There’s some similarities between the two transactions by America’s largest fossil-fuel drillers. Both are buying businesses run by founding families at recent – and perhaps soon-to-decline – toppy oil prices. For Pioneer, it is Scott Sheffield, 71, who is selling, while John Hess, 69, is letting go at his family’s namesake. With Brent crude prices hovering around $91 a barrel and prospects for oil shaky at best, the decisions say something about the transition from wildcatters-turned-billionaires to drillers, whose existence is on the line.
The main appeal for Chevron is Hess’s 30% stake in a consortium producing oil offshore in Guyana. It is a prolific field, expected to pump out over 1.2 million barrels a day by 2027. Hess has said the breakeven price for five projects there range from $25 to $35 per barrel, so even if prices fall considerably, the fields make money. Importantly, Chevron is catching up to Exxon, which runs and owns 45% of the same Guyana consortium. If the deal closes, Chevron will become a partner with Exxon.
The opportunity is already reflected in Hess’s stock price. It was already valued at 11 times EBITDA over the last four quarters, compared to Chevron’s 6 times. Sure, the premium on the all-stock deal is only 5% based on Friday’s closing price. But Hess’s pre-tax profit next year, according to LSEG data, will be $4.7 billion. Add $1 billion of annual synergies from the combination, taxed at the statutory rate, and the deal’s return is 9%. That’s slightly above Hess’s weighted average cost of capital, according to Morningstar. But it doesn’t leave much room for error or rising rates.
Higher production in Guyana after 2024 will increase Chevron’s returns, assuming the price of oil remains favorable. Exxon’s deal with Pioneer assumes a higher return in the near term. Both have giant respective fields in the Permian which can be turned on and off quickly. But in essence, Chevron boss Mike Wirth is making the more aggressive bet that oil demand sticks around for years to come by paying up for Guyana. That makes his path trickier. With electric car sales accelerating, the risk may be that he is expanding through a mega-acquisition exactly as oil demand starts to evaporate.
Oil giant Chevron said on Oct. 23 that it had agreed to acquire rival Hess for $53 billion in stock, the second-largest oil transaction this month following Exxon Mobil’s $60 billion bid for Pioneer Natural Resources. Hess investors will receive 1.025 shares of Chevron for each share held, worth $171 per share based on the closing price on Oct. 20.
Hess owns a 30% share in a consortium in Guyana alongside Exxon, which owns a 45% interest, and Chinese oil company CNOOC, which owns the remaining 25%. Their oil field is expected to produce over 1.2 million barrels per day by 2027.
Founded by John Hess, who still holds a 9% stake, the company also has a 465,000-acre position in the Bakken and assets in the Gulf of Mexico. It expects to produce between 385,000 and 390,000 barrels of oil equivalent per day this year.
Editing by Lauren Silva Laughlin and Aditya Sriwatsav
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