The U.S. oil industry continues to bet on an enduring future for fossil fuels. In the latest mega-deal, Chevron (CVX) will pay $171 per share for Hess (HES) in an all-stock transaction. Hess shareholders will receive 1.025 shares of Chevron for each Hess share, giving the company a total enterprise value of $60 billion, including debt.The relatively small premium Chevron is paying for Hess reflects the fact that its shares were trading close to an all-time high.
The acquisition will give Chevron a significant foothold in Guyana, the South American country that is one of the world’s newest oil producers. It will enable faster production growth and more generous returns to investors, according to Chevron.
This is the second major deal in the oil sector in the past few weeks, after ExxonMobil (XOM) agreed to buy shale powerhouse Pioneer Natural Resources (PXD) for $60 billion plus debt.
Both transactions underpin a bet by the U.S. energy giants that oil (CLZ23) and natural gas (NGX23) will remain central to the world’s energy mix for decades to come. And both deals are on a scale rarely seen since the mega-mergers of the late 1990s and early 2000s — think BP-Amoco, Exxon-Mobil, and Chevron-Texaco — that formed the modern supermajors.
Globally, $254 billion worth of merger and acquisition deals that have been announced in the oil and gas industry this year, marking the highest year-to-date total since 2014.
I believe the Hess deal will be a significant positive boost for Chevron. Let’s see why.
What the Deal Does for Chevron
The Hess pickup adds acreage in the Gulf of Mexico and the Bakken shale basin (465,000 acres), but the real crown jewel in the company's asset portfolio is Guyana.
The country is a former British colony in South America with a population of 787,000 whose fortunes have changed since ExxonMobil discovered large offshore oil deposits in 2015. It is now one of Latin America’s most prominent producers, surpassed only by Brazil and Mexico.
Crude oil production began in 2019 and is rising rapidly. Guyana's oil production has soared from nothing before 2019 to an average of 260,000 barrels a day last year, according to the U.S. Energy Information Administration, and is expected to approach 480,000 barrels per day next year.
Buying Hess will give Chevron 30% ownership of more than 11 billion barrels-equivalent of recoverable resources (6.6 million acres) in offshore Guyana (Stabroek block), which is one of the world’s major new oil producers. Stabroek is a huge resource, with at least 11 billion barrels of oil equivalent recoverable. It will account for 2% of global oil supply by 2030.
Exxon is already a major player in Guyana. Along with its partner Hess and China's CNOOC, they're the only active oil producers in the country. Their projects are expected to reach 1.2 million barrels per day of output by 2027.
Here's what Morningstar said about Hess in late August 2023: “The firm's Guyana assets will be an engine for rapid growth in the next few years, differentiating Hess from other independent upstream firms.” So, Chevron is buying growth, thanks to the newly acquired Hess Guyana assets.
In a news release, Chevron said the acquisition would add about 10% to its overall oil and gas production of about 3 million barrels a day. In the second quarter, Chevron produced almost 3 million barrels of oil equivalent a day, while Hess produced 387,000 barrels of oil equivalent a day — up from 344,000 in 2022 as production has increased in Guyana.
The acquisition will also boost Chevron’s estimated five-year production and free cash flow growth rates, and extend them into the next decade.
Returns to investors will also get a lift, with the company expecting to recommend an 8% increase in its first-quarter dividend in January, and a further $2.5 billion of share buybacks once the deal has closed.
Chevron Stock Is a Buy Right Here
Even before this deal, Chevron planned to grow production to nearly 4 million barrels of oil equivalent per day by 2027, up from about 3 million barrels in 2023. The added volumes were scheduled to come from new production in the Permian Basin, where the company expects to grow volumes to 1.25 million barrels oil equivalent per day by 2027, compared to about 700 million barrels in 2022 - while delivering returns of nearly 30% and about $5 billion of free cash flow by 2027.
So, despite Wall Street not liking any of these large energy deals, as evidenced by the heavy selling on the news, I have the opposite view.
The acquisition of Hess will give Chevron a nice growth boost. That makes the stock a buy anywhere in the $150 to $170 range.
