By Alina Shaikh, Alexander Svanidze, Carlo Leopardi, Edoardo Tosto di Valminuta, Matthew Gurevich and Tommaso Arona (Boston University) & Jingying Liu, Pierre Six and Mathilde Heibig (HEC Paris)
Photo: Chris Leboutillier (Unsplash)
Overview of the deal
Acquirer: Chevron Corporation
Target: Hess Corporation
Total Transaction Size: $53bn
Expected closing date: first half of 2024
Target advisor: Goldman Sachs (financial), Wachtell, Lipton, Rosen & Katz (legal)
Acquirer advisor: Morgan Stanley (financial), Paul, Weiss, Rifkind, Wharton & Garrison (legal)
Chevron, a major player in the energy industry, has announced its plans to acquire Hess, another prominent US oil and gas producer, in an all-stock transaction valued at $53 billion. As part of this acquisition, Hess CEO John Hess is anticipated to join Chevron's Board of Directors. The transaction, announced on Monday in a joint press release by the two groups, comes less than two weeks after the announcement of ExxonMobil's $60 billion takeover of Pioneer Natural Resources.
The acquisition aims to diversify the portfolio, with a particular focus on gaining strategic assets such as the Stabroek block in Guyana and the valuable Bakken assets held by Hess. Through this transaction, Chevron aims to enhance its presence in the US shale market, thereby mitigating concerns of being overly concentrated on its Tengiz project in Kazakhstan and in the US Permian region. Additionally, the inclusion of these new assets would add substantial inventories to Chevron's holdings, with a projected drilling inventory of at least 15 years in the Bakken region.
"This combination [of Chevron and Hess] will further strengthen and diversify our already advantaged portfolio" - Mike Wirth, Chairman and CEO (Chevron)
Company Details (Acquirer - Chevron)
Chevron Corporation is the second-largest integrated energy company headquartered in the United States. Through their subsidiaries and affiliates, Chevron produces crude oil, natural gas and many other essential products. Overall, Chevron’s five U.S. refineries have the combined capacity to process more than 1.0 million barrels of oil per day.
Founded in 1879, headquartered in San Ramon, California
CEO: Mike Wirth
Number of employees: 43,846 (in 2022)
Market Cap: $270.73bn (as of 07/11/2023)
EV: $292.265bn
LTM Revenue: $202.702bn
LTM EBITDA: $45.936bn
LTM EV/Revenue: 1.4x
LTM EV/EBITDA: 5.7x
Recent Transactions: Chevron x PDC Energy - $6.3bn (May 2022) ; Chevron x REG - 3.15bn (February 2022) ; Chevron x Noble Energy - $5bn (July 2020)
Company Details (Target - Hess)
HESS is an American-based energy company involved in discovering and producing crude oil and natural gas. Their strategic placement in The Bakken Formation and their 30% interest in The Stabroek Block in Guyana (largest oil discovery in 10 years) makes them a very powerful player within the energy sector. HESS’s oil production revenue comes from the U.S (57.6%), Guyana (33.6%) and other regions like Malaysia, Gulf of Mexico, and Thailand (8.8%). HESS also owns 37.8% of HESS Midstream, operating midstream assets; processing, shipping, and storing oil for large energy companies including HESS itself.
Founded in 1933, headquartered in New York, NY
CEO: John B. Hess
Number of employees: ~1,623 (as of 2022)
Market Cap: $43.69bn (as of 11/01/2023)
EV: $51.87bn
LTM Revenue: $10.43bn
LTM EBITDA: $6.21bn
LTM EV/Revenue: 4.97x
LTM EV/EBITDA: 8.11x
Projections and Assumptions
Short-term consequences
The deal follows a series of other acquisitions which have contributed to making Chevron one of the top two gas and oil US-producers by reinforcing its core business. The benefits the company seeks from this deal are mainly staying on top of all major changes in the gas and oil sector growth, since HESS should add 10% to Chevron’s overall oil and gas production, as well as cost reductions. The expected synergies from this deal are supposed to be as high as $ 1 billion before tax within a year of closing. HESS will be bringing, among other things, large assets and specialised expertise on unconventional resources such as shale.
The deal is also to affect the company’s organisation since John Hess (forms CEO of HESS) should join Chevron’s Board of Directors.
Finally, Chevron’s acquisition of HESS will also affect shareholders. Indeed, Chevron is expected to increase its first quarter dividend per share of 8% (to $ 1.63), pending the new Board of Directors’ approval. In addition, the company is looking to continue expanding its share repurchasing scheme ($ 20 billion per year) with an additional $2.5 billion this year. This strategy was made possible by the favourable macroeconomic context for oil and gas companies that has been going on for the past years. But for now, Chevron’s current shareholders are still concerned about the deal, mainly due to regulatory and environmental concerns, which resulted in a decrease of its share price.
Long-term Upsides
Chevron’s acquisition of Hess has a range of advantageous implications in the long run, including an estimated $1 billion in cost synergies and an anticipated increase in free cash flow. Chevron aims to strengthen its market dominance through this horizontal integration, targeting Hess's strategic assets like the Bakken Formation and a 30% interest in Guyana's Stabroek Block. This positions the company to strengthen its operations in the Permian and Denver-Julesburg Basin endeavours and leverages Hess's upstream proficiency with Chevron’s downstream capabilities to potentially boost profit margins. The deal also encompasses a vital human capital aspect, with Hess CEO (John B. Hess) expected to join Chevron's board, symbolising a unification of industry expertise. Financial projections suggest that the acquisition will make Chevron's cash flow per share accretive by 2025, subsequent to operational synergies and the start of the fourth floating production storage and offloading vessel in Guyana. This strategic move is set to propel Chevron's production and free cash flow growth rates over the next five years and beyond. Following the growth strategy, Chevron proposes an 8% dividend increase to $1.63 per share in the upcoming quarter, pending board approval, and boost share repurchases to $20 billion annually, a $2.5 billion hike post-acquisition. Chevron’s CFO Pierre Breber has underscored the strategy to intensify returns to shareholders through rising dividends and augmented share repurchases.
Risks and Uncertainties
GLOBAL CONFLICT – Chevron’s acquisition is amidst a complicated time. The war in Ukraine causes a lot of uncertainty as Russia continues to export crude oil using aging tankers on which sanctions have limited traction. The outbreak in Israel furthers this point, as the Middle East has a lot of influence on the crude sector. The outcome of these wars will have a massive effect on the oil industry, like when the Nord Stream pipeline “exploded” last year, causing crude prices to surge ~17% and leaving millions without energy.
MERGER ARBITRAGE – Another crucial risk involves merger arbitrage where investors are dumping Chevron’s stock to acquire Hess’s to capitalize on the 10% takeover premium embedded in the transaction. According to GuruFocus’ 13F filings, it is not clear how Chevron’s stock will react in the long-term, however various big names have been actively selling the company’s stock. Warren Buffett's Berkshire Hathaway sold about $6 billion of Chevron stock in the first quarter and another 12 million shares right before the merger announcement.
ENVIRONMENTAL CONCERNS – The main risk relates to the environmental concerns, since rather than looking for ways to diversify away from crude oil, these oil giants continue to expand their oil production and exploration services. This is a strong message that these companies believe in the continuation of global reliance on oil and want to continue to capture as much market share as possible. Implementing an ESG component could help mitigate the risk of stakeholder’s negative outlook and would demonstrate that the company is not simply chasing profits.