After Nearly $70 Billion in Acquisitions, What's Next for Chevron?

Chevron (CVX 0.37%) has gone on a shopping spree this year. In May, the oil giant sealed a deal to buy PDC Energy for $7.6 billion (including the assumption of debt). That transaction closed in August. It followed that up with an even bigger splash in October when it agreed to buy Hess (HES 0.67%) for $60 billion, including debt. Chevron expects that acquisition to close early next year.

With two sizable deals already in the fold, it begs the question of what's next for Chevron. Here's a look at what investors should expect from the oil stock in the coming months.

Focused on execution

Chevron's acquisitions follow big splashes by rival ExxonMobil, which already agreed to buy Denbury Resources and Pioneer Natural Resources for nearly $70 billion this year. Exxon is still hungry for another deal. The company's CFO, Kathy Mikells, recently told the Financial Times that it's "always looking." However, while it's "very inquisitive," Exxon is also "very picky," according to its CFO.

While Exxon is open to another deal, Chevron is "focused on [the Hess] transaction," according to a Financial Times interview with its CFO Pierre Breber. He commented that, "It's a big transaction . . . we'll focus on executing this one well."

Chevron first needs to close the deal, which it expects will occur in the first half of next year. After closing, the company will focus on integrating Hess' assets into the fold. There's more risk involved with this integration because Hess brings two new operating regions to Chevron's portfolio: Guyana and the Bakken. The Bakken upgrades and diversifies its portfolio by adding a new cash-gushing asset. Meanwhile, the company expects Guyana to be a major growth driver over the next several years.

Another important factor is that Chevron expects to capture $1 billion in cost savings within one year of closing. Capturing those savings is a key to the transaction creating value for shareholders.

Chevron also needs to digest its PDC Energy deal. It should be easier to integrate PDC Energy because that company operates in two of Chevron's existing basins (DJ and Permian). However, Chevron can't take its eye off the ball by shifting all its focus to Hess because PDC Energy is a needle-mover for the company. It expects to capture $100 million in cost savings while adding $1 billion to its annual free cash flow.

Shifting from buyer to seller

Chevron's deals for PDC Energy and Hess will enable the oil giant to enhance, upgrade, and diversify its global portfolio. With a stronger portfolio, the company has the flexibility to monetize some of its non-core assets. It aims to sell $10 billion to $15 billion of assets by 2028. Those sales would sharpen its focus on its core operating regions while giving it more cash to strengthen its balance sheet and return capital to shareholders.

One asset Chevron could sell is its position in the Haynesville shale. It holds about 70,000 net acres in that gas-rich area. As part of its portfolio prioritization, the company paused drilling on its largely undeveloped position earlier this year. It could sell the entire asset or partner with another energy company that would drill on its land. The Haynesville will likely be the first of many non-core assets Chevron unloads in the coming years.

Ramping up the cash returns

Chevron expects its dual deals for PDC Energy and Hess to enhance its free cash flow growth in the future. Meanwhile, non-core asset sales will further bolster its cash position. These catalysts will give Chevron more money to return to shareholders.

The company expects to increase its dividend by 8% in January. That's a higher growth rate for the company, which has increased its payout by a peer-leading 6% annual rate over the last five years. Chevron could continue growing its payout at a higher clip in the future, fueled by its increasing free cash flow from its recent acquisitions and high-return capital program. The company anticipates that the Hess deal will help it more than double its free cash flow by 2027, assuming oil averages around $70 per barrel (below the current price).

Chevron also expects to ramp up its share repurchase rate. The company noted that it intends to increase share repurchases by $2.5 billion annually after closing the Hess deal. That would put them at the top of its $10 billion-$20 billion guidance range in a higher oil price environment. This share repurchase rate will help offset some of the share dilution from its recent acquisition spree.

Focused on enhancing value

Chevron's primary focus in the near term is executing its PDC Energy and Hess integration plans. That will enable it to maximize the value of those assets, including its free cash flow. The company also plans to sharpen its focus on its core positions and strengthen its already elite balance sheet by selling non-core assets. These factors will enable the company to return even more cash to shareholders. That makes the future look bright for Chevron shareholders.