PDC Energy, Inc. (CVX) Earnings Call Transcript & Summary

Good morning. My name is Jennifer, and I will be your conference facilitator today. Welcome to Chevron's conference call to discuss its announced acquisition of PDC Energy. [Operator Instructions] As a reminder, this conference call is being recorded. I will now turn the conference call over to the General Manager of Investor Relations at Chevron, Jake Spiering. Please go ahead.

Thank you, Jennifer. Good morning. and welcome to this special call to announce an important proposed combination. I'm Jake Spiering, General Manager, Investor Relations at Chevron. And with me today are Chevron's Chairman and CEO, Mike Wirth; PDC Energy's President and CEO, Bart Brookman; and Chevron CFO, Pierre Breber. We will refer to the slides and prepared remarks that are available on Chevron's website. Before we begin, please be reminded that this presentation contains estimates, projections and other forward-looking statements. Please read cautionary statement on Slide 2. Now I'll turn it over to Mike.

All right. Thanks, Jake. I'm pleased to announce that Chevron has entered into a definitive agreement to acquire PDC Energy. PDC is a strong strategic fit, with Chevron's portfolio. This transaction is aligned with our objective to safely deliver higher returns and lower carbon through a disciplined use of capital. The combination is expected to strengthen our position in DJ Basin and add high-return investment opportunities that also lower our overall upstream carbon intensity. We expect PDC's Delaware Basin acreage efficiently integrated into our leading position in the Permian. The transaction is expected to be accretive to all important financial measures in the first year after closing, assuming strip prices. We anticipate Chevron's annual free cash flow to increase by about $1 billion, including cost synergies and CapEx efficiencies. We'll raise our annual CapEx guidance by $1 billion to a range of $14 billion to $16 billion per year through 2027 after achieving about $400 million in CapEx efficiencies post closing. Our Investor Day guidance for compound annual growth rates in production and free cash flow through 2027 is unchanged from what will now be a higher combined base. There's also no change in the company's recently announced or recently increased share buyback guidance. Each PDC shareholder will receive 0.4638 Chevron shares as total consideration which represents a 14% premium on the 10-day average closing price. They'll have continued ownership in the business through shares of a much larger, more diversified company with long-standing financial priorities of dividend growth, disciplined capital investment, a strong balance sheet and share buybacks through the cycle. Chevron's shareholders should benefit from the incremental value that we expect the high-quality assets and synergies to realize over time as part of a global integrated company. I believe this is a compelling deal for shareholders of both Chevron and PDC. The value of the deal is supported by PDC's leading position in the DJ Basin, which is largely contiguous or adjacent to existing Chevron operations and significantly derisked with regulatory approval to enable development at current levels in Weld County into 2028. Our go-forward plans will include a development approach, focused on capital efficiency and returns. The Permian is addition to our premier existing position, adding 25,000 net acres in the core of the Delaware Basin. The acreage is held by production and development will be optimized within our broader Permian portfolio. After closing, Chevron's proved reserves will increase by 10%, and our Colorado business will be one of our top 5 assets in terms of production and free cash flow. In the addition of PDC's assets and leading capabilities is expected to further lower Chevron's carbon intensity. In closing, we're constantly looking to add good resource at good value. This transaction does both. PDC's assets strengthen our position in important U.S. basins and will compete for capital in our diversified portfolio as we drive for higher returns, and we're doing it through a transaction that we expect to be accretive across key financial metrics. We have a track record of successfully integrating companies and we look forward to welcoming PDC employees to join us in safely delivering lower carbon energy to a growing world. Now I'll hand it over to Bart to say a few words.

Thanks, Mike, and it's great to be with you today to discuss this transaction, which was unanimously approved by the Board of Directors, an exciting day for PDC. . But let me begin by expressing my sincere gratitude to all the PDC employees. It is their dedication and extraordinary talent that launch PDC on its trajectory of excellence and positioned us for a transaction of this magnitude. I am exceptionally proud of our team. . From our early roots in West Virginia, PDC has grown and evolved into a company with a strong track record of operational credibility in the DJ and Permian Basins. This credibility, along with our tremendous asset quality, has led us to this announcement. We are excited about this transaction for many reasons. It brings significant diversification and Chevron's long-standing financial priorities that include returning capital to shareholders through dividends and share repurchases. We are incredibly proud to maximize value, both with this transaction over the long term for all PDC shareholders. As Mike mentioned, the combined Chevron-PDC assets in the DJ represent an extremely compelling opportunity. This transaction will bring two of the best-in-class operators together and ensure continued output growth, lower operational costs, environmental stewardship and value creation for years to come. Both companies have excellent reputations as responsible operators who prioritize people, communities and the environment, a win-win combination by any account. I look forward to working with the Chevron team to ensure a smooth transition. And with that, I'll turn this call back to Jake.

Thank you, Bart. That concludes our prepared remarks. We are now ready to take your questions. [Operator Instructions] Jennifer, please open up the lines.

[Operator Instructions] Our first question comes from Nitin Kumar with Mizuho.

Perhaps my first one for Mike. In terms of scale, this deal is additive but not transformative to Chevron's asset position. So could you perhaps expand on the strategic rationale, particularly why target a predominantly Wattenberg-focused operator while there seem to have been some deals and assets in the Delaware and the Permian recently? And also just from a higher level, is this deal indication that Chevron thinks it's time for consolidation than U.S. shale?

Yes, Nitin. Look, this clearly supports our objective of delivering higher returns and lower carbon. The quality of the assets is very high. It's a complementary fit with our current DJ Basin operations. We've been very pleased with those assets since the Noble acquisition. PDC is respected in that basin for their operational capabilities and their ability to deliver energy safely and responsibly. They've got a very strong record of lowering the carbon intensity of their operations. It adds 1 billion barrels of reserves to our books at less than $7 per BOE. Both companies have a real commitment to managing our engagement with the regulatory process in Colorado at county level and at the state level and it's good for shareholders. It's immediately accretive across all the key measures. And as we mentioned, there's $1 billion in incremental free cash flow. So this is a transaction that has a strong strategic rationale, strong value creation for the shareholders of both companies, and we just think it makes a lot of sense. I'm not going to comment on the broader M&A trend. This was a unique opportunity between our 2 companies that both of us see in a similar fashion, and we're very pleased.

Great. It was worth the shot. If I can ask Bart, a quick one. As you know, we've been fans of the story for some time. Your stock was trading at a discount to peers. So why was this the right time or multiple for you all to sell at? Is it getting harder to be a stand-alone SMID-cap company in your opinion?

Yes, Nitin, at the end of the day, a great opportunity for our shareholders. We looked at world-class assets, diversification. Chevron strong shareholder return focus on their dividends and their share repurchase program. . In all honesty, as we have worked with the team, we also saw it as a great organizational and cultural blend. And as Mike discussed and I discussed, an opportunity to create bull's-eye 600,000-acre position in the DJ for long-term growth in the basin and improved efficiencies. So it was the right deal at the right time for us, fully supported by our Board.

We'll go next to Neil Mehta with Goldman Sachs.

Congrats, Bart and great to talk to you, Mike. I guess the first question is around the $400 million of capital efficiencies and synergies. Can you talk a little bit about where those are coming from and the confidence interval around those?

Yes. So look, we've got these large adjacent positions in the DJ Basin and the intention to optimize our development plan now across that 600,000-acre position, so both drilling and completion activities. We expect to be able to keep on a similar production trajectory with a reduced level of D&C activity and really focus on returns. So the companies have slightly different basis of design on spacing, on frac intensity. We'll take a look at that across the portfolio and kind of go with best in -- best-in-class to drive returns and efficiency. And so I think we just -- you put these 2 together and you get that -- those kind of scale opportunities. You'd go to the Permian and our position there, as you know, is very large. We're always looking for ways to core up acreage. The PDC acreage in the Delaware Basin is held by production, so there's no real timing pressure there. And so we'll optimize that into our overall Permian portfolio and development plan, and we think that we have got a pretty clear line of sight to the CapEx efficiencies.

The only add I would make, Neil, is we're baking it into our CapEx guidance, right? PDC's CapEx is notionally around $1.4 billion per year. We're increasing our CapEx guidance by only $1 billion. So it's baked into our guidance that reflects the high level of confidence that Mike just talked about.

The follow-up is just as it relates to Colorado. A couple of years ago, regulatory risk was top of mind and it was acute. Maybe you could just step back and just give us a state of play around sort of permitting risks as you see it in the state? And do you have the all clear? And how should we, as an investment community, evaluate any potential risk around that?

Yes. Maybe I'll start and then invite Bart to add his perspective, Neil. Both companies have, I think, demonstrated a commitment to constructive engagement with regulators, as I said, both at the local level, at the county level, at the state level. A few years back, there was a new permitting framework established. We've received these comprehensive area plan approvals as has PDC. There are years and years worth of approved development plans now in place in both companies. So as we bring those together, we've got years of inventory that's already permitted, which allows us to optimize the capital as we just discussed. And I think both companies have demonstrated a respect for the higher expectations that have been expressed by the citizens of Colorado, by the elected officials in Colorado. And frankly, our industry is holding itself to a higher standard as well. Our expectations for our own operations have risen. And so rather than view this as some sort of a confrontation, I think we've viewed it as a way to raise our own game as we're looking to do so and do that in a way that is constructive and allows this good engagement with stakeholders and to continue to invest in the economy of Colorado. So Bart, you might want to add a little bit of a perspective from your point of view?

Yes. Neil. And Mike, you were spot on, the regulators, I can tell you the state of Colorado view these 2 companies as kind of the gold standard right now. And we bring a great team. I know Chevron has a great team. We have all the confidence. We'll continue to navigate some of the challenging regulations at time in all honesty. But just a reminder to everybody, we've been successful in the process of obtaining approximately 1,000 permits here in the last 9, 10 months. So we have success. We understand the system. We're managing our way through it, and we've got a great reputation with the regulators. So I think we're in a really good position. The acreage position, as Mike noted in his comments, 100% -- pretty much 100% Weld County. And our perspective on this is there is not a better company probably in the world to be the champion of energy in the state of Colorado than Chevron. So I think that was something we had good discussions with the Board about and I think it's a great move for the state of Colorado.

Our next question comes from the line of Jason Gabelman with TD Cowen.

Congrats on the deal. I guess my first question is just you had discussed over the past 6 months at least, that you thought commodity prices were too high to execute upstream M&A and obviously, this deal suggests otherwise. So maybe I was hoping you could talk about if something has changed in terms of that commentary that you've previously provided and any outlook on the M&A environment in light of this deal? And then my second question is just specifically on the U.S. natural gas markets. The PDC has a higher gas split than I guess what Chevron has in the Permian Basin. So I wonder, as you look out with Henry Hub being relatively low now, but do you expect natural gas prices to strengthen over the next few years with new LNG capacity coming online? And is that part of the strategic thought process behind this deal?

Yes. So Jason, prices are lower today than they were 6 months ago. I don't know where they're going to be 6 months from now. But when prices were in the [ 80s ] and [ 90s ] and higher, it felt like we were certainly at the top end of the market, and it's harder to do deals there. We're down at a different point in the market right now. And look, we're always looking for good resource at good value. And this was somewhat of a unique combination and an opportunity for us to acquire this position that we've been talking about in the DJ Basin at a value that works for both companies and provides the accretive financials that we've talked about. And so we've tested it in different price environments. We've given you some guidance at the forward strip. But it's still a good deal at a lower price deck than that. And so we feel good about it at this point. I can't project what else might happen in M&A. So I'll just let you engage in the conjecture on that one. On natural gas markets, look, the gas oil ratios are a little different between the 2 positions, but not hugely different. We look at all the commodities here. So it's oil, it's NGLs and it's gas. We've got our own long-term views that we used to run the economics and we test them at lower price cases than that. And there is strong -- there's going to be stronger global demand for gas growth, then there will be for oil. We see over the next decade and beyond as the world looks to decarbonize, certainly, there's going to be more LNG projects sanctioned in the U.S., and that's going to add to that demand. And so the full basket of prices, the profile and the commodities fits with our views, and it passes all of our lower commodity price tests.

The only thing I'd add is we'll update our commodity price sensitivities when we close. I mean you'll see a bigger impact on our Henry Hub natural gas sensitivity than you will on our liquids just because of our global portfolio. And we -- and Mike affirmed our production CAGR and free cash flow CAGR, both off of now a higher base. We're doing that at $3.50. I know we got some questions at our Investor Day about using a higher Henry Hub price. So we're using a lower price now than we showed just at our Investor Day a couple of months ago, aligned with where the futures are trading right now for 2024.

We'll go next to Josh Silverstein with UBS.

I just wanted to talk about the financing of the transaction. You mentioned the value gap and the multiples. So I guess, for wanting to use stock for at least a portion of this, but why not use the a portion of the cash balance to try to make this lease a little bit more accretive on a per share basis?

Yes. Josh. Typically, in our industry, there's a lot of commodity price volatility, as you know. And so if you have a significant amount of cash in a deal and it takes, let's just say, 6 months to close the deal, you're going to have commodity prices higher or lower when you get to closing. And so we're in a roughly, call it, a $70 oil price world today. If we get to closing and we're in a $90 oil price world or a $50 world, the cash price that we agree today is going to look like you've got a winner or a loser. And if you do it in equity, you lock in the exchange ratio. And that creates essentially a hedge against moves in either direction on commodity price. So it's really something that we find when we talk to people on deals. It's a way to take that out of the equation and get to an agreed value for the transaction. The other thing, just to point out, we're buying back our shares at $17.5 billion a year. So the shares that would be issued for this transaction are repurchased in less than 2 quarters. And so if you're looking for accretion and you're worried about dilution, those shares are gone in less than 2 quarters. So another way to look at it is if it takes us 2 quarters to get through the regulatory process, we will buy back more shares than it takes to complete this transaction. And so you're still going to be through the buyback, you're going to have a lower share count out there.

What I would add is, you're right, your accretion metrics look better when you use cash. But for all the reasons that Mike said, we prefer to use equity, but this is a transaction that is really strongly accretive, particularly on cash flow metrics. Free cash flow, we talked about $1 billion. It's solidly accretive on earnings per share at strip pricing [ and ] go to below pricing and still get earnings per share accretion. And it's ROCE accretive modest, but we know that's a very high bar to pass. So this is the harder test when you use all equity, and we do it for all the reasons said. But this is a transaction that you could say is maybe modestly sized, but it punches above its weight in terms of its financial accretion. And then I'll just say, we think there's a lot of upside in Chevron shares, and we think PDC shareholders will enjoy that over time.

That's helpful. And just as my follow-up, Mike, you mentioned the 6 months in the regulatory process. I'm curious on thoughts there's a deal smaller in terms of dollar amount, but one that's being held up by the FTC right now. This transaction further consolidate the basin where there's only a couple of large players to begin with. Just any thoughts there as far as how you have got to factor that into the transaction as well?

Yes. Each transaction is unique. We're confident this transaction is pro-competitive. It's purely an upstream production transaction. We don't see -- there's no midstream. There's no downstream. We don't see any competition issues being involved. Obviously, we'll work through the process with the regulator. But we don't believe there's any reason that this should not ultimately be approved.

We'll go next to Paul Cheng with Scotiabank.

Maybe the first one -- 2 questions, please. First one is for Pierre. $100 million on the OpEx saving. That seems low. Just looking at the potential saving and G&A and interest expense, it seems like we already can get there. Can you tell us a bit that what's the split in that OpEx saving between at the field, the G&A and interest expense? That's the first question.

Paul, I'll take that. Look, we do due diligence really based on material information, there's limited details you can get into because everything is disclosed in the filings. As we have with Noble, once we are allowed to work together and see more, we'll -- we expect to beat that number, and we did. We doubled our Noble synergies by the time we were done. So this is primarily G&A. There's no interest -- very limited interest expense of some insurance. There's some -- obviously some corporate functions that are redundant. The operational synergies, the procurement synergies, we need to see contracts, we need to get into, as Mike said, kind of looking at both what we both do and taking the best of what both PDC and Chevron does. So we expect more we'll update you as go along. It's the best estimate we have now based on what we can see, we'll see more, and we expect that number to increase over time.

So Pierre, you're saying that it's not including much of an interest cost saving, right? Because that [indiscernible] will be redeemable from the PDC?

That's right. There's some short term that you can do, but the bonds are -- the way they're structured is they're difficult to call early and book those savings. It's the nature of how bondholders structure them. So we'll -- over time, we will realize that. We're doing everything kind of on the -- in the first year after closing, we're using 2024. So it's pretty modest by 2024. You'll see more savings over time.

Okay. My -- after you close the deal, can you just share that what is the pace of development for DJ? Will DJ become a growth platform for you guys going forward? And if it is, what kind of pace of growth that you are expecting?

Yes. So Paul, there's a slide that we showed production. Our production in the DJ last year was just a little bit over 140,000 barrels a day. On Slide 7 in the deck, you can see, in 2024, that number is -- using the 400,000 barrel a day range, we've got a bar on there for 2027 that shows it kind of in that same ballpark, maybe just a touch higher. Our current view is that we grow into that range and then we really focus on efficiency and capital and returns. And so you could kind of think of it kind of plateauing in that range, which is a way for us to generate strong free cash flow, high efficiency and strong returns.

Once you get to the $400 million, is the $1 billion CapEx still a -- roughly a good one to use?

So Paul, we're going to wrap you up on this. So -- but again, we're taking $400 million of CapEx efficiencies. I think that was an earlier question. It's about half in the DJ, half in the Permian. We're getting multiyear production guidance. We'll continue -- we've updated our CapEx guidance. So I think it's all included in our updated guidance.