Wood Mackenzie

LONDON/HOUSTON/SINGAPORE
EnergiesNet.com 10 24 2023

Addressing Chevron’s acquisition of Hess, David Clark, Vice President, Corporate Research for Wood Mackenzie said, “Three weeks ago, Chevron was the leader among Major’s in the Permian, was underweight deepwater, and faced rising concern over portfolio concentration risk. ExxonMobil had a highly diverse portfolio, stronger deepwater exposure, but ranked just fifth-ranked by Permian volumes and inventory.

“Two deals later, Chevron, ExxonMobil and the M&A landscape in oil and gas have a very different feel. ExxonMobil now has easily the highest upstream portfolio concentration among the Majors and has locked up a dominant position in the Permian Midland Basin. Chevron has addressed its portfolio concentration concerns and is now the IOC leader in deepwater.”

Hess brings Chevron a material interest in one of the world’s hottest growth plays in Guyana. With high returns and low Scope 1 and 2 emissions intensity, Guyana accounts for ~70% of Wood Mackenzie’s Hess valuation. Multi-play potential and prospects beyond existing discoveries offer future upside.

Continued Clark, “The deal follows too quickly in the footsteps of ExxonMobil’s Pioneer takeover to be a reaction – they must have been negotiated concurrently – but it’s difficult not to draw parallels. Both targets have premium portfolios, trading at premium prices. These are not opportunistic deals, but strategic moves to realign portfolios for the coming decades.”

The Majors’ global oil and gas production

Here are some of the key takeaways:

1.  Another big equity deal, despite pristine balance sheets.

“Both ExxonMobil and Chevron have chosen to deploy Supermajor equity strength rather than bullet-proof balance sheets,” said Alex Beeker, Research Director, corporate research for Wood Mackenzie “An all-stock deal allows Hess shareholders to participate in future upside and receive immediately higher distributions. Just like the ExxonMobil deal the week before, it also protects Chevron from price downside, with both parties sharing the risk until the deal is closed.

“Using equity to do these huge deals also leaves the buyers’ balance sheets in strong shape to weather potential unexpected downturns, develop portfolios without new funding and look at other opportunist bolt-on deals when they become available.”

2.  A strategic reduction in portfolio concentration

According to Wood Mackenzie analysis, Chevron currently has the most concentrated upstream position in the Majors peer group. Adding Hess’ position in deepwater Guyana and a mature large-scale, cash-generating operation in the Bakken (two new regions for Chevron) immediately reduces concentration risks. Conversely, ExxonMobil post-Pioneer, will have the most concentrated upstream portfolio in the peer group – but unlike Chevron, has full value chain integration on the US Gulf Coast as a counterweight.

Following the addition of Hess, Chevron will become the leading IOC in deep- and ultra-deepwater by value, overtaking Shell. The Stabroek block will become Chevron’s second most valuable international upstream asset, larger than its stake in Kazakhstan’s giant Tengiz project.

3.  Energy Transition: the divergence between US Majors and Euro Majors just got wider

“Chevron and ExxonMobil have both demonstrated confidence in a sector that is grappling with how to respond to the energy transition,” said Clark. “The US Majors are investing in low carbon solutions, including CCUS, biofuels and hydrogen, but have so far avoided utility-scale wind and solar investments.

“In contrast, the Euro Majors have taken a more aggressive approach to investing in new energies. Despite recently signalling that oil and gas will be part of their portfolios for longer than some previously planned, stakeholder alignment concerns and lower valuation multiples would make deals of this size very challenging.”

According to Wood Mackenzie, the acquisitions of Pioneer and Hess have widened the strategic divergence between the US Majors’ and Euro Majors, with the US Majors leaning harder into oil and gas. Chevron and ExxonMobil are now guiding for 4.5 million boe/d and 5 million boe/d of production respectively by 2027. At that scale, both will be producing at least 50% more than the largest upstream portfolio of the Euro Majors.

4.  Matching advantage with advantage

“Chevron’s upstream portfolio is already high quality; new assets have a high bar to reach to attract capital,” said Beeker. “Hess’ attractiveness as an acquisition target has long been its focused core assets, which have sufficiently high returns, low emissions and materiality to be accretive to the majority of buyers. The Stabroek deepwater block is elite in both of these dimensions. It has yielded over 30 major discoveries, including the flagship Liza project. Drilling conditions are benign, and fiscal terms attractive.”

5.  Broader sector impact

Added Clark, “Most large deals over the last two decades have been ‘unanswered’.  There were no major M&A reactions to ExxonMobil buying XTO, or Shell buying BG. But trends have sporadically broken out, for example “Permania” in 2015, and the creation of the Supermajors in the late 1990s.

“The consensus view calls for the beginning of a major wave of consolidation. The scale of these two deals, has certainly been a major step, and a handful of other deals that have prompted media buzz. We don’t think a flood of deals is a certainty, but it is fair to presume that the parameters of C-suite discussions have been broadened by the events of the last two weeks.”

woodmac.com 10 23 2023