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Hess Guyana’s Secret Value Becomes Part of Exxon Arbitration, Sources Say


These translations are done via Google Translate

Summary

  • Panel to consider independent appraisal of Hess Guyana
  • Exxon sees Chevron-Hess merger as disguised asset buy, say sources
  • Hess Guyana makes up 70% of Chevron’s $53 bln bid, say analysts
  • Chevron, Hess see appraisal as irrelevant to arbitration case

Aug 20 Chevron  last October offered to pay $53 billion for Hess, one of the two biggest deals in the largest wave of consolidation in the oil industry in decades. The asset most coveted by Chevron in the takeover is Hess’s stake in a Guyana field operated by top U.S. rival Exxon.

Exxon and China’s CNOOC, another partner in the venture, have challenged the deal, claiming a contractual first right to buy Hess’s stake in the field, a matter to be decided by a three-person arbitration panel.

Getting the panel to consider the appraised value is central to Exxon’s claim that the deal is an asset acquisition disguised as a merger. Exxon believes the Guyana asset is so valuable that the merger would trigger a change of control and give Exxon and CNOOC a right of first refusal to the asset sale, the people said.

On the other hand, Chevron and Hess do not believe the Guyana valuation will have any bearing on the panel’s view of the contract arbitration. Their position is Exxon’s right does not apply because there is no change in Hess’ control of its Guyana unit, people familiar with their thinking said.

Valuation can be a critical and lengthy step in change of control disputes, said Christopher B. Strong, a vice president at trade group Association of International Energy Negotiators (AIEN) and a partner at Vinson & Elkins law firm, which has done work for Exxon.

The prize in the contest is Hess’ 30% stake in the Stabroek offshore Guyana joint venture with some 11.6 billion barrels in oil and gas discovered so far. The consortium, which includes Exxon with a 45% stake and CNOOC with 25%, operates all of Guyana’s output and earned $6.33 billion in profits last year by pumping 137 million barrels of oil. That output is expected to more than triple by 2027.

Exxon CEO Darren Woods told Reuters earlier this year he would consider a counterbid for all or part of Hess Guyana’s stake, but only after the arbitration panel accepts its claim to first right, and a price has been determined.

Woods’ position remains unchanged, people familiar with his thinking said this month. Wall Street analysts estimate Hess Guyana represents about 70% of Chevron’s $53 billion bid.

Reuters Graphics Reuters Graphics
Reuters Graphics Reuters Graphic

Reuters Graphics Reuters Graphics

NO COMPROMISE

The case hinges on whether a change of control in Hess Guyana will occur. The deal is structured so Hess will remain intact and become an affiliate of Chevron, the two companies have said.

“Exxon and CNOOC continue to ignore the plain language of the operating agreement, and Chevron and Hess remain confident that the arbitration will confirm that the Stabroek ROFR (right of first refusal) does not apply to the merger,” the companies said in response to Reuters questions.

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Chevron CEO Michael Wirth recently dismissed the chance of any compromise with Exxon and CNOOC. The companies had held talks earlier this year, but they halted when Exxon filed the arbitration case.

“It doesn’t appear that (a compromise) is how this is going to end up,” Wirth said on Aug. 2.

However, if the panel accepts the right of first refusal applies, Hess has said it will not sell its Guyana stake to Exxon or CNOOC. Hess will remain independent if the Chevron deal is quashed, CEO John Hess said earlier this year.

PRESSURE ON CHEVRON

Chevron could use a Guyana boost. Its profits have fallen for the last six quarters on a year-over-year basis. Its share price has dropped 8.7% in the last 52 weeks, compared with a 7.7% increase at rival Exxon.

In May, Exxon closed its $60 billion acquisition of top U.S. shale oil producer Pioneer Natural Resources, which was the biggest acquisition in the latest consolidation wave. The deal helped Exxon deliver $9.24 billion in second-quarter earnings, more than twice Chevron’s profit for the same period.

“(Exxon) is in the best shape I’ve seen it in 20, 25 years. It has put itself in a remarkable position,” said oil analyst Paul Sankey.

Meanwhile, Chevron’s CEO is shaking up the company, replacing lieutenants and relocating the company’s headquarters to Texas from California. Wirth also aims raise up to $15 billion from asset sales, after the Hess deal closes.

He had hoped to close the deal in the first half of 2024, and the delay stalls Chevron’s ability to reap cost savings, staffing and operating synergies in addition to slowing its asset sales. Hess shareholders miss out on getting Chevron’s much higher dividend payments, which was a lure for the deal.

A second-half 2025 closing could pressure Chevron into a settlement that lessens promised deal benefits, analysts and investors said. But if the valuation proves to be higher than Exxon expects, it also could make a counterbid more expensive.

“Exxon may be creating enough uncertainty in the situation that it’ll be worthwhile for Chevron to perhaps give up some economics in order to get this thing resolved,” said Roy Behren, co-president at Westchester Capital Management, which owned nearly $226 million in Hess stock at the end of June, according to LSEG.

 

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