A deal by
Chevron
to buy smaller oil-and-gas producer
PDC
Energy is raising eyebrows for what some consider a particularly cheap acquisition price.
“I have heard some portray this as a take-under…technically not correct but tells you the sentiment,” writes Dan Pickering, chief investment officer of Pickering Energy Partners, in an email to Barron’s. “Chevron is the winner in this one.”
A take-under is a deal where the acquirer pays below-market prices.
Chevron (ticker: CVX) is agreeing to buy PDC Energy (PDCE), a top Colorado oil-and-gas producer for $6.3 billion, or $72 a share, a price that Chevron notes is 14% above PDC’s average share price over the previous 10 trading days.
PDC was trading at $69.82 on Monday—a sign that investors see the deal as likely to be completed but not a certainty. The apparent discount to the deal price may also relate to the fact that Chevron is paying for PDC with its own stock, so fluctuations in Chevron stock will impact PDC’s stock, too. Chevron shares fell 1.8% on Monday.
It looks like a good deal for Chevron, which would become the largest producer in Colorado. For PDC shareholders, the deal is getting a harsher reception. The price is about 25% below the average analysts’ price target of $90.29, and some are questioning whether Chevron ought to be paying more.
The boards of both companies have signed off on the acquisition, but PDC shareholders still get to vote on whether to approve the deal.
There are several ways to value an oil and gas deal, which makes it hard to tell whether an acquisition is a relative value.
The deal values PDC at 2.9 times its expected enterprise value to Ebitda, or earnings before interest taxes depreciation and amortization, over the next four quarters, according to Truist analyst Neal Dingmann. That’s in line with two other deals made this year, he calculates.
But it’s less than other recent deals on some other metrics, including the price per each flowing barrel of oil, which measures the deal value based on how much oil the company currently produces—according to Dingmann.
Others also questioned the price.
“Without commenting on whether the deal will go through or not, PDC shareholders might want to ask the question: why now, why sell at 2 times its 2024 Ebitda?” said Mizuho Group analyst Nitin Kumar.
After Monday’s announcement of the deal, the companies had a conference call with analysts. PDC CEO Barton Brookman said he believes the company was able to “maximize value” for its shareholders.
Some analysts questioned whether there was a competitive bidding process, which might have boosted the price.
“What is surprising to us is we do not believe the deal was fully shopped across the industry which could have potentially enabled an even higher bid for PDCE,” wrote Dingmann in a note before the conference call.
On the call, Dingmann asked Brookman if PDC had received other offers. Brookman said “I can’t give you a lot of details, but I can promise you the Board undertook a rigorous process as we looked at the merits of this deal and other pathways that we could go down and it was unanimous that this is the best deal for our shareholders. So the process was thorough. I can promise you.”
Some analysts noted that PDC has traded higher than the acquisition price in the past year. Its 52-week high is $89.22.
“PDC shares traded above $80 multiple points in 2022,” said KeyBanc analyst Tim Rezvan in an interview with Barron’s. “They were above $70 earlier this year. So the pricing does not seem terribly strong to us.”
In addition, PDC has a strong balance sheet and free cash flow, and recently acquired enough permits for about five years in Colorado, a state where permitting reviews can be complex. “This was not a company in any type of financial or strategic distress,” Rezvan said.
That said, Rezvan still expects the deal to pass muster with shareholders. Oil producers in Colorado have tended to trade at more modest valuations than Texas producers, given the difficulty of obtaining permits in Colorado, among other issues, he said. It doesn’t appear that there were other bidders for PDC, so the company’s other option would be to remain independent. And if the deal fell apart, there’s a good chance that in the near term the share price would fall back to $65, where it was trading before the announcement, he noted.
PDC’s largest shareholders are Vanguard,
BlackRock
and Fidelity, which tend to hold very large passive stakes in companies through their investors’ ownership of index funds and other ETFs. The next two largest shareholders are Dimensional Fund Advisors and Wellington Management. Asked if Dimensional supports the deal, a spokesman wrote that “as a systematic investment manager, we do not comment on individual stocks.” Wellington did not respond to a request for comment.
The deal could also potentially be held up by another factor. The Federal Trade Commission has lately been challenging some oil and gas deals on antitrust grounds. This deal would leave three companies with the vast majority of acreage in Colorado, analysts said.
Asked about the issue on the conference call, Chevron CEO Mike Wirth said “We don’t see any competition issues being involved.”
Write to Avi Salzman at [email protected]
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