Traders are finding out the hard way that profiting off a big oil discovery can be messy.

Bloomberg
One of the biggest oil deals of the past year is throwing up some nasty surprises for a group of hedge funds.
Chevron Corp. agreed in October to acquire Hess Corp. for $53 billion. The transaction stands to give Chevron a 30% stake in Guyana’s offshore Stabroek block, one of the world’s fastest-growing major oil developments and the biggest crude discovery in a decade.
Millennium Management, Pentwater Capital Management and Balyasny Asset Management were among the investors taking significant stakes in Hess after the deal was announced.
They spied a classic arbitrage opportunity: Hess was trading below the Chevron offer price, perhaps unreasonably so, because the deal seemed relatively safe. Hess and Chevron said they expected the merger to close midyear.
But trouble over the transaction started brewing early on. About a month after its disclosure, western neighbor Venezuela reignited a century-old border dispute by claiming two-thirds of Guyana as its own.
That sent the spread between Chevron and Hess shares, which will be zero if the deal closes, to nearly $14, implying the transaction was in peril.
The spread quickly narrowed as the two countries agreed to not provoke each other, but concerned hedge fund executives from London and New York flocked to Georgetown, Guyana’s capital, in February to assess whether the dispute could thwart the deal.
Days later, a Chevron filing dropped the bombshell that Exxon Mobil Corp., which operates and owns 45% of Stabroek, considers it has a right of first refusal over the Hess stake. Exxon accuses Chevron of trying to “circumvent” its pre-emption rights to acquire a third of the Guyana oil development, which the Texas energy giant has led since the initial discovery in 2015.
Escalating the dispute with its biggest competitor, Exxon took the case to arbitration this week.
Chevron and Hess both say pre-emption rights don’t apply to a corporate merger. Exxon is “very, very confident” in its case, senior vice president Neil Chapman said. Spreads surged again.
Arbitration now heads to the International Chamber of Commerce in Paris, a process that could take six months.
While the tumult over the transaction isn’t ideal for the funds betting on it, part of their playbook is chasing attractive risk-reward opportunities.
Yes, wider spreads mean bigger risks. But they also lead to bigger returns — as long as the deal closes in the end.
–Kevin Crowley and Yiqin Shen, Bloomberg News
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