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Chevron acquires HESS Corporation in $53B all-stock deal


Vice-President: Leonardo Bassino

Analysts: Joshua Cayaban, Shagun Shrivastava, Darrel Tan


Deal Overview 


Acquirer: Chevron Corporation 

Acquiree: Hess Corporation 

Deal Size: $53 billion 

Transaction Type: All-stock deal 

Buy Side Advisors: Morgan Stanley (financial), Paul Weiss (legal), Rifkind (legal) and Wharton &  Garrison (legal). 

Sell Side Advisors: Goldman Sachs (financial), Wachtell (legal), Lipton (legal) and Rosen & Katz (legal).


Introduction


Chevron Corporation's definitive agreement to acquire Hess Corporation for $53 billion in an all-stock transaction, valued at $171 per share based on Chevron's closing price as of October 20, 2023, marks a significant consolidation event in the energy sector. This acquisition, with a total enterprise value of $60  billion, is expected to significantly diversify and upgrade Chevron's portfolio. The acquisition is centered  around Hess's partnership in a massive offshore oil project in Guyana, which is considered the crown jewel of  the deal. This project, along with Hess's Bakken assets in the U.S., is anticipated to bolster Chevron's  production and free cash flow growth into the 2030s. The deal, unanimously approved by both companies'  Boards of Directors, is subject to Hess shareholder approval and regulatory clearances, with an expected  closure in the first half of 2024. The acquisition of Hess adds a major oil field in Guyana as well as shale fields  in North Dakota, further enhancing Chevron's position in the global energy market. 


Chevron Overview 


Chevron Corporation is a global energy leader with a significant presence in the development of energy  resources around the world. The company’s operations encompass a wide range of activities in the energy  sector, including the exploration, production, and transportation of oil and natural gas. Chevron is known for  its talent and technical knowledge, which play a crucial role in its ability to develop energy resources  efficiently and sustainably. The company’s commitment to driving human progress is evident in its approach  to energy development, focusing on innovative solutions and responsible environmental stewardship.


Hess Overview 


Hess Corporation, founded in 1933 as Hess Incorporated, has evolved from a small residential fuel oil delivery  service into a leading independent energy company. Over the years, Hess has expanded its operations and now  plays a significant role in the global energy landscape. The company's growth trajectory reflects its adaptability  and commitment to meeting the changing energy needs of society. As an independent energy company, Hess  has established a strong presence in the industry, marked by its expertise in exploration and production  activities. 


Deal Structure 


The all-stock deal between Chevron Corporation and Hess Corporation is valued at $53 billion. Under the  terms, each Hess shareholder will receive 1.0250 shares of Chevron for every Hess share. The total enterprise  value, including debt, is set at $60 billion. The acquisition is entirely stock-based, with Chevron issuing  approximately 317 million shares of common stock upon closing. This equity issuance forms the entirety of  the transaction value, encompassing net debt and the book value of non-controlling interest. This acquisition  strategically positions Chevron by upgrading and diversifying its portfolio. The combined entity is anticipated  to achieve accelerated production growth and free cash flow, surpassing Chevron's existing five-year guidance. 


In a notable addition, John Hess, CEO of Hess Corporation, is expected to join Chevron’s Board of Directors,  bringing valuable industry insight to the combined company's leadership. The Boards of Directors of both  companies have unanimously approved the transaction. The acquisition is set to conclude in the first half of  2024, contingent upon various conditions, including approval from Hess shareholders and regulatory  clearance. 


The transaction price, offering a 10.3% premium based on a 20-day average of closing stock prices on October  20, 2023, has garnered attention. Market reactions include a 3.7% decline in Chevron's shares and a 1.1%  decrease in Hess's shares. While the proposed sale price represents a 10% premium over the 20-day average,  it reflects a 5% premium over Hess's closing price on the announcement date. 


Industry Analysis 


The oil and gas sector is a major contributor to the world economy, boasting revenues of about $4 trillion as  of 2022. The industry is integral to the energy sector, providing essential services in various areas such as  transportation, electricity generation, and the manufacturing industry. Leading crude oil net producers include  countries like the United States, Saudi Arabia, Russia, Canada, and China. This industry features a mix of  state-owned and private energy conglomerates, which are some of the most influential corporations  worldwide. Prominent players in the oil and gas sector are divided into public and private entities. U.S.-based  Exxon and Chevron are major private sector companies. In contrast, state-owned enterprises include Saudi  Aramco from Saudi Arabia, Gazprom from Russia, and China National Petroleum Corporation from China.  Equinor, formerly Statoil from Norway, TOTAL from France, and Italy's ENI also play significant roles, with  varying degrees of state involvement. 


The industry is divided into three main segments: upstream, which deals with exploration and production;  midstream, focusing on transportation and storage; and downstream, which includes refining and marketing  of oil and gas products. It is an industry that demands heavy capital investment, and in 2020, it attracted over  $511 billion in funding, especially for advancing technologies to optimize operations. 


Despite its economic significance, the oil and gas industry faces considerable challenges, particularly climate  change and the shift towards more sustainable energy sources. There is growing pressure on these companies  to adapt their operations and business strategies in light of energy transitions and to actively participate in  reducing carbon emissions, aligning with the objectives of the Paris Agreement. The industry also deals with  issues surrounding labour rights and public criticism, especially regarding profiteering during energy crises.

 

Global oil markets are recovering from a turbulent last 3 years due to the Covid-19 pandemic and Russia’s  invasion of Ukraine. Russia’s invasion of Ukraine sparked a surge in oil prices and brought concerns regarding  the security of supply. Due to concerns the conflict placed on global oil and gas supply chains and energy  security, the US is strongly positioned to fill the emerging reliable supplier of liquified natural gas, as the  global markets seeks alternative sources to Russian gas. Furthermore, the Russia-Ukraine conflict accelerated  the development of clean energy technologies. Growth in world oil demand is expected to slow significantly  during 2022-28 as the energy transition advances. To stay relevant in the changing energy landscape, many  companies in this sector are branching out into renewable energy sources like wind and solar and focusing on  research and development. Nevertheless, a more substantial shift in investment priorities and industry-wide  transformation is crucial to speed up the transition to sustainable energy and meet climate change objectives.  This industry is at a crossroads, as its future hinges on its ability to navigate energy transitions, cut emissions,  and adopt sustainable practices. How the oil and gas sector responds to these challenges will shape its future  and play a vital role in combating climate change and promoting a sustainable energy future. 


Risks 


While the acquisition of Hess by Chevron is strategically fitting, it does not come without its risks. The  integration of Hess into Chevron's operations poses significant challenges, including the alignment of  corporate cultures and systems. Regulatory hurdles, given the deal's size and impact, could also present  obstacles. Additionally, the transaction occurs in a context of fluctuating energy prices and shifting global  energy dynamics, which could affect the long-term profitability and strategic benefits of the deal. The Guyana  offshore project, a central aspect of this acquisition, has been subject to criticism regarding the contract  negotiations, which were seen as one-sided in favor of the companies. Concerns have been raised about the  potential exploitation of Guyana's resources and the minimal financial benefits for the country. This aspect  adds a layer of complexity and potential reputational risk for Chevron, as it navigates the geopolitical and  ethical dimensions of the acquisition. Despite these challenges, Chevron's Chairman and CEO, Mike Wirth,  has expressed confidence in the combined company's ability to grow production and free cash flow faster and  for longer than Chevron's current five-year guidance. The transaction is structured to be accretive to cash flows  per share in 2025, post-synergy realization and the start-up of the fourth FPSO vessel in Guyana. Chevron also  plans to increase shareholder returns through higher dividend per share growth and share repurchases post closing.


Deal Rationale 


Chevron’s acquisition of Hess is driven by a compelling strategic rationale which is expected to create  substantial value and enhance Chevron's competitive position within the oil and gas industry. The strategic  amalgamation of Chevron and Hess heralds a new era of revenue synergies, driven by a combination of  strategic asset acquisitions and production optimisation. 


Revenue Synergies 


Chevron's recent acquisition of a 30% ownership share in the Stabroek Block in Guyana, which holds the  equivalent of over 11 billion barrels of oil, is predicted to significantly boost cash margins per barrel. This  move is seen as strategically advantageous, as the asset not only possesses substantial proven reserves but also  presents potential exploration opportunities. This acquisition provides Chevron with a unique avenue for  continuous revenue growth. The benefits of this acquisition extend to include Hess' Bakken assets,  encompassing a total of 465,000 net acres. By integrating these assets into Chevron's portfolio, the company  strengthens its position in the U.S. shale market, contributing to a diversified revenue stream with a long lasting inventory. The anticipated synergetic growth in production for the combined company is expected to  drive Chevron's revenue upward into the next decade. This aligns with the company's commitment to  delivering value to shareholders through consistent top-line growth. Chevron’s CFO, Pierre Breber,  emphasised the strategic significance of the deal, stating, “Building on our track record of successful  transactions, the addition of Hess is expected to extend further Chevron’s free cash flow growth. With greater  confidence in projected long-term cash generation, Chevron intends to return more cash to shareholders with  higher dividend-per-share growth and higher share repurchases.” This underscores the financial prudence and  commitment to shareholder returns embedded in the acquisition strategy. 


Cost Synergies 


The acquisition has been strategically formulated to unlock significant cost synergies, aiming to improve  operational efficiencies and create a more agile and competitive entity. The combined company's carefully  planned capital expenditure budget, estimated between $19 and $22 billion, demonstrates a methodical  approach to resource allocation, ensuring streamlined operations while still prioritising strategic investments.  The expectation is to achieve approximately $1 billion in run-rate cost synergies before taxes within a year of  closing by harmonising operational processes, optimising procurement strategies, and consolidating  administrative functions. This integration facilitates the elimination of redundant expenses and the efficient  use of resources, ultimately enhancing overall cost-effectiveness. Chevron's commitment to increasing asset  sales and generating $10 to $15 billion in pre-tax proceeds through 2028 not only highlights a disciplined  portfolio management approach but also contributes to reducing debt and strengthening the company's  financial position. The meticulous focus on cost optimisation is poised to enhance Chevron's competitiveness,  leading to increased shareholder value over the long term.


Discounted Cash Flows Analysis




Multiples Analysis



Conclusion 


Chevron’s acquisition of Hess Corporation represents a significant consolidation event expected to remarkably  affect the competitive environment of the sector. The $53 billion, all-stock transaction is set to magnify  Chevron’s portfolio through the inclusion of the major shale fields in North Dakota and oil fields in Guyana,  therefore aligning to the company’s long-term diversification and expansion goals. The deal, set to finalise in  Q1 2024, takes place during the industry’s transition to sustainable practices and complex global energy  dynamics. In the midst of such transformative and unpredictable quarters, marked by technological  advancements and environmental considerations, the transaction is poised to enhance Chevron’s competitive  position, also thanks to the predicted revenue and cost synergies, expected to fully transpire over the five-year  period ending in 2030.  

A successful execution of the deal will demonstrate Chevron’s strategic vision towards diversification and  geographical consolidation, providing guidance for the industry’s future path in the face of shifting energy  patterns.


References 


  1. Affairs, C.P., Government and Public (2023). Chevron Announces Agreement to Acquire Hess.  [online] chevron.com. Available at: https://www.chevron.com/newsroom/2023/q4/chevron announces-agreement-to-acquire-hess.

  2. CHAPMAN, M. (2023). Chevron buys Hess for $53 billion, 2nd megadeal in the oil patch this  month as energy prices soar. [online] AP News. Available at: https://apnews.com/article/chevron hess-exxon-oil-merger-acquisition-37ff382d6fa713b7a1e887c7be5f1e93. 

  3. Chen, J. (2020). Energy Sector Definition. [online] Investopedia. Available at:  https://www.investopedia.com/terms/e/energy_sector.asp#:~:text=The%20energy%20sector%20or %20industry. 

  4. companiesmarketcap.com. (n.d.). Largest energy companies by Market Cap. [online] Available at:  https://companiesmarketcap.com/energy/largest-companies-by-market-cap/

  5. finbox.com. (n.d.). The Complete Toolbox for Investors | finbox.com. [online] Available at:  https://finbox.com

  6. IEA (2023). Overview and key findings – World Energy Investment 2023 – Analysis. [online] IEA.  Available at: https://www.iea.org/reports/world-energy-investment-2023/overview-and-key findings. 

  7. Policy, C. (2018). Chevron Corporation - Human Energy. [online] chevron.com. Available at:  https://www.chevron.com

  8. Valle, S., Roy, M., Valle, S. and Roy, M. (2023). Chevron to buy Hess Corp for $53 billion in all stock deal. Reuters. [online] 24 Oct. Available at: https://www.reuters.com/markets/deals/chevron buy-hess-corp-53-bln-stock-2023-10-23/. 

  9. Wikipedia. (2024). List of countries by electricity production. [online] Available at:  https://en.wikipedia.org/wiki/List_of_countries_by_electricity_production#:~:text=China%20is%20 the%20world%27s%20largest [Accessed 23 Mar. 2024]. 

  10. www.ft.com. (n.d.). News updates from October 23: China stocks hit lowest level since 2019,  Chevron to buy Hess for $53bn. [online] Available at: https://www.ft.com/content/e9fd66f6-6e7b 4374-b84a-77ffa89d8547#post-fe2a2305-8412-498d-9ae9-61fbaf56d4ea [Accessed 23 Mar. 2024]. 

  11. www.hess.com. (n.d.). Hess Corporation | A Leading Independent Energy Company. [online]  Available at: https://www.hess.com [Accessed 23 Mar. 2024].


The opinions expressed in the reports are those of the members of the Junior IB team and are not affiliated with any university or institution. The financial recommendations provided are for educational purposes only and the Junior IB team takes no responsibility for any losses that may occur from implementing any ideas presented in the reports. The Junior IB team is not authorized to provide investment advice. The information, opinions, and estimates presented in the reports reflect the Junior IB team's judgment at the time of publication and are subject to change without notice. The price, value, and income of any securities or financial instruments mentioned in the reports may fluctuate. The Junior IB team has no business relationship with any of the companies mentioned in the reports and does not receive any compensation for their inclusion.


Copyright © March 2024 | The Junior IB.





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