Amidst ongoing consolidation in the shale patch, Exxon recently made headlines with its $60 billion all-stock acquisition of tier-1 Permian producer Pioneer Resources. However, while Exxon is catching up, Chevron emerged as an early mover in the market, capitalizing on the pandemic-induced downturn to acquire PDC Energy. As we delve into Chevron’s deal and its upcoming Q3 earnings report, let’s explore the implications for investors and traders interested in the financial markets.

The PDC Deal: A Wise Move for Chevron

Chevron finalized its $6.3 billion all-stock acquisition of PDC Energy on August 7. With the inclusion of assumed debt, the total enterprise value reached $7.6 billion. The decision to use Chevron stock for the transaction proved advantageous for shareholders, as Chevron was trading at a higher EV/EBITDA multiple compared to PDC at the time of the agreement.

Moreover, Chevron’s acquisition of PDC Energy brought significant benefits:

• Over 1 billion barrels of oil equivalent (boe) in high-quality proved reserves, representing a 10% increase in Chevron’s reserves base.
• The deal is expected to be accretive to financial metrics, generating an estimated $1 billion in additional annual free cash flow.
• Chevron aims to achieve approximately $500 million in combined annual operational and capital expenditure efficiencies from the deal.

While PDC Energy owned valuable assets in the Permian Basin, the acquisition primarily focused on consolidating the two companies’ Denver-Julesburg acreage, known as the DJ Basin. This strategic move positions Chevron favorably for growth in both the DJ Basin and the Permian Basin.

Q3 Earnings Preview: Promising Outlook

With the PDC deal closing on August 7, Chevron’s Q3 production is expected to receive a substantial boost. According to earnings estimates from Yahoo Finance, analysts predict Chevron’s Q3 results to reach an average earnings per share (EPS) of $3.56. Although this figure pales in comparison to last year’s Q3 earnings due to prevailing geopolitical factors, it represents an improvement from Q2’s performance.

Additionally, with the inclusion of PDC’s production, Chevron is likely to report a quarterly production of over 3 million boe/d for the first time in its history.

The Dividend: Chevron’s Strong Growth

Chevron’s positive earnings estimate for full-year 2023, amounting to $13.89/share, indicates a favorable outlook for shareholders. The estimated earnings surpass Chevron’s current $6.04/share dividend obligation, signaling potential for a dividend increase. Chevron has a history of delivering superior dividend growth compared to Exxon and has consistently exhibited a stronger balance sheet, enabling it to make well-timed acquisitions and maintain efficient operations.

As the chart below illustrates, Chevron’s dividends have seen a significant growth trajectory over the past five years, reinforcing its position as a shareholder-friendly company:

Dealing yet another blow to Exxon’s recent acquisition, Pioneer Resources, Exxon paid a significantly higher price – three times more per barrel of oil equivalent (boe) – than Chevron’s acquisition of PDC Energy. Chevron’s superiority in terms of both strategic decision-making and financial performance further establishes it as the premier choice for investors seeking exposure to the global super-major oil and gas industry.

Summary and Conclusion

Chevron continues to dominate as our top pick among global super-major oil and gas companies. The company’s strong financials, diversified growth prospects, and robust free cash flow position it favorably in the market. Chevron’s commitment to shareholders is evident through its excellent dividend growth and substantial share buyback program.

According to the EPS estimates for next year, Chevron is expected to achieve $14.77/share, indicating potential for a stock price increase of 18% to over $200/share. Additionally, investors enjoy a 3.6% yield and can anticipate a solid 20%+ return within the next 12 months. Investing in Chevron not only protects portfolios against inflation and geopolitical turmoil but also offers strong growth prospects in the face of ongoing global energy dynamics.

As demonstrated in the three-year chart below, Chevron’s stock is on the verge of a breakout, poised to exceed the $160 level and potentially reaching $200/share. This projection is bolstered by the current geopolitical landscape and the substantial amounts of crude oil withheld by Russia and Saudi Arabia from the global market.