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
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