CVX - PDC Energy: $7.6 Billion Acquisition By Chevron Appears To Be At A Fair Price

2023-05-26 11:18:47 ET

Summary

• PDC Energy is being acquired by Chevron for approximately $7.6 billion, including the assumption of $1.3 billion in debt.
• This is close to what I had previously valued PDC at in a long-term $75 WTI oil environment.
• PDC Energy is now trading at only a slight discount to the value of 0.4638 Chevron shares.
• Chevron expects to benefit mainly from operational and capital efficiencies from the deal.
• This deal would leave DJ Basin production concentrated among three companies, leading some to believe there may be some regulatory risk with the deal.

PDC Energy ( PDCE ) announced that it was being acquired by Chevron ( CVX ) for $7.6 billion, including the assumption of $1.3 billion in debt. This was close to my previous estimates of PDC's value , which valued it at $7.65 billion to $8.065 billion at long-term $75 WTI oil. PDC shareholders will receive 0.4638 Chevron shares for each PDC share they own, with the deal expected to close by the end of 2023.

I am moving to a neutral outlook on PDC Energy now since it is trading for nearly the same price as 0.4638 Chevron shares. Depending on when the deal closes, PDC Energy is trading about 0.6% to 1.2% lower than its equivalent in Chevron shares after adjusting for future dividends. I also don't expect the deal price to be increased since it appears to be roughly fair to me.

Deal Details

PDC Energy is being acquired by Chevron in an all-stock transaction that values it at $72 per share, based on Chevron's share price at the time of the deal announcement. This includes $6.3 billion for the stock consideration plus the assumption of $1.3 billion in debt. The total transaction value is thus approximately $7.6 billion.

PDC shareholders are receiving 0.4638 shares of Chevron for each PDC share that they own. At Chevron's current price of $154.56, this results in an estimated value of $71.68 for PDC's shares, while the deal is expected to close by year-end.

Dividends

PDC is currently trading at $70.63 ($1.05 less than the deal value based on Chevron's current share price). However, this difference is likely to be partially made up by dividends during the remainder of 2023.

Chevron currently pays a $1.51 per share quarterly dividend, which translates to approximately $0.70 per PDC share based on the 0.4638 Chevron shares to one PDC share exchange rate for the acquisition. Chevron's Q2 2023 ex-dividend date has already passed, so there will be two more dividend payments by the end of the year, which adds up to approximately $1.40 per PDC share equivalent.

PDC is currently paying a quarterly dividend of $0.40 per share, with the next dividend payable on June 22 to stockholders of record at the close of business on June 8. The record date for PDC's Q2 2023 dividend was 20 days later than the record date for Chevron's Q2 2023 dividend.

Thus, if the deal closes at the end of 2023, PDC shareholders of record on June 8 would end up with three dividend payments by the end of 2023 compared to two dividend payments for Chevron shareholders of record on that same date. However, if the deal closes a bit earlier than that (such as at the end of November 2023), PDC shareholders would not get a Q4 2023 dividend from either Chevron or PDC.

Buying PDC instead of Chevron right now saves approximately 0.6% net of dividends if the deal closes at the end of November and approximately 1.2% net of dividends if the deal closes at the end of the year. This discount isn't large given the potential regulatory scrutiny over the deal.

Notes On Acquisition Price

The acquisition price appears to be relatively fair to me. I had previously estimated PDC's value at approximately $80 to $85 per share at the end of 2023. This assumed that PDC's free cash flow during 2023 would allow it to reduce its net debt to $1.01 billion by the end of the year as well as repurchase shares to bring its share count down to 83 million.

Thus, this would result in an estimated enterprise value of $7.65 billion (at $80 per share) to $8.065 billion (at $85 per share) for PDC based on my long-term commodity price expectations of $75 oil and $3.75 gas.

Chevron's $7.6 billion acquisition price appears to be reasonable and pretty close to that range. Chevron is also paying a 14% premium to PDC's average closing price for the 10-day period up to May 19. The per-share value is lower than my estimates due to PDC's currently higher share count and debt compared to my end-of-2023 projections.

Some analysts believe that Chevron got a very good deal with its acquisition of PDC Energy based on EV to EBITDA metrics, but looking at free cash flow, the deal seems relatively fair as well. PDC's capex budget is approximately 62% of projected EBITDA for 2023 at current strip, although it is also growing production by mid-single digits compared to Q4 2022.

PDC is expected to generate around $800 million in free cash flow at current strip, so the free cash flow yield would be around 10.5% based on the deal price of $7.6 billion. With a maintenance capex budget for 2023 instead, PDC would generate around $1 billion in free cash flow at current strip, for an FCF yield of 13.2%.

Benefits For Chevron

As noted above, I believe the deal value is pretty close to fair price. However, Chevron does expect significant efficiencies resulting from the deal. It believes that it can continue to grow DJ Basin production a bit (mid-single digits yearly growth until 2024, followed by low-single digits growth until 2027) with $1 billion per year in net additional capex. PDC's capex budget for 2023 was around $1.425 billion, so it is reducing this budget through around $400 million per year in estimated capex efficiencies. It also expects to achieve $100 million per year in pre-tax operational cost reductions.

If Chevron can achieve those targeted savings, then the whole deal may add a couple of percent to its value. It expects to generate $1 billion in additional free cash flow per year at $70 Brent and $3.50 Henry Hub gas. This would be a 4.7% increase to its 2021 free cash flow, which had relatively similar commodity prices, while Chevron's share count is going up by 2.2% from this deal.

Conclusion

Chevron is acquiring PDC Energy for $7.6 billion, which appears to be a roughly fair price to me based on my previous estimates of PDC's value. I don't expect a higher offer for PDC Energy and some think there may be a bit of regulatory risk with the deal due to the continued consolidation of DJ Basin production . As a result, I am now neutral on PDC Energy since its shares are trading only at a very minor discount to its equivalent value in Chevron shares.

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