Chevron (CVX 0.37%) is an internationally diversified integrated energy giant with a scale and reach matched by only a handful of competitors. It has the ability to acquire entire companies at a fairly large scale. It recently agreed to buy PDC Energy (PDCE), an onshore U.S. energy producer. There's a lot to understand about this deal.
Big oil
Energy is the lifeblood of the modern world, and oil and natural gas are vital sources of power. Although there is a shift taking place toward cleaner alternatives, like solar and wind power, demand for oil and natural gas is likely to keep growing for many years. By some estimates growth will continue through 2050, with more conservative estimates suggesting that demand flatlines over that span. Either way, growing global population will require more energy, and that will more than likely mean strong demand for the energy that companies like Chevron produce.
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Meanwhile, oil and natural gas are depleting assets. Basically, as you pull these commodities from the ground there's less of them available from a given investment. This is why energy companies are always on the lookout for new investments -- and why they are also willing to buy competitors. That's the backdrop for Chevron's $6.3 billion acquisition of PDC Energy.
There are a host of positives here. For starters, since Chevron's stock is near its highest levels over the past a decade, the "currency" it is using to buy PDC is attractively priced relative to other options in this all-stock deal. That also means that Chevron won't have to take on any additional debt or use its cash hoard, which would weaken its incredibly strong financial position. So this is a shareholder-friendly move.
Secondly, the added oil reserves will increase Chevron's reserve base by 10% in one swift move. Those reserves, meanwhile, are going to cost around $7 per barrel, which is pretty attractive. More oil at a cheap price is a clear win for an energy giant like Chevron.
One more positive
That said, there's one more thing going on here that investors shouldn't overlook. Chevron is also getting more green with this deal. Chevron provided an interesting graphic in its acquisition presentation. It showed the average carbon intensity of natural gas production globally and the average intensity of oil production. Then it highlighted that its goal was to get its carbon intensity to around a third of the global level for natural gas and about half that of the oil carbon intensity.
That's a good direction, and there are multiple levers to pull to get there. One way is to jettison higher carbon intensity assets and/or buy lower carbon intensity assets. PDC Energy's carbon intensity is currently around half of Chevron's 2028 target! As an example, there is "zero routine flaring" in the basin in which PDC Energy operates. So with this move, Chevron is not only increasing its reserves, but it is also reducing the carbon intensity of its business, speeding up its efforts to reach that 2028 goal.
While not the only reason for the transaction, investors shouldn't overlook this issue. It will likely be an increasingly important factor as companies like Chevron look for reserves.
A win/win
Regardless of your stance on oil and natural gas environmentally, the fact is these fuels will remain important for many years unless there is a dramatic technological breakthrough on the energy front. With that backdrop, Chevron's purchase of PDC Energy makes sense financially and environmentally, as it helps to reduce the carbon intensity of the company's energy production.
This is unlikely to be a one-time thing, with Chevron and its peers all likely to pay increasing attention to this factor as they look to maintain, or grow, their energy footprints.
