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Chevron to acquire Hess Corp in $53 billion all-stock deal, despite soaring oil prices

Despite oil prices reaching multi-year highs, Chevron Corp announced on Monday its intention to acquire its smaller US rival, Hess Corp, in a $53-billion all-stock deal.

The announcement comes just two weeks after Exxon Mobil revealed its plans to pay $60 billion ($93 billion) for the US shale oil and gas producer, Pioneer Natural Resources. Exxon’s move aimed to boost its presence in the Permian Basin fields of Western Texas and New Mexico, an area where Chevron is already heavily involved.

Chevron’s acquisition of Hess is strategically focused on increasing its presence in the largest oil discovery outside the US in recent years, located offshore the small Caribbean nation of Guyana. Consequently, this deal will bring America’s two largest oil majors into direct competition in two of the world’s fastest-growing oil basins: the Permian Basin of East Texas and New Mexico and the Guyana offshore region.

Guyana has emerged as a significant oil producer in recent years, with substantial discoveries made by Exxon Mobil, its partner Hess, and China’s CNOOC. Together, they produce 400,000 barrels per day from two offshore vessels and have expressed plans to develop up to 10 additional offshore projects. This positions Guyana to become the world’s fourth-largest offshore oil producer, surpassing Qatar, Mexico, and Norway.

Chevron is offering an all-share deal valued at $171 per share, based on Chevron’s closing price on October 20, 2023, which was $168.83. Following the announcement, both Chevron and Hess saw their shares decline, with Chevron’s down by 3.7% and Hess losing 1%. Investors generally view Chevron’s move as a done deal.

Under the terms of the acquisition, Hess shareholders will receive 1.0250 shares of Chevron for each Hess share. The total enterprise value of the transaction, including debt, is $60 billion. Notably, since Hess shares closed at $163.02 on the previous Friday, valuing the company at $50 billion, there is minimal dilution.

The combined entity is expected to achieve accelerated production growth and generate free cash flow for an extended period compared to Chevron’s current five-year guidance, as stated by both companies. Chevron’s CFO, Pierre Breber, highlighted the company’s intention to increase cash returns to shareholders, with higher dividend per share growth and increased share repurchases.

Hess shares have surged more than 21% year-to-date, outpacing the S&P 500’s 10% rise. Although oil prices have risen approximately 9% year-to-date, Chevron’s shares have underperformed, showing a 4.1% decline until last Friday’s close.

To ensure the satisfaction of shareholders and critics seeking more cash returns, Chevron has committed to enhancing the cash returned to shareholders. The company anticipates recommending an 8% boost in its first-quarter dividend to $1.63, subject to board approval. Additionally, the company expects to increase stock buybacks by $2.5 billion, reaching the upper end of its annual guidance range of $20 billion, once the transaction concludes.

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