Oil and gas giant Chevron (NYSE:CVX) — one of the world’s supermajors — generated headlines Monday morning when it announced the acquisition of shale producer PDC Energy (NASDAQ:PDCE), sending shares up over 8%. However, CVX stock wasn’t so lucky, losing about 1% in the early afternoon hours. While Chevron may enjoy long-term benefits from the deal, some viability concerns cloud the acquisition.
According to a Bloomberg report, Chevron agreed to buy PDC for $6.3 billion. At the same time, Chevron CEO Mike Wirth emphasized that while he’s open to more deals, the oil stalwart will stay disciplined on price. Per the accompanying press release, the deal involves an all-stock transaction valued at $72 per share of PDCE stock.
The PDC deal “doesn’t preclude our ability to do further transactions,” Wirth said in a phone interview with Bloomberg. “But we don’t have gaps to fill. We’re always looking, but we’ll stay very disciplined as we have been on a number of transactions as we have done over recent years.”
The news agency remarked that while the PDC buyout is small by Chevron’s standards, the deal “…fits neatly into Wirth’s plan to grow in areas that fit with its existing assets rather take on large, transformative acquisitions.”
Specifically, the acquisition should double Chevron’s drilling portfolio in Colorado’s DJ Basin to more than 600,000 acres. It should also nearly triple production in the area to 400,000 barrels a day.
Chevron Responds to Paradigm Shift but CVX Stock Still Incurs Risk
Naturally, the most significant paradigm shift in the broader hydrocarbon space materialized because of Russia’s invasion of Ukraine last year. Reuters pointed out that President Joe Biden called out American oil majors for not increasing output in the U.S. as fuel prices skyrocketed. Wirth mentioned that the PDC deal is consistent with addressing that criticism.
While that’s theoretically a positive for CVX stock, the market responded in a lackluster fashion to shares on Monday. Reuters stated, “[a]nalysts in recent months have been questioning Chevron’s ability to counter worries that the company’s core U.S. shale properties are in decline following poor performance in the Permian basin of West Texas and New Mexico last year.”
“We expect these concerns on the Permian may linger,” stated RBC Europe research analyst Biraj Borkhataria.
Another criticism centered on CVX stock concerns an underlying lack of aggressiveness. For example, Bloomberg pointed out that Chevron attracted praise for its acquisition of Noble Energy. This transaction represented a bolt-on deal similar to the scope of the PDC buyout. However, Chevron also courted scrutiny for not delivering the same magnitude of growth as Exxon Mobil (NYSE:XOM).
Why It Matters
According to TipRanks, Wall Street analysts peg CVX as a consensus moderate buy. This assessment breaks down as six “buys,” 10 “holds” and zero “sells.” Overall, the experts’ average price target lands at $190, implying over 23% upside potential.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.