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Tag: oil and gas

Chevron Acquires PDC Energy in $6.3 Billion, All-stock Deal

Monday morning provided some corporate M&A fireworks as Chevron announced the purchase of Colorado-based PDC Energy. It will acquire all of the outstanding shares of PDC in an all-stock transaction valued at $6.3 billion, or $72 per share.

The deal makes Chevron an even more formidable operator in Colorado by tacking an additional 275,000 net acres in the the Denver-Julesburg (DJ) Basin onto its existing position after acquiring Noble Energy three years ago.

PDC also holds 25,000 net acres in the Permian basin, a prolific oil bas in Texas responsible for America’s surge in oil production. It’s split of assets between the DJ and Permian basins makes Chevron a sensible strategic buyer as it can leverage operational synergies in both area with the company expected to capture about $100 million in annual operational synergies.

“PDC’s attractive and complementary assets strengthen Chevron’s position in key U.S. production basins,” said Chevron Chairman and CEO Mike Wirth. “This transaction is accretive to all important financial measures and enhances Chevron’s objective to safely deliver higher returns and lower carbon. We look forward to welcoming PDC’s team and shareholders to Chevron and continuing both companies’ focus on safe and reliable operations.”

“The combination with Chevron is a great opportunity for PDC to maximize value for our shareholders. It provides a global portfolio of best-in-class assets,” said Bart Brookman, PDC President and CEO. “I look forward to blending our highly complementary organizations, and I’m excited that PDC’s assets will help propel Chevron toward our shared goal for a lower carbon energy future.”
Transaction Benefits

In a news release, Chevron highlighted four key developments about the deal, noting it is:

  • Complementary to Chevron’s operations in important U.S. production basins
  • Adding 10% to oil equivalent proved reserves for under $7 per barrel
  • Accretive to earnings per share and return on capital employed (ROCE)
  • Expected to add $1 billion to annual free cash flow

Shortly after the news broke, Andrew Dittmar of Enverus Intelligence Research, a nationally-recognized oil and gas M&A analyst, offered his in-depth review of the deal.

“The acquisition of PDC provides Chevron with high-quality assets expected to deliver higher returns in lower carbon intensity basins in the United States. PDC brings strong free cash flow, low breakeven production and development opportunities adjacent to Chevron’s position in the DJ Basin, as well as additional acreage to Chevron’s leading position in the Permian Basin.”

Besides favorable ESG metrics and the immediate financial accretion that comes from buying from the smaller-sized E&P peer group that has been discounted by the market, Dittmar pointed out that focusing on the DJ Basin likely allows Chevron to acquire undeveloped upside at more favorable pricing. The company looks to have paid less than $5,000 per acre with more than 80% of the total deal value allocated to existing production. That compares to the Permian Basin where equity valuations for companies with equivalent inventory tend to be higher and M&A markets more competitive. Land containing equivalent quality inventory has priced at north of $20,000 per acre in recent M&A in both the Midland and Delaware basins.

The Colorado assets do come with some increased regulatory risk, but the worst case for stopping permitting feared several years back has largely not come to pass. Companies have successfully been able to secure years of drilling permits and the PDC assets’ location in Weld County helps alleviate future development concerns versus more populated portions of the play.

With its large exposure in the play and position in the market, Chevron is well positioned to be a champion for oil and gas production in Colorado.

Rising to the Cleantech Challenge

The oil and natural gas industry propelled America to greatness in the last century. It is the foundation of energy and artificial light, allowing homes and businesses to be lit at night. The industry is the reason America can heat homes in the winter and keep them cool in the summer. Without it, Americans, particularly impoverished families, could have perished from the effect of sweltering summers or bone-chilling winters. With the advent of automobiles, the industry made it possible for people from all walks of life to travel by land, sea or air, opening up the world to everyone.

While the whole world was becoming smaller, industry challenges were getting bigger. One of the biggest challenges the industry faced happened as it evolved at the end of the 20th century. It was our first glimpse of the reality of drilling for oil and natural gas in big cities. For the previous 150 years, the industry had traditionally limited drilling operations to remote, rural locations, far from population centers. The bonanza of the shale revolution changed everything.

READ — How Environmentalism and the Oil and Gas Industry Can Coexist

To maintain public support and license to operate, the industry needed to quickly adapt to its new landscape, but reforms were slow to materialize, a reality that became increasingly obvious with tapping the shale below Colorado’s Denver/Julesburg (DJ) Basin. With drilling and hydraulic fracturing, or “fracking” sites in and near various Colorado communities such as Longmont — pushback came fast and furious from the public and activists to the industry’s efforts to develop the oil-rich shale beneath the ground.

Mary Austin, executive director of the Colorado Cleantech Industries Association (CCIA), says the proactive efforts by the oil and gas companies she worked with quickly became obvious when she came on board at CCIA a decade ago. “What hammered home was that they were doing it anyway,” Austin said.

A big part of CCIA’s mission is to help the innovators of cleantech solutions engage with its members, not just oil and gas, but in a variety of industries. Each year, CCIA holds “The Oil and Gas Cleantech Challenge.”

“We do an international call for applications, then the oil and gas companies vet them down to 10 or 12 that they want to meet with in person, and then we do a pitch day,” she said. “We just completed our ninth oil and gas cleantech challenge on September 29 in Denver.”

Heidi Gill, CEO of Urban Solutions Group, founded her company with a focus on developing an innovative sound wall technology after hearing the intensity surrounding noise issues. Like Austin, Gill emphasizes the importance of proactivity in addressing community concerns.

“I always say whether it’s in oil and gas or a different industry, whether you’re older in your career or newer in your career, the people and the businesses that are going to survive are the ones that get good, and get good quick, at understanding the importance of social elements to your business and make it a critical driver for your projects and your operation,” she said.

READ — Clearing the Air on Colorado’s Emissions

With fracking as a focal point for environmentalists and concerned residents looking to halt development of the DJ Basin, the development of solutions in the area became a top priority for the industry. This need led Chris Wright, CEO of Liberty Oilfield Services, to focus on creating a new kind of fracking fleet. He wanted one whose generators are powered by electricity that Liberty generates with natural gas captured right on the lease site.

“Our view on electric frack fleets is that they need to check three boxes,” Wright said. “One, they must be cost-competitive with existing fleets; two, they must be operationally as good or better than existing fleets; and three, they have to actually have lower emissions. The history of electric frack fleets is they don’t check any one of those boxes.”

Through ongoing innovations and process improvements, Wright and his team at Liberty succeeded in checking all three. “For us, it’s deciding how many fleets we’re going to build and where they’re going,” he said.

For an industry that thrives on advancing and adopting innovative technologies, no shale play has provided a better test lab for cutting-edge innovation than the DJ Basin.

Domestic Tranquility — The Importance of Government Initiatives for American Made Products

Two years ago, when gasoline prices were in the $2.20 range, I thought how fortunate I was, not to mention everyone else, that a staple of modern life wasn’t just affordable, but a decent bargain. Then, of course, came the climb, when gasoline prices in Colorado and other locales shot up above $5 a gallon, even $5.50, and on the west coast where my daughter lives, the price at the pump soared to as much as $7 a gallon. In July the price, in spite of a 40-year spike in inflation, was down in the mid-$4 range, and I remember stopping by a station near where I live that was posting $4.17! I was ecstatic. I wanted to go inside the station and thank them.

READ —Finding the Silver Lining Amidst Rising Interest and Inflation Rates

But then I read the news that the giant oil companies, like Exxon Mobil, Chevron and Shell, reported record profits for the second quarter of this year, aided by massive increases in gasoline and natural gas, both commodities affected by Russia’s war in Ukraine, or so they say. I ceased being thankful for recent price drops in that obviously, while everyone in the country and the world feels the negative impacts of the global economy set off by war and supply chain issues, the providers of those products didn’t seem to share in the misery.  

Somehow that doesn’t seem fair. Over the years I have maintained a relatively conservative approach to domestic oil exploration because I believe(d) the benefits of energy independence outweigh the negative impacts of such domestic exploration. Since we’re nowhere near ending our dependence on fossil fuels for heating, cooling and transportation, my belief is that we should continue fossil development – and work on and invest diligently in eco-friendly alternatives – until such time that our dependence on oil and gas goes away. And it will, sooner rather than later. In return for such forbearance, however, the oil companies should at least focus their attentions on providing such commodities to the U.S. in ample supplies, at a fair price and a reasonable profit margin. They are not doing so.  

This situation got me thinking about domestic development and investment in a whole range of products that could and should be made in the United States.

Interestingly enough, just recently my Korean-made refrigerator, a Samsung, went on the fritz, and in searching for an appliance repair service, I was horrified by the number of them that just flat-out said, “We don’t service Samsung and LG (another Korean appliance maker).” They only work on domestic brands, like Frigidaire, Westinghouse, GE, Whirlpool and Maytag – many of which, to be fair, are also manufactured overseas but apparently better supported domestically. Turns out my only choice was to buy a new fridge, and in visiting the major box stores that sell appliances I discovered that while they sell both Samsung and LG, none of the staff there recommends them. Yet another example, it seems to me, to favor domestic development and manufacturing.         

Then in July came the news of the bi-partisan passage in Congress of the CHIPS Act, legislation designed to boost – with government subsidies for domestic manufacturing development – the production of electronic microchips on U.S. soil and to make our country more competitive with, and less reliant on, China. CHIPS stands for Creating Helpful Incentives to Produce Semiconductors and Science Act, and the law will put some $52.7 billion in subsidies directly into U.S. computer chip manufacturing, and then another $230 billion+ into a variety of domestic-focused development of science and technology that is now being imported – with some of that investment to federal laboratories and businesses right here in Colorado. 

CHIPS is designed to answer the shortages that beset us in obtaining microchips from foreign sources with their whims and spurious economies, but why stop there? Why not a CHIPS-like act to do the same for shoes, tractors, televisions, mobile phones, apparel, furniture, food, building materials – and, yes, even refrigerators? And subsidies for training American workers for high-paying jobs. After all, our founding fathers, in the Preamble of the U.S. Constitution, said we should “insure domestic tranquility” to secure “the blessings of liberty.”

I’m all for domestic tranquility.

 

Jeff RundlesJeff Rundles is a former editor of ColoradoBiz and a regular columnist. Email him at [email protected].

Should Colorado adopt California’s energy policies?

Natural gas, once seen as a bridge fuel to a new energy future, is now the target of attacks by anti-industrial activists.  

Armed with significant financial assets, environmental groups have spent the past year targeting the natural gas industry and its consumers through local bans on new natural gas hookups. Most of the local bans are located in California and the Northeast, but proposals to restrict new natural gas hookups continue to spring up across the country, including in Colorado.  

 The fact is these bans are a bad deal for consumers. Natural gas is currently used by both residential and commercial building owners for a variety of purposes, with water heating, space heating, and cooking making up the primary preferred applications.

The popularity of natural gas is due to its price and the comparative savings consumers are afforded by using natural gas when compared to electricity. 

As Jonathan Lesser explained in a 2019 Wall Street Journal article:  

“Consider California, the state at the forefront of natural-gas-hookup bans. Last year, the average price of natural gas in California was about $12.30 per million British thermal units (a measure of the heat content of the fuel), according to the U.S. Energy Information Administration. For a homeowner with a new, 95% efficiency natural gas furnace or water heater, that translates into a cost of just under $13 per million BTUs.

Compare that with the cost of electricity, which averaged 18.84 cents a kilowatt-hour in California in 2018, about 50% higher than the national average. That works out to $55 per million BTUs, more than four times the cost of natural gas. Even heat pumps for space and water heating can’t bridge that gap.”

 By adopting these local bans, Colorado would be moving in a similar direction to California where policymakers have been doing everything in their power to undermine access to affordable and reliable energy. If Colorado chooses to go down that same path, Colorado’s energy consumers should expect the same problems that currently plague California.  

Today, California’s residential electricity prices are the fifth highest in the country. Last year, the average cost of residential electricity in California was 23.4 cents per kilowatt-hour, compared to the national average residential electricity price of 14 cents. On December 3, the California Public Utilities Commission approved an 8.1 percent electricity rate increase for PG&E, which will cost the average residential customer in that service territory an additional $13.44 per month.  

 It’s also clear that bans on natural gas are exacerbating California’s poverty problem. As others have noted, many cities adopting these bans are some of the wealthiest parts of America. In California in particular, the municipalities that are restricting the use of natural gas are far wealthier than the state or national averages, meaning that by raising energy prices these localities are erecting further barriers to entry. These higher energy bills are of particular concern because they have more of an impact on low-income households. 

 California’s bans on natural gas are occurring while California’s electricity prices are increasing, and that the state’s electricity grid has been shown to be unreliable. State residents’ electricity demand has been affected by rolling blackouts during heat waves and power cutoffs to prevent fires caused by old equipment. In fact, blackouts are so common that thousands of Californians have bought small generators powered by fossil fuels to ensure reliable power.  

In states like California where the confluence of renewable energy mandates and aggressive zero emissions targets have contributed to rendering the electric grid unreliable, bans on new natural gas hookups push more demand onto the grid, further taxing the system. The quest to electrify everything creates relative reliability risks on the electric grid, making conservation orders and failures of the grid an even more harmful event than it otherwise would be. 

California’s approach to energy policy should be a warning to Colorado’s energy consumers. Policies that restrict the use of natural gas will raise energy prices and concentrate risks on the grid. Outside of the impacts on energy consumers, the long-run effects of California’s energy policies are beginning to show themselves as companies are currently fleeing the state due in part to expensive and unreliable energy. 

 One final point that should be made about these natural gas bans is that they undermine consumer preferences. Natural gas has certain properties that consumers prefer based on usability. The most prominent example is the gas range stove, which both commercial and home chefs tend to prefer for preparing and serving food. By eliminating new natural gas hookups, new restaurants will not have the option to use the types of stoves chefs tend to prefer. This is why the California Restaurant Association is pushing back on these bans.  

Natural gas bans undermine energy consumers who simply desire access to affordable and reliable energy. In order to promote competition and to preserve consumer sovereignty in energy markets, states like Colorado should continue to push back on these local bans on new natural gas hookups.   

Ier Headshot Alex 03  Alex Stevens is a policy analyst at the Institute for Energy Research and the host of the Plugged In Podcast. He is a frequent commentator on the relationship between business and government in the energy industry as well as the effects of regulation and subsidies on energy markets.