In late 2023, Chevron announced its agreement to acquire Hess for $53 billion, a strategic move aimed at enhancing the company’s production and free cash flow growth into the following decade. However, this transaction has yet to be finalized due to a legal dispute with ExxonMobil over Hess’s partnership with ExxonMobil in offshore Guyana.
The two oil giants are currently engaged in a court battle regarding the acquisition. Confident in its position, Chevron has purchased approximately 5% of Hess’s stock on the open market, a transaction valued at over $2 billion based on Hess’s current market capitalization of $46.5 billion. This purchase may result in financial savings for Chevron if the acquisition is completed.
The ongoing consolidation wave within the oil industry was set in motion when Exxon agreed to acquire Pioneer Natural Resources for $59.5 billion in October 2023. Chevron followed with its own $53 billion acquisition agreement for Hess. While Exxon’s acquisition has been completed, bolstering its presence in the Permian Basin, Chevron’s deal with Hess remains pending due to objections from Exxon.
Hess’s significant presence in Guyana is the central point of contention. While Hess also operates in other regions, most of its value is tied to its 30% interest in the Stabroek block in Guyana. This Exxon-operated offshore oil field holds an estimated 11 billion barrels of oil equivalent resources, producing high-margin oil with promising growth prospects. Analysts suggest that this stake accounts for roughly 70% of Hess’s overall value.
Exxon contends that Chevron’s motivation for purchasing Hess is largely driven by its interest in the Stabroek block, potentially triggering the change of control clause in its joint development agreement with Hess and CNOOC. Chevron disputes this claim, prompting both companies to seek arbitration, with a ruling expected in May.
The Stabroek block is regarded as Hess’s most valuable asset, recognized for generating strong and increasing free cash flow. Given Exxon’s development plans to expand production in Guyana, Chevron anticipates that acquiring Hess will double its free cash flow by 2027 and extend its production growth outlook into the 2030s.
Beyond Guyana, Hess holds strategic value for Chevron, particularly through its position in the Bakken, complementing Chevron’s operations in the Permian and DJ basins. This asset is known for producing strong cash flow, supported by Hess Midstream’s integrated assets.
By incorporating the assets in Guyana and the Bakken, Chevron aims to diversify and enhance its portfolio. The acquisition would also extend Chevron’s reach in the Gulf and Southeast Asia, increasing its capability to generate free cash flow.
In acquiring Hess, Chevron sees a comprehensive package that complements its existing assets and global operations. Confident in a favorable arbitration ruling, Chevron has acquired nearly 15.4 million shares of Hess, just under 5% of its outstanding shares, at a discount compared to the exchange ratio in the merger agreement. This could yield financial benefits if the arbitration is resolved in Chevron’s favor.
Chevron remains confident in its position against Exxon and anticipates closing the acquisition of Hess within the year. The company is staking over $2 billion on this belief by acquiring nearly 5% of Hess’s stock. This strategic investment could potentially result in further financial benefits if the acquisition is completed successfully, solidifying the deal’s value.
