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

Chevron (CVX -0.06%) has embarked on a significant shopping spree this year. In May, the oil giant finalized a deal to acquire PDC Energy for $7.6 billion (including the assumption of debt). This transaction closed in August. It then made an even bigger splash in October by agreeing to purchase Hess (HES 0.04%) for $60 billion, including debt. Chevron anticipates the closure of this acquisition early next year.

With two sizable deals already in the fold, it raises the question of what’s next for Chevron. Here’s a glimpse of what investors should anticipate from the oil stock in the coming months.

Focused on execution

Chevron’s acquisitions follow substantial moves by rival ExxonMobil, which has already sealed deals to buy Denbury Resources and Pioneer Natural Resources for nearly $70 billion this year. Exxon is still in pursuit of another deal. While the company remains “very inquisitive,” it is also “very picky,” according to its CFO Kathy Mikells.

In contrast, Chevron is “focused on [the Hess] transaction,” according to its CFO Pierre Breber in an interview with the Financial Times. He stated, “It’s a big transaction… we’ll focus on executing this one well.”

Chevron first needs to complete the deal, expected to occur in the first half of next year. After closing, the company will concentrate on integrating Hess’ assets. This integration involves more risk as Hess brings two new operating regions to Chevron’s portfolio: Guyana and the Bakken. However, Chevron expects to capture $1 billion in cost savings within one year of closing, a key factor in creating value for shareholders.

Chevron also needs to manage its PDC Energy deal, which should be easier to integrate as the company operates in two of Chevron’s existing basins (DJ and Permian). However, Chevron can’t shift all its focus to Hess because PDC Energy is also significant for the company. It anticipates capturing $100 million in cost savings and 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, which would sharpen its focus on its core operating regions and provide more cash to strengthen its balance sheet and return capital to shareholders.

One potential asset Chevron could sell is its position in the Haynesville shale, with about 70,000 net acres in that gas-rich area. The company paused drilling in this largely undeveloped position earlier this year and could sell the entire asset or partner with another energy company. 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. Non-core asset sales will further bolster its cash position, allowing it to return more money to shareholders.

The company anticipates increasing its dividend by 8% in January, a higher growth rate than its 6% annual increase over the last five years. Chevron could continue growing its payout at a higher rate in the future, fueled by its increasing free cash flow from recent acquisitions and high-return capital programs. The company also expects to ramp up its share repurchase rate, intending to increase share repurchases by $2.5 billion annually after closing the Hess deal.

Focused on enhancing value

Chevron’s primary focus in the near term is executing its PDC Energy and Hess integration plans to maximize the value of those assets, including their free cash flow. The company also plans to sharpen its focus on its core positions and strengthen its balance sheet by selling non-core assets, enabling it to return more cash to shareholders in the future.