XOM - Chevron Makes Its $53B Move For Hess Corporation's Guyana Crown Jewel

2023-10-23 13:04:18 ET

Summary

• Chevron Corporation announced the acquisition of Hess Corporation for $53 billion, aiming to strengthen its resource depth and quality in Guyana.
• The deal is expected to close in the first half of 2024 and will give Chevron access to Hess's Guyana and Bakken assets.
• Chevron expects the acquisition to contribute to production growth over the next decade and plans to increase dividends and share repurchases.
• The acquisition is priced at a slight premium against Hess stock's close last week, suggesting Chevron did not pay excessively.
• I argue why, while the deal is expected to be near-term earnings dilutive, investors aren't unduly concerned, as they focus on the long-term potential of the acquisition.

Chevron's Acquisition Of Hess Corporation

In a massive move by Chevron Corporation (CVX), the company announced the acquisition of Hess Corporation (HES). Hess is a leading independent oil and gas producer, as Chevron looks to bolster its resource depth and quality in Guyana.

Accordingly, the deal is worth $53B, about 5.8% above the Hess market cap on Friday (October 20). The deal is worth $60B in enterprise value terms in enterprise value terms, as Chevron expects the acquisition to close in the first half of 2024.

Chevron's massive acquisition was made after it reportedly moved away from an initial consideration to acquire Occidental Petroleum (OXY). It also followed closely from arch-rival Exxon Mobil's (XOM) recent acquisition of Pioneer Natural Resources (PXD). Given Hess's well-diversified assets, I believe Chevron's acquisition price is sound, notwithstanding Hess' growth premium.

Chevron will gain access to Hess' crown jewel Guyana assets through the acquisition. Accordingly, Chevron will acquire Hess's 30% high-margin ownership stake in the Stabroek Block operated by Exxon. Chevron stressed the significance of this access, indicating it as "exceptional, with industry-leading cash margins and low carbon intensity." Furthermore, Chevron expects the assets to extend the quality and depth of its production scale, "contributing to production growth over the next decade."

Moreover, Chevron gains access to Hess's Bakken assets, bolstering Chevron's existing shale acreage. Despite that, management expects the deal to be dilutive to earnings in the near term. However, the acquisition is anticipated to lift its cash flow per share by 2025. Furthermore, investors should expect a further lift to Chevron's 5Y production and free cash flow ("FCF") growth factors.

With that in mind, Chevron underpinned its confidence in the deal by proposing an 8% YoY increase in FQ1'24 dividends to $1.63 per share. In addition, Chevron "intends to boost share repurchases by $2.5 billion, aiming for the upper limit of its annual guidance range of $20 billion." While the company highlighted the increased share repurchases are "contingent upon favorable oil price scenarios," I have confidence in the uptrend bias of the energy sector (XLE), as I have been bullish since March 2023.

Despite that, Hess' valuation isn't cheap, rated "F" by Seeking Alpha Quant . Moreover, the all-equity deal will see Chevron issuing about 317M shares, a 17% increase against its current outstanding shares of 1.867B. Despite that, CVX is falling by less than 3% at writing, suggesting investors remain relatively confident about the deal's potential medium- and long-term bottom line accretion.

Furthermore, Chevron also highlighted it expects to achieve $1B in run-rate cost synergies from the deal, with a CapEx range of between $19B to $22B. Furthermore, management highlighted that it "expects to increase asset sales" between $10B and $15B, providing opportunities to optimize its portfolio further through 2028.

While I was more cautious (Hold rating) about CVX in my previous article , I'm less concerned now, given the broad recovery in the underlying energy sector. Furthermore, I assess CVX's price action as increasingly constructive, although it needs to regain control of the $172 level decisively to renew its medium-term uptrend bias.

Despite that, the slight pullback following the announcement of the Hess acquisition suggests market participants remain confident of its ability to execute the deal robustly. As such, investors are likely seeing the near-term earnings per share dilution as less of a concern as they focus on Hess's long-term inventory depth and high-quality assets.

As such, I view the acquisition favorably. Coupled with Chevron Corporation's relatively well-balanced valuation (rated "C-" by Quant), I'm ready to upgrade my thesis on CVX.

Rating: Upgraded to Buy

Important note: Investors are reminded to do their due diligence and not rely on the information provided as financial advice. Please always apply independent thinking and note that the rating is not intended to time a specific entry/exit at the point of writing unless otherwise specified.

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