In a significant move, Chevron Corp. (NYSE:CVX) has announced its acquisition of Hess Corp. (NYSE:HES) for $53 billion, becoming the second major deal in the energy sector this month as oil prices continue to surge.
The sharp rise in crude oil prices in early 2022, triggered by Russia’s invasion of Ukraine, has resulted in prices hovering around $90 per barrel, with an additional 9% increase this year. This surge in oil prices has made major oil companies financially robust and on the lookout for strategic investments.
The Chevron-Hess deal closely follows Exxon Mobil’s recent announcement of its intention to acquire Pioneer Natural Resources for approximately $60 billion.
Several factors are contributing to the upward pressure on oil prices, including the ongoing conflict in Ukraine. Furthermore, global oil markets are being affected by production cutbacks from major oil-producing nations such as Saudi Arabia and Russia. The situation is exacerbated by the potential for a broader Middle East conflict due to the war between Israel and Hamas. Although attacks on Israel do not directly disrupt global oil supply, they create the risk of oil supply disruptions and higher prices, as noted by the U.S. Energy Information Administration.
Chevron’s acquisition of Hess adds a substantial oil field in Guyana to its portfolio, along with shale properties in the Bakken Formation in North Dakota. Guyana, a South American country with a population of 791,000, is poised to become the world’s fourth-largest offshore oil producer, surpassing countries like Qatar, the United States, Mexico, and Norway. Guyana has witnessed increased oil production activity in recent years, attracting major oil companies such as Exxon Mobil, China’s CNOOC, and Hess, all competing for highly profitable oil fields in northern South America.
Chevron Chairman and CEO Mike Wirth emphasized that this acquisition aligns with their objective to deliver higher returns and lower carbon emissions. Additionally, the deal is expected to boost Chevron’s estimated production and free cash flow growth over the next five years, extending its growth profile into the next decade. This aligns with Chevron’s plans to increase dividend growth and share repurchases.
The acquisition is structured with Chevron paying for Hess using stock. Hess shareholders will receive 1.0250 shares of Chevron for each Hess share, valuing the deal at $60 billion including debt.
Despite increasing concerns about climate change, elevated energy prices have led to more exploration and drilling, offering significant returns to investors. The energy sector has witnessed a series of acquisitions focused on U.S. shale fields, reflecting a trend of consolidation among major energy producers seeking cost efficiencies. In 2020, during the pandemic, Chevron announced the acquisition of Noble Energy for $5 billion, while ConocoPhillips bought shale producer Concho Resources in an all-stock deal valued at $9.7 billion.
It’s worth noting that despite global climate change concerns, Britain approved a major oil and gas project in the North Sea, disregarding warnings from scientists and the United Nations about the need to curb new fossil fuel development to avert catastrophic climate change.
Chevron anticipates that the deal will enable increased returns to shareholders. They project recommending an 8% boost to their first-quarter dividend in January, subject to board approval. Additionally, the company expects to raise stock buybacks by $2.5 billion to the upper end of their guidance range of $20 billion per year once the transaction is completed.
Both Chevron and Hess boards have approved the deal, following six months of negotiations. The transaction is targeted to close in the first half of the next year, pending approval from Hess shareholders. John Hess, the CEO of Hess Corporation, is expected to join Chevron’s board, given his family’s significant ownership stake in Hess.
On the stock market, Chevron Corp and Hess Corp stocks experienced a decline on the day the deal was announced.
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