Rocky Mountain gas driller PDC Energy Inc. was looking to expand its small Permian Basin position and approached neighbor Chevron Corp. about buying bolt-on oil leases in the play from the supermajor. Chevron did not want to sell and was looking instead to expand its gas position in the Rockies. Chevron turned the tables and bought PDC for $6.3 billion, according to regulatory filings.
One of the top reasons Chevron gave for wanting the deal was PDC's environmental record. Chevron said it wanted to lower its carbon intensity and learn from PDC's efforts in Colorado's strict regulatory environment, according to PDC's proxy statement released July 7 prior to a shareholder vote Aug. 4.
"PDC's assets are expected to help propel Chevron toward the companies' shared goal of a lower carbon energy future while also safely delivering higher returns," according to the prospectus. Chevron plans to keep many PDC workers on the job to take advantage of their environmental, social and governance knowledge and practices, the proxy said.
Chevron representatives "indicated that Chevron had been impressed with PDC's successes and management team and that an acquisition of PDC would align with Chevron's focus on generating higher returns while expecting to further lower Chevron's upstream carbon intensity via practices such as electric drilling and completion equipment, no routine flaring, low emission facility designs, and other best practices," PDC's proxy said.
PDC's ESG reputation
PDC said it had wanted to expand beyond its Colorado location since 2018 to reduce the regulatory risk it was taking on in Colorado. At the same time, PDC wanted to add oil from another basin to balance out volatile natural gas prices, the proxy said, much like the 2021 merger of Marcellus Shale driller Cabot Oil & Gas and Permian operator Cimarex Energy that created Coterra Energy Inc.
Tisha Schuller, a former president and CEO of the Colorado Oil & Gas Association, sees PDC's ESG reputation as well earned. PDC has had "thoughtful" engagements with regulators and legislators and is known for reducing its regulatory risk by proactively building relationships with the communities in which it operates, Schuller said in an email.
Schuller is the founder and CEO of Colorado-based consulting firm Adamantine Energy, which specializes in advising oil and gas operators on ESG practices, community engagement and economic justice issues.
PDC kicked lots of tires; Chevron drove the deal off the lot
PDC looked at several companies, both private and public, outside the Denver-Julesburg Basin as merger targets, according to the proxy statement's account of the events leading up to the deal. It came close to a deal but backed away when the seller sought more cash. Throughout 2021 and 2022, PDC's president and CEO, Bart Brookman, kept after Chevron, looking to carve off a bit of the major's Permian empire to add to PDC's territory. At one point, PDC offered itself up as an operator in a Permian Basin joint effort. Chevron declined that deal.
But in the new year, Chevron changed the dialogue from Permian oil to Rockies gas. Chevron's vice president of M&A and origination, Frank Mount, met Brookman at an industry conference in January and told him the tide had shifted — Chevron wanted to explore buying PDC.
Chevron closed the deal in less than six months. There was a little quibbling over the exchange ratio for PDC's stock; Chevron nudged up the ratio PDC shareholders would receive for their stock while turning down PDC's bid to include a cash component.
The lawyers and accountants produced the final deal May 21, a Sunday, after working through the weekend to smooth out the details of the deal. PDC's board approved the deal that afternoon, and it was announced to the public May 22 before the markets opened.
"[Chevron] is the beneficiary of the pro-forma material core DJ position; the largest in the industry," Truist Securities analyst Neal Dingmann told clients after the deal was announced in May. "While there was slight investor concern over an all stock over a cash deal, we believe [Chevron] squashed concerns suggesting it would repurchase more shares in two quarters than the total deal."
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