PINS - Wall Street Lunch: Chevron Buys Hess

2023-10-23 13:20:00 ET

Summary

• Chevron to buy Hess in an all-stock transaction for $53 billion.
• The 10-year Treasury yield briefly crosses 5% for the first time since 2007.
• Jefferies comes out with its USA Equity Strategy report and allocation recommendations.

Listen below or on the go on Apple Podcasts and Spotify

Chevron (CVX) agrees to acquire Hess (HES) in an all-stock deal. (0:15) The 10-year Treasury yield tops 5% for the first time since '07. (1:21) Morgan Stanley (MS) slammed as purposeless in downgrade. (3:29)

This is an abridged transcript of the podcast.

Our top story so far

Oil that is, black gold, is Texas tea.

Chevron ( CVX ) announces a deal to acquire Hess ( HES ) in an all-stock transaction valued at $53 billion, or $171 per share.

The price represents a 10.3% premium on a 20-day average based on October 20, 2023 stock prices. But the premium is just 5% above the Friday close.

Hess shares are little changed around $164, indicating a little skepticism by the arbs on the deal price. Chevron is off 2%.

Hess shareholders will receive 1.025 shares of Chevron for each Hess share. Chevron will issue about $317 million in common stock.

The transaction has a total enterprise value of $60 billion, which includes net debt and non-controlling interest, and has been approved by both companies' boards. It is expected to close in the first half of 2024.

Chevron's acquisition of Hess enhances its portfolio, adding the Stabroek block in Guyana and Bakken assets to its DJ and Permian basin operations.

There is no word on whether the iconic Hess toy trucks will get a rebrand.

In today’s trading

Attention is squarely on the bond market in a volatile session.

The 10-year Treasury yield (US10Y) rose above 5% for the first time since 2007. But rates have since reversed course, and it’s back down to 4.9%.

Still, Althea Spinozzi of Saxo Bank says it “is likely” it can continue to march above 5.2%.

Higher rates put downward pressure on stocks earlier. But buyers have come in as the bond selloff has abated. The S&P (SP500) is down less than -0.5%.

Strategists were quick to point out that 5% is just a psychological level, but people love large numbers.

As longer rates outpace the rise in shorter rates, the yield curve continues to flatten. The 2s10s gap is just 20 basis points.

Bloomberg macro strategist Ven Ram notes that “after more than a year of being inverted, some of the key segments of the Treasury curve are about to revert to zero."

He adds, "That is usually taken as an imminent sign that the economy is about to contract or even entered a recession — but that isn’t the case this time around. It has more to do with a higher neutral rate and rising real-risk premiums.”

Moody's economist Mark Zandi said, "If you had told me a few months ago that today 10-year Treasury yields would be near 5% and mortgage rates over 8%, I probably would have told you that the stock market would be down big and the economy headed to recession. While that still could happen, odds are good that it won’t."

"That’s because the surge in rates hasn’t been fueled by high inflation or rising inflation expectations... If so, the Fed would still be tightening policy, and that would be a mortal threat to stocks and the economy."

Instead, the "runup in long-term rates is due in good part to the economy’s resilience," he says.

As the 10-year crossed the milestone today, hedge fund manager Bill Ackman announced he had covered his bond short . Ackman announced at the beginning of August that he was shorting the 30-year Treasury (US30Y). At the time, the 30-year yield was a full percentage point lower, around 4.1%.

He tweeted, “There is too much risk in the world to remain short bonds at current long-term rates.”

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Among active stocks

Odeon Capital analyst Dick Bove downgraded Morgan Stanley ( MS ) to Hold from Buy, describing the investment bank as "floating without clear purpose" since 2022.

After Chairman and CEO James Gorman's announcement that he wants to retire, the bank's board asked him to stay on until it decides on a new leader. "History indicates this makes no sense at all," Bove said. "It places the firm in turmoil, and it sets up a competition that leads to major infighting and lower operating results."

Harpoon Therapeutics ( HARP ) added about 50% after announcing updated Phase 1/2 results for the company’s experimental cancer therapy in small cell lung cancer and other neuroendocrine tumors.

Volkswagen ( VLKAF ) fell after the German automaker cut its profit margin outlook for the current year. Volkswagen now sees adjusted operating income to be at the previous year's level of €22.5 billion in comparison to the previous guidance that called for a 7.5% to 8.5%. Deutsche Bank said that implies a 10% cut at the midpoint.

Stifel upgraded Pinterest (PINS), citing "more positive" checks on advertising.

Analyst Mark Kelley raised his rating to Buy from Hold and boosted his price target to $32 from $27. Overall, digital advertising checks were "largely positive," he said.

In other news of note

SAG-AFTRA, the labor union representing Hollywood actors, and the Alliance of Motion Picture and Television Producers will resume negotiations on Tuesday. That’s nearly two weeks after talks broke down over actors' demand for a cut of streaming services' revenue.

"As we mark the 100th day of our strike, we are pleased to confirm the company executives have asked us to return to the table," SAG-AFTRA said in a post. "We are ready, willing, and able to engage on a moment’s notice to meet and to work across the table to achieve a deal that is worthy of your sacrifice."

Hollywood actors have been on strike since July over demands for higher pay, better working conditions, and guardrails for AI use, among others.

And in the Wall Street Research Corner

Jefferies published its USA Equity Strategy report and allocation recommendations.

It has Healthcare ( XLV ) as an overweight after an “awful absolute and relative performance.” Strategists note that M&A activity is ahead of average for the sector.

Consumer Discretionary ( XLY ) comes in at market weight. Jefferies notes that consumer spending has been holding up, but a hard landing could “adversely impact” how consumers respond. In addition, even higher oil prices and student loan repayments could negatively impact the sector.

Among the underweights is Communications Services (XLC). They say the higher-for-longer rate environment should help, but it still has too many non-earners.

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