In the second energy megadeal this month, Chevron, the second-largest U.S. oil giant, said Monday it had agreed to acquire Hess, a midstream competitor, in an all-stock deal worth $53 billion.
The deal marks further consolidation in the energy industry, particularly in the United States, where smaller companies appear to be taking advantage of relatively high oil prices to join forces with larger players. The deal follows Exxon Mobil’s $60 billion purchase of shale driller Pioneer Natural Resources this month, another sign of confidence among the industry’s major players in the future of fossil fuels even as politicians push for cleaner energy sources.
Like Exxon’s acquisition of Pioneer, Chevron’s move shows that oil majors are looking to invest closer to home amid rising political risks in Asia, the Middle East and Africa. In recent years, Chevron has increased its holdings in the Rockies and the Permian Basin, crossing Texas and New Mexico.
“Besides the United States, South America is the region where Chevron is making its bet,” said Peter McNally, an energy analyst at Third Bridge, a research firm. He said the recent wave of acquisitions reminds him of the wave of takeovers a quarter-century ago that created Exxon Mobil and Chevron-Texaco. At the time, he said, companies were looking to cut costs; today, the acquired companies offer large assets and specialized expertise to develop unconventional resources such as shale.
The crown jewel of the deal is the acquisition of Hess’ investment in offshore Guyana, which, in partnership with Exxon Mobil, is producing 400,000 barrels a day, up from nothing four years ago. Production is expected to triple by 2027, with Guyana accounting for more than 1 percent of total global production.
Exxon, Hess and CNOOC, a smaller Chinese partner, have made more than 30 discoveries in Guyana, with more than 11 billion barrels in the largest block, Stabroek alone.
Natural gas is bubbling with oil, providing an opportunity for the local electricity market and export potential to Trinidad and Tobago to produce LNG for European markets.
Exxon Mobil is the operator of the Guyana project and a major investor, with Hess assisting in what has become one of the biggest ATMs in the oil business. Along with West Texas, Guyana is Exxon’s largest investment to increase future production.
Chevron has a long-standing investment in Venezuela, which borders Guyana, creating potential synergies if the U.S. government further eases sanctions it has imposed on that country.
Chevron will also acquire the Hess shale fields in North Dakota; offshore production in the Gulf of Mexico, where it made a major oil discovery this year; and natural gas business in Southeast Asia.
In a news release, Chevron said the acquisition would diversify its portfolio. Hess will add about 10 percent to Chevron’s total oil and gas production of about three million barrels per day.
Mike Wirth, Chevron’s chairman and CEO, said in a statement that the deal enhances the company’s operations “by adding world-class assets.”
Pierre Breber, Chevron’s chief financial officer, said “the addition of Hess is expected to further expand Chevron’s free cash flow growth.”
“With greater confidence in projected long-term cash generation,” he added, “Chevron intends to return more cash to shareholders” in the form of dividends and larger share buybacks.
John Hess, Hess’ CEO, is expected to join Chevron’s board. Mr. Hess and his family will be big winners from the deal.
On a conference call with Mr. Wirth, Mr. Hess recalled what he said was the “long, proud history” of his company, which began about 90 years ago with his father delivering fuel oil during the Great depression.
Mr. Hess described the merger as combining his company’s growth prospects, particularly in Guyana, with Chevron’s broader reach, financial strength and ability to pay much larger dividends.
In a note to clients on Monday, Biraj Borhataria, an analyst at RBC Capital Markets, said it was surprising that Chevron struck a big deal when Exxon, the company’s main rival, appeared out of the hunt for its multibillion-dollar purchase of Pioneer. He thinks Chevron “can bide its time.”
Mr Borhataria said Hess would give Chevron “a stronger, more diversified portfolio, which should bode well for shareholders over the long term; but in the near term the news could weigh on the stock.”
Chevron shares fell about 2 percent Monday morning.
Bernstein Research said in a note Monday morning that the firm sees “little risk” in regulatory challenges, although “an activist challenge to the deal is possible.” The research note added that “a counter-deal is possible.”
Environmentalists were critical of the deal, as they were of Exxon’s acquisition of Pioneer. “Chevron’s acquisition of Hess this week is another troubling sign that the fossil fuel industry has no intention of slowing down,” said Cassidy DiPaola, campaign manager for Fossil Free Media. “Deals like this lock us into greater dependence on fossil fuels and greenhouse gas emissions for decades to come.”
Chevron, like Exxon, says it is building new capabilities to capture carbon dioxide and bury greenhouse gases in the ground or recycle them.
The Chevron-Hess deal is the latest in a series of industry-changing mergers and acquisitions. Occidental Petroleum acquired Anadarko Petroleum four years ago for $40 billion. Pioneer has spent more than $10 billion in recent years to buy Parsley Energy and DoublePoint Energy in 2021.