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Chevron’s $53bn acquisition of Hess Corporation

Acquisition Overview

The second largest oil company based in the US by revenue, Chevron (NYSE: CVX) has confirmed the acquisition of Hess Corporation. The transaction points to a wider pattern in the US energy sector, a rush of M&A activity, as companies look to deploy profits earned as a result of the energy crisis. In this all-stock deal, Chevron's agreement to buy the oil and gas producer is the biggest in their history. The deal, announced on October 23 2023, comes directly after Chevron’s rival ExxonMobil agreed to acquire Texas share producer Pioneer Natural Resources earlier this month for an enterprise value of $64bn. The Chevron and Hess companies’ estimated cost savings are ~$1bn within a year of closing, while Chevron said it expected to increase asset sales and raise proceeds of between $10bn-15bn by the end of 2028, before tax. This marks it as a significant milestone in the company’s strategic expansion, encompassing the contextual advantage brought to it by the energy crisis and its own desire to pursue inorganic growth to outcompete competitors.

Deal Structure

Chevron secured the acquisition in an all-stock deal valued at $53bn, or $171 per share (based on Chevron’s closing price on October 20 2023), encompassing a total enterprise value including debt and book value of non-controlling interest of $60bn. Chevron’s CEO announced that it had entered into a definitive agreement with Hess, and CEO John Hess is expected to join the Chevron Board of Directors. The all-stock transaction means the shareholders of Chevron receive all outstanding shares in the acquiring company, Hess, as payment rather than cash utilising Chevron’s equity. Under the terms of the agreement, Hess shareholders will receive 1.0250 shares of Chevron for each Hess share, and upon closing of the transaction in aggregate Chevron will issue approximately 317 million shares of common stock. Shares of Chevron, with a market capitalisation of $513bn, fell 3.7% in response. Shares in Hess, with a market capitalisation of 50% (at the time of the deal) ended 1.1% lower. The proposed sale price represents a 10% premium over the average Hess shares over the previous 20 days, but only a 5% premium upon close on Friday 20th October 2023. In January, Chevron expects to recommend an increase to its first quarter dividend per share of 8% to $1.63, which will be subject to the approval of the Chevron Board of Directors. The deal is subject to regulatory approval and the Boards of Directors and is expected to close in the first half of 2024.

Morgan Stanley & Co. LLC is acting as the lead financial advisor to Chevron. Goldman Sachs & Co. LLC is acting as the lead financial advisor to Hess.

Chevron Overview

Chevron, as an American multinational energy corporation, predominantly specialises in oil and gas and is one of the world’s leading integrated energy companies. The company has an operational presence in North America, South America, Europe, Asia, the Middle East and Africa and Chevron is headquartered in San Ramon, California. Interestingly, despite its headquarters and its presence as the second largest oil company in the US behind ExxonMobil, only about a quarter of its oil and gas production is located in this country. However, within oil and gas, Chevron is vertically integrated, and involved in hydrocarbon exploration production, refining, marketing and transport, chemicals manufacturing and sales, and power generation. Thus, it operates in two segments upstream and downstream with the upstream involving the processes associated with the exploration, development and transportation of crude oil and natural gas, whilst the downstream segment refines crude oil into petroleum products, markets them and the refined products, as well as the manufacturing of renewable fuels. Chevron’s strategy is to leverage its strengths to safely deliver lower carbon energy to a growing world. It aims to do so by utilising its global lead in deepwater technologies and exploration activities, such as its facilities in the Gulf of Mexico as some of the lowest carbon intensity producing assets in the world. Here, Chevron boasts its deepwater US Gulf of Mexico has only ~6 kg of carbon dioxide/boe carbon intensity. It is in a promising position to execute this given the wider energy sector boom, with revenue up 51.5% from FY22-FY23, to $235.7bn.

Founded: 1906

Number of Employees: 43,846 (December 2022)

Enterprise Value (EV): $311.70bn (2023)

LTM Revenue: $246.3bn (2022)

LTM EBITDA: $58.471bn (2023)

LTM Operating Income: $49.67bn (2022)

Market Capitalisation: $291.2bn

Hess Corporation Overview

Hess Corporation is a leading global independent energy company engaged in the exploration and production of crude oil and natural gas, with leading positions offshore Guyana, the Bakken shale play in North Dakota, the deepwater Gulf of Mexico and Thailand. Headquartered in NYC, it completed a multi-year transformation in 2013 to be recognised as an exploration and production company, exiting all downstream operations. Globally, Hess is recognised as an industry leader in environmental, social and governance (ESG) performance. Hess’s strategic fit for Chevron is made clear by its assets; 30% ownership in more than 11bn barrels of oil equivalent discovered recoverable resource with high cash margins per barrel, strong production growth outlook and potential exploration upside. Moreover, in the Bakken, Hess’s inventory of 465,000 net acres of high-quality, long-duration inventory supported by the integrated assets of Hess Midstream and the complementary Gulf of Mexico assets and steady free cash flow from Southeast Asia natural gas business makes clear its strength in standing as an acquired business. In combining their businesses, Chevron looks to benefit from Hess’ leading deepwater development and production and top quartile performance in offshore drilling and project delivery.

Industry Insight

The Russia-Ukraine war’s impact on the US oil and gas sector: Since Russia’s invasion of Ukraine, the global prominence of the US oil and gas sector has tremendously increased, boosting exports until the US is at the top of the world’s energy exporting nations. As of March 2023, the US government provided data to show the US exported a record 11.1m barrels a day of oil and refined products. Perhaps then, the war had a subconscious shift in public opinion towards non-renewable fuels in light of the necessity of energy, and the uncertainty, particularly in Europe, brought about by its dependence on Russian energy and the subsequent change in the global energy landscape. The economic disruption caused by the war has amplified calls for an accelerated energy transition, and compounds the effects of high inflation and supply chain disruptions following the fallout from the COVID-19 pandemic, to reinforce to consumers the need for more secure energy both in the immediate and long term, to meet growing energy needs from and rapidly developing and growing global population. The culmination of these factors has led to perhaps a short-term dependence on oil and gas sources in the US and elsewhere, such as Hess’ Gulf of Mexico, Guyana and Bakka assets, whilst investing in renewable technologies or a more secure and resilient transition. Not least, the immediate spike in energy prices following the invasion leads to the second point of how it has affected investment decisions within US energy firms.

Period of consolidation following bumper profits created by the energy crisis: The US energy sector has ushered in a period of higher demand for consolidation and ways of spending bumper profits due to the energy crisis and the Ukraine-Russia war. Industry analysts predict the big-money acquisition made by Exxon first, then quickly followed by Chevron may see the start of big-money deals and multi-billion mega-mergers like these ones, with the megadeals indicative of a larger overarching ambition. This comes in the context of a focus on tightening global supplies of fossil fuels in years of underinvestment, and in light of the war, the need for energy security seeing demand for crude remaining strong. With Exxon zoning in on its core operations in the Permian basin as its motivation, while Chevron looks to expand into where it does not have existing assets; the Guyana and Bakken shale, Bob McNally, president of Rapidan Energy Group, expects these megadeals as just a prelude to the large investment wave in coming years due to the energy shock. The mood of the sector can be summarised in the feeling of an incoming few years of a boom, in comparison to the underinvestment and bust of the last few years, with the pandemic and more importantly, the Russia-Ukraine war serving as a turning point.

The question of climate change and phasing out of non-renewable fossil fuels: The oil and gas industries are facing an uncertain future, as developed countries face global and internal pressure to lead the way by reducing reliance on fossil fuels, and diversifying their energy mix. The Bloomberg model shows that the pathways that limit global temperature increase to 1.5 degrees Celsius by 2050 are looking increasingly out of reach, but there remain plausible pathways to stay with 1.77C of warming. However, this would still require a revolution in the energy sector, to increase momentum and accelerate emissions reductions. For the likes of US energy giants like Chevron, their pledge to ESG and renewables remains at the forefront and much-publicised image of their purpose, with the acquisition. More broadly, the confident deals by Exxon and Chevron will likely instil more confidence in the wider oil industry to overcome any hesitation and invest in oil and gas. A direct comparison can be drawn in contrast with some European energy majors, such as BP and TotalEnergies, which are increasing investments in renewable energy at a faster pace than their US peers. Wirth criticised forecasts from the International Energy Agency, the developed world’s energy watchdog, showing fossil fuel demand peaking before the end of this decade.

Strategic Rationale

It is clear in line with the context of the industry, the acquisition of Hess by Chevron in the biggest deal in its history comes at a crucial point in the US energy sector. The highly competitive nature of the energy industry means the move directly following Chevron’s only larger competitor, ExxonMobil is one of strategic sense. Firstly, the external unexpected profit boost from the energy crisis has arguably benefited US energy firms to some extent across the industry, as the US rises to top the global exporting energy leader boards, leaving Saudi Arabia in second, and Russia in third. For shareholders at Chevron and Hess, to seize the time and negotiate an agreement whilst all its competitors are also searching for ways to spend their investment, strategically keeps them on top of the next wave of expansion and innovation. Moreover, not only does it maintain Chevron’s competitive edge in size and fortify its upmarket hold in existing areas, Hess’ unique location gives access to Chevron’s expansion into new ones through Hess Corporation's established footholds.

Chevron’s purchase of Hess helped to diversify Chevron’s portfolio of oil assets, which until now have been very concentrated in the Permian Basin of Texas and New Mexico. Mike Wirth, Chevron's chief executive, has labelled the deal a ‘unique and compelling opportunity’ to expand geographically, and bulk up its offshore presence through Guyana assets. Guyana has become a major oil producer in recent years after huge discoveries by Exxon Mobil, its partner Hess and China’s CNOOC. Together, these three produce 400,000 barrels per day (bpd) from two offshore vessels. As such, the Hess acquisition will increase Chevron’s oil and gas output by more than 10% in addition to the geographical advantages gained. This also allows Chevron to enter the Bakken shale formation of North Dakota, despite it being a declining basin, it is invaluable still. It is symbolic of big oil companies wanting to invest closer to home amidst rising political risks in Asia, the Middle East and Africa. Thus, the acquisition fits with Chevron’s ongoing strategy, seeing it increase its holdings in the Rocky Mountains and the Permian Basin straddling Texas and New Mexico.

The strategic rationale behind this is one reflective of the wider oil industry’s mood; entering a consolidation phase, as the merged entity positions Chevron to strengthen its long-term performance and enhance the portfolio with world-class assets. The Chevron CEO claims similar values, cultures, and focus on integrity and delivering higher returns with lower carbon. In press releases, he emphasises the large amount of synergy to be gained with the Hess CEO claiming to create a ‘premier integrated energy company’.

Long term prospects

Chevron, in completing this deal, is doubling down on its bed and demand for fossil fuels will remain robust for decades to come. The transaction is expected to achieve run-rate cost synergies of around $1 bn before tax within a year of closing. In the longer term, Chevron’s new stronger portfolio after closing means it expects to increase asset sales and generate $10-15bn in before-tax proceeds through 2028. This figure is substantial and an increase in sales and before-tax proceeds close to the $10bn mark would mark the $53bn acquisition as a long-term success, as it shows the ability to both expand Chevron’s upstream assets whilst also increasing the sales and revenue of the company, whilst lowering costs through economies of scale and streamlining.

However, in line with ESG considerations, the question of the US energy sector in line with climate change is one that requires consideration. Chevron and Hess’ deal comes amidst calls from experts, such as those published by Bloomberg that switching power generation from fossil fuels to clean power is the single biggest contributor to global emission reductions in their Net Zero Scenario. This would account for half of all emissions abated over 2022-2050. As such, the acquisition in its long-term prospects through public opinion may see some more negative attitudes. But it is important to note the increased need for energy security highlighted by the energy crisis, and taking into account both Chevron and Hess’ ESG promises.

In considering the Chevron-Hess agreement, the firms argue it as being aligned with their objective of safely delivering higher returns with lower carbon. In the longer term, this makes strategic sense as the increased production and free cash flow growth rates over the next five years are expected to extend their growth profile into the next decade. As a result, this would support their plans for long-term investments in projects and partnerships. For Chevron, this is the like of partnerships with Beyond6 LLC and Brightmark LLC.

Perhaps the issue of culture clashes and bureaucratic problems is beneath the surface, and a number of factors will determine how successfully the enlarged Chevron navigates its inorganic expansion. The strategic synergy and competitive advantages to be gained from its geographic expansion into Hess’ areas of expertise seem promising, such as expansion into the extremely lucrative northern South American oil fields in Guyana. Even more so, while the spread out geographic distribution may bring principal agent-type communication problems, it may also alleviate areas of cultural or integration challenges or clashes.

Written by Angela Shi (Trinity College)

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