Tuesday Oct 24 2023 13:49
4 min
Chevron's acquisition of Hess Corp. for $53 billion is just one of several major deals in the energy sector this month, as leading oil producers take advantage of surging oil prices.
The increase in crude oil prices in early 2022, fueled in part by Russia's invasion of Ukraine, has led to oil prices hovering around $90 per barrel, marking a 9% increase this year. This has left major oil companies with substantial cash reserves and a desire to find investment opportunities.
The Chevron-Hess deal was announced less than two weeks after Exxon Mobil revealed its plan to acquire Pioneer Natural Resources for close to $60 billion.
Multiple factors are contributing to the upward pressure on crude oil, with continuous futures contracts for international benchmark Brent trading around the $90 mark on Tuesday, while similar contracts for U.S. benchmark West Texas Intermediate (WTI) traded around $85.
These include the ongoing war in Ukraine, reduced oil production by Saudi Arabia and Russia, and the potential for a broader Middle East conflict as tensions rise between Israel and Hamas. While attacks on Israel don't directly disrupt global oil supply, “they raise the potential for oil supply disruptions and higher oil prices,” as noted by the U.S. Energy Information Administration in its most recent Short-Term Energy Outlook (STEO), published on October 11.
On Monday, Chevron shares declined by 3.69%, closing at $160.68. The decline traced a generally downbeat trading session for the stock market, as the benchmark S&P 500 Index dropped by 0.17% to 4,217.04, and the Dow Jones Industrial Average (DJIA) experienced a 0.58% decrease, closing at 32,936.41. Shares of New York-based Hess Corp. ended down 1%.
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On Monday, Chevron announced its acquisition of Hess will allow it access to a major oil field in Guyana and shale properties located in the Bakken Formation of North Dakota. Guyana, a South American nation with a population of 791,000, is on the brink of becoming the world's fourth-largest offshore oil producer, surpassing countries like Qatar, the United States, Mexico, and Norway. In recent years, it has emerged as a prominent producer, with major oil corporations, including Exxon Mobil, China's CNOOC, and Hess, engaging in intense competition for highly profitable oil fields in northern South America.
Chevron is funding the acquisition of Hess through the issuance of its own stock. Under the terms of the agreement, Hess shareholders will receive 1.0250 Chevron shares for each share of Hess. Taking into account the associated debt, Chevron values the entire transaction at $60 billion.
“This combination is aligned with our objective to safely deliver higher returns and lower carbon,” Chevron Chairman and CEO Mike Wirth said in prepared remarks on Monday. “In addition, Hess increases Chevron’s estimated production and free cash flow growth rates over the next five years, and is expected to extend our growth profile into the next decade supporting our plans to increase our peer-leading dividend growth and share repurchases.”
The boards of Chevron and Hess have given their approval to the agreement that was announced on Monday, following six months of negotiations. The deal is slated to close in the first half of 2024, pending the approval of Hess shareholders. It is expected that John Hess, the CEO of the company, who has a substantial ownership stake in Hess, will become a member of Chevron's board.
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Past performance is not indicative of any future results. This information is provided for informative purposes only and should not be construed to be investment advice.
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