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Chevron to Buy Hess for $53 Billion – WSJ

Deal is the latest sign of consolidation among oil-and-gas companies, highlighting industry’s bet on continued fossil-fuel use. Chevron also said that it would boost returns to shareholders. (Philip Gostelow/Bloomberg News)
Deal is the latest sign of consolidation among oil-and-gas companies, highlighting industry’s bet on continued fossil-fuel use. Chevron also said that it would boost returns to shareholders. (Philip Gostelow/Bloomberg News)

Colin Eaton, WSJ

Energiesnet.com 10 23 2023

Chevron CVX -3.63%decrease; red down pointing triangle said it would buy Hess HES -0.93%decrease; red down pointing triangle in an all-stock deal worth $53 billion in the second major oil tie-up this month, after Exxon Mobil’s deal to buy Pioneer Natural Resources.

The U.S. energy company said buying Hess would upgrade and diversify its portfolio, marking Chevron’s entrance into an Exxon-led partnership overseeing a generational oil find in Guyana, while picking up additional U.S. shale assets largely in North Dakota.

The transaction, less than two weeks after Exxon’s acquisition of Pioneer, shows America’s second-largest oil company is similarly tying its future to a bet that the world will continue to have an appetite for oil for decades, even as many countries are seeking to cut emissions and transition toward green energy.

The major oil companies’ doubling down on fossil fuels follows a recent prediction by the International Energy Agency that fossil-fuel demand globally would reach its zenith this decade.

stock-price preformance
Source: FactSet

“These are two great American companies coming together to be even stronger at a time when investment in American energy is important from the standpoint of jobs and from the standpoint of energy security,” Chevron Chief Executive Mike Wirth said in an interview on Monday.

The deal values Hess at $171 a share based on Chevron’s closing price on Friday, with Hess shareholders receiving 1.025 shares of Chevron for each Hess share. The price represents a premium of 4.9% from Hess’s closing share price on Friday and 10.3% when compared with the stock’s 20-day average price.

Hess shares edged down less than 1% to $161.80 in morning trading, while Chevron shares fell 3.3% to $161.33. Including debt, the transaction has a total enterprise value of $60 billion.

The deal comes as oil-and-gas companies are flush with cash after energy prices rocketed in the wake of Russia’s invasion of Ukraine, with executives signaling they were ready to deploy their war chests at the deals table.

Hess has been led for decades by Chief Executive John Hess, who—along with a few other shale executives—has made the public case for bolstering domestic energy supplies. Hess is expected to join Chevron’s board, Chevron said.

Hess, who owns about 9% of the eponymous company, led it to scoop up a large position early on in the American shale revolution, primarily in the Bakken Shale of North Dakota.

The biggest prize for Chevron is Hess’s nearly one-third share of the estimated 11 billion barrels of oil and gas found off the shores of Guyana. Exxon and its partners, Hess and China’s Cnooc, have revved up Guyana’s oil production from nothing in 2019 to 400,000 barrels a day.

The partners expect to be pumping 1.2 million barrels a day by 2027, making it one of the world’s fastest-ever oil developments. By then, the former British colony will be the source of $180 billion in market value for the consortium, some analysts have said.

Exxon Mobil earlier this month struck a nearly $60 billion agreement to buy Pioneer Natural Resources in the largest oil-and-gas deal in two decades. Both Exxon and Chevron have also agreed on smaller transactions earlier this year.

On Monday, Wirth said the deal for Hess would position his company to strengthen its long-term performance and further enhance its portfolio. The combination is also expected to achieve cost synergies of around $1 billion before taxes within a year of closing, the company said. Wirth said the combined company should have an inventory of lucrative drilling locations into the next decade.

Wirth has become a vocal defender of the U.S. oil industry as fossil-fuel producers have come under scrutiny of the Biden administration, environmental groups and European governments for their contribution to climate change.

“I don’t think this would in any way be read as not being supportive of a lower carbon future, but it also recognizes the reality that oil and gas are important today and will be for many, many years to come,” Wirth said in the interview.

Mark van Baal, founder of Follow This, a climate-focused investment group, said Chevron’s deal runs counter to the Paris climate agreement and that investors must exert more pressure on oil companies to reduce production.

 Chevron’s board of directors has said it would waive the company’s fixed retirement age to allow Wirth to remain CEO for a longer period as it weighs its C-suite strategy. Wirth became CEO in 2018, when the company was reeling from years of cost overruns made more acute by an oil-market crash in 2015 and anemic energy prices. He was seen as an executive who could corral runaway costs. 

In 2019, Wirth refused to enter into a bidding war when

Occidental Petroleum swooped in to buy Anadarko Petroleum for billions more than Chevron had offered. Chevron received a $1 billion breakup fee and bought Noble Energy for a lower price the next year, a deal that gave the company access to Middle East natural-gas markets and a bigger U.S. footprint. 

Wirth has touted his strategy since walking away from Anadarko to focus on acquisitions that offered low premiums to its targets, including its agreement in May to buy PDC Energy for more than $6 billion. Chevron’s deal to buy Hess is its third since the onset of the Covid-19 pandemic in 2020 with a premium of around 10%, Chevron said. 

Wirth said he expects Chevron will make a double-digit return on capital employed, a measure closely watched by investors, at midrange oil prices and would be prepared for an oil downturn, should one occur. Echoing other oil executives and analysts, Wirth said it is time that companies scale up via mergers and acquisitions. 

“Ours is an industry, particularly as you get into the shale patch, that was due for some consolidation,” Wirth said on a call with investors on Monday. 

Chevron said it expected the Hess deal, which needs a green light from Hess shareholders as well as regulatory approvals, to close in the first half of 2024.

Wirth and Hess said they don’t foresee regulatory issues in closing the deal. They expected Guyana’s government to continue to honor a production-sharing agreement it had struck with the consortium, and they see approval from U.S. antitrust regulators, who have taken a close look at large corporate acquisitions under the Biden administration.

“In the global crude market, we’re a small player,” Wirth said on the call. 

Chevron also said Monday that it would boost returns to shareholders. The company said it expects to increase its first-quarter dividend by 8% in January and plans to increase share repurchases.

Energy companies have reported lower results this year after record-setting levels last year, but are still reporting big profits because of elevated commodity prices. Chevron is to report its third-quarter earnings on Friday.

Hess was founded in 1933 by John Hess’s father Leon, the former owner of the New York Jets football team. Hess said his company’s legacy began about 90 years ago with his father “delivering fuel oil in a secondhand truck during the Depression.”

In recent years the company has sold off some assets in various countries to focus on its core operations. It is also known for its sale of toy trucks around Christmas, a tradition that Hess and Wirth said on Monday would continue.

Write to Collin Eaton at collin.eaton@wsj.com and Peter Stiff at peter.stiff@wsj.com

wsj.com 10 23 2023

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