction which ranks as far and away the largest U.S. oil and gas upstream acquisition thus far in 2023.

In an interview conducted in late April, Enverus Director Andrew Dittmar had identified Chevron as one of the major shale producers that would be looking for fit-for-purpose acquisitions during the rest of 2023, along with ExxonMobil
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. The buyout of PDC Energy enables Chevron to add 275,000 net acres of leasehold in Colorado’s DJ Basin and another 25,000 net acres to its Delaware Basin assets in South Texas.

In an email, Dittmar notes that the DJ Basin acreage adds to Chevron’s already-large position there, to an extent that the deal could potentially attract anti-trust scrutiny from the federal government. “As one potential concern given its positioning though, the company will need to negotiate any anti-trust pushback as the DJ is relatively consolidated and the regulatory body recently seems to have been applying higher scrutiny to M&A,” he says.

Dittmar points out that Chevron paid “a modest premium for PDC, 14% based on a 10-day volume weighted average and 10.5% based on a prior-day close while maintaining financial accretion,” adding that “the deal will drive accretion to EPS, CFPS, FCFPS and ROCE with about $1 billion in incremental annual free cash flow.”

Dittmar adds that Chevron was able to acquire the new DJ Basin acreage for a favorable price of less than $5,000 per acre, with more than 80% of the deal value allocated to existing production. This compares to costs of over $20,000 per acre for Permian assets in recent transactions.

While acreage in Colorado does come with a higher degree of regulatory scrutiny than acreage in the Permian and some other shale plays, Dittmar notes that the initial concerns over recent state regulations may have been overblown, and the industry has been able to adapt and continue to get its business done. “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,” he says. “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.”

In fact, the higher regulatory scrutiny in Colorado likely made this deal at this time more attractive to Chevron given the rising scrutiny related to every company’s emissions profile. In its release, Chevron points to an opportunity to improve its overall ESG ratings as another positive feature of the deal, saying, “The acquisition of PDC provides Chevron with high-quality assets expected to deliver higher returns in lower carbon intensity basins in the United States.” A significant piece of that factor is Colorado’s ban on routine flaring of natural gas in the DJ Basin.

Bottom Line

During our interview in April, Dittmar said he expected the pace of M&A activity to heat up as the year progresses, as potential acquiring companies seek to invest large stores of cash on-hand in new, accretive assets, and pointed to Chevron and ExxonMobil as two likely buyers in the shale sector. Chevron was the first to act, but it is fair to point out here that rumors of a possible buyout of Permian Basin giant Pioneer Natural Resources
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by ExxonMobil circulated again in early April.

The “bigger is better” philosophy has dominated the upstream segment of the U.S. shale sector in recent years, as operators strive for economies of scale to help create higher investor returns. This and other factors imply that Chevron’s buyout of PDC Energy could well become a kickoff-point for another round of consolidation as other buyers work to keep up.