Chevron has made a significant move in the world of energy with its announcement of a $53 billion stock acquisition of Hess. This strategic maneuver is designed to bolster Chevron’s presence in the U.S. oil landscape and secure a substantial stake in Exxon Mobil’s colossal Guyana discoveries. Notably, this deal follows Exxon’s own substantial acquisition, valued at $60 billion, which was unveiled earlier this month, effectively extending the oil and gas production capacities of both companies, much of which is attributed to their involvement in U.S. shale. It’s also sending European oil competitors, who had been shifting their focus towards renewable energy, trailing further behind in the fossil fuel race.
Chevron’s CEO, Michael Wirth, expressed his enthusiasm, stating, “This is great for energy security: It brings together two great American companies.” Wirth’s focus has been on fortifying Chevron’s foothold in shale oil and gas, as evidenced by its previous acquisitions of PDC Energy and Noble Energy.
Shale Expansion
The union of Hess, PDC, and Noble is projected to propel Chevron’s total oil and gas output to an impressive 3.7 million barrels per day (bpd). It will also substantially boost Chevron’s shale production by 40%, reaching 1.3 million bpd and positioning it head-to-head with Exxon’s anticipated shale output post its Pioneer Natural Resources acquisition.
The amalgamation with Hess is not just about increasing Chevron’s shale presence; it also diversifies Chevron’s oil production, adding to its U.S. Gulf of Mexico operations and bringing it into the Bakken shale region in North Dakota.
Moreover, the deal extends Chevron’s reach into the Guyana oil block, alongside Exxon and CNOOC, with a 30% stake. The Guyana asset has gained tremendous recognition, earning the title of “crown jewel” in Hess’s portfolio due to its rapid growth, with over 11 billion barrels of oil and gas discoveries since 2015.
CEO John Hess revealed that discussions with Wirth had been ongoing for about two years. He highlighted the mutual understanding of each other’s companies and the strategic alignment they saw. The history between these two leaders runs deep, as they had been partners in U.S. Gulf of Mexico ventures for several years and have shared countless conversations and meals to pave the way for this deal.
Financial Dealings and Market Response
Goldman Sachs and Morgan Stanley played pivotal roles in the deal, advising Hess and Chevron, respectively. However, the market responded with a temporary sell-off, causing Chevron’s shares to dip by 3.3% and Hess’s shares to experience a slight 1% decline, closely tracking the fall in crude oil prices on the same day.
Chevron offered a stock exchange ratio of 1.025 of its shares for each share of Hess, translating to around $171 per share – representing a premium of about 4.9% over the stock’s previous closing price. The total value of the deal stands at $60 billion, which includes assumed debt.
This acquisition falls on the heels of Exxon’s recent rapid-fire moves, which saw it acquire Pioneer and Denbury for a combined $64 billion. This positions Exxon at the pinnacle of the U.S. shale industry and solidifies the company’s burgeoning carbon storage business.
Regulatory Prospects
The timing of this deal did catch some analysts by surprise, who had expected Chevron to take a more measured approach after Exxon’s mammoth acquisition. Regulatory reviews are on the horizon, but Wirth believes that anti-trust concerns are unlikely. The newly formed entity anticipates generating approximately $1 billion in cost synergies within the first year following the deal’s closure.
In light of the acquisition, Chevron has outlined plans to divest between $15 billion and $20 billion in assets and allocate between $19 billion and $21 billion annually to major projects post-deal completion. Furthermore, the CEO of Hess will join Chevron’s board of directors once the deal concludes.
This move marks a shift in the landscape of energy companies, with consolidation gaining momentum as oil demand decreases and firms seek to optimize efficiency and cut costs. However, environmentalists have been critical of this trend, asserting that it hinders the fight against climate change. Chevron and Exxon argue that they remain committed to reducing carbon emissions and expanding their investments in renewable energy. This pivotal deal is slated to be finalized in the first half of 2024, reinforcing Chevron’s position as a dominant player in the energy industry, with an increased focus on the U.S. oil market and a strategic foothold in Guyana’s burgeoning oil sector.
