Long-time Buffett favorite in the energy sector Chevron (NYSE:CVX) is one of America’s largest oil and gas producers with a market cap of nearly $300 billion.
A couple of years ago the leadership team began efforts to purchase Hess (NYSE:HES), a much smaller oil company with valuable offshore assets in the growing oil production region around Guyana and Suriname in South America.
Since then, though, Chevron has been delayed by a combination of regulatory and legal challenges. Will Chevron acquire Hess, and what value does the smaller oil company bring to Chevron’s large portfolio?
First, Some Background on the Hess Acquisition Efforts
Chevron first announced its agreement to buy Hess in late 2023, valuing the company at $53 billion. The deal was made as an all-stock acquisition in which Hess shareholders would receive 1.025 shares of CVX in exchange for each of their HES shares. At the time the offer was made, that would have equated to about $171 per share of HES.
Almost immediately, however, Chevron faced obstacles to its acquisition aims. To begin with, the acquisition came under regulatory scrutiny for antitrust concerns.
More importantly, fellow oil major Exxon moved to block the buyout. Exxon owns a 45% stake in an oil consortium in Guyana, which stands to produce an incredible amount of oil in coming years from its proven offshore reserves.
Hess also has a 30% stake in that consortium, and Exxon claims that it should be given the right of first refusal to buy Hess’s part if the company’s ownership changes.
In January, the merger was finally given regulatory approval by the FTC, though this approval doesn’t impact the outcome of the upcoming arbitration involving Hess and Exxon. Under the terms of the FTC’s final approval, Hess CEO John Hess will be prohibited from joining Chevron’s board. He can, however, serve as an advisor strictly on matters related to the operations in Guyana.
Recently, Chevron announced that it had bought up 4.99% of Hess’s shares, signaling management’s confidence that the deal will ultimately go through. The decision to buy these shares was also a calculated chess move of sorts because it allowed the company to grab a chunk of Hess at a lower price than what it expects to pay in stock when the deal finally closes.
What Do The Odds Look Like?
The question of Hess’s stake in the Guyana oil consortium is expected to be decided by the middle of this year. Much will hinge on whether a change of control of the Guyana oil assets took place because this is what would trigger the right of first refusal under the terms of Hess’s agreement with Exxon. Hess and Chevron both believe that, since Hess will continue to exist under Chevron’s corporate umbrella, no change of ownership will actually take place.
Exxon, meanwhile, will have to make a case based on intent because it claims that the two companies structured their acquisition agreement specifically to bypass the terms of the agreement between Hess and Exxon. There could be a fairly strong argument in that case, as the Guyana oil fields are easily Hess’s most valuable asset.
If Hess loses the upcoming arbitration to Exxon, it would void the closing terms of the deal between it and Chevron, meaning that Chevron wouldn’t acquire the company.
Given that Chevron is already deploying capital to buy HES stock, however, it appears that the company is quite self-assured when it comes to its chances of being able to complete the acquisition.
And because the arbitration favors Chevron if a strict and simple interpretation of the terms struck between Hess and Exxon is followed, it seems more likely than not that Chevron will ultimately be able to go ahead with the purchase.
What Does Hess Add to Chevron’s Portfolio?
It’s difficult to overstate just how valuable Hess could be to Chevron. To begin with, the Guyana oil fields are among the most valuable new oil assets in the world, and buying Hess will give Chevron direct exposure there.
Proven offshore reserves in Guyana’s oil fields are estimated at 11 billion barrels, and by 2028 the region could be producing over 1 million barrels per day.
Guyana could also help to offset some of the losses Chevron will face by winding down its operations in Venezuela’s Orinoco River basin. Though it has been allowed to operate in Venezuela despite US sanctions since 2022, the Trump administration recently required Chevron to stop its production there.
While the shutting down of Venezuelan fields wasn’t even on the horizon when Chevron first made the offer for Hess, the timing of buying new assets in Guyana shortly after losing those in Venezuela could be extremely fortunate for the company.
Beyond Guyana, Hess also adds value to Chevron by giving it proven oil assets in other places. Hess has active production in the Bakken oil fields and the Gulf of Mexico, both of which will add to and complement Chevron’s existing portfolio. Although Chevron’s strongest base in the US will likely continue to be the Permian Basin, the Bakken fields that Hess owns would add 465,000 acres to its US assets.
According to Chevron’s own statement when the offer to acquire Hess was first made public, the acquisition will also add substantially to Chevron’s free cash flows. This, in turn, will enable Chevron to return more cash to its shareholders through dividends and share buybacks.
Given that Hess shareholders will become Chevron shareholders under the terms of the acquisition agreement, it’s likely that they will also benefit significantly from the combined cash flows of the two companies together.
Will Chevron Acquire Hess?
Chevron’s acquisition of Hess will be determined following the arbitration between Hess and Exxon later this year. Chevron’s chances of buying the company look fairly promising.
While Exxon may be able to make a case around intent, the fact that Hess will continue to exist as an ownership entity for the Guyana assets will likely tip the scales in its favor.
Given the substantial value accretion Hess will add to Chevron and the fact the latter has already cleared regulatory challenges, the purchase will likely take place fairly quickly if the arbitration board rules against Exxon’s claim.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.
