Chevron agreed to purchase US oil and gas company Hess for $53 billion in an all-stock transaction, increasing its bet on the demand for fossil fuels for many decades to come.
The deal, the largest in Chevron history, gives Hess a $60bn enterprise value including debt and allows the supermajor to establish a presence in Guyana where the biggest oil find of the last decade was made.
The US energy sector is experiencing a surge of mergers and acquisitions as companies seek to maximize the profits generated by the energy crises. ExxonMobil, Chevron’s rival, agreed to purchase Texas shale producer Pioneer Natural Resources for $64bn earlier this month.
Mike Wirth said that the oil industry is entering a phase of consolidation and the Hess acquisition offered the company an “unique opportunity” to expand its offshore presence by acquiring assets in Guyana, while also entering North Dakota’s Bakken Shale Formation, which has been a productive but declining basin.
He said that the industry was in need of consolidation, particularly as it relates to the shale patches. When you consider the entire spectrum, we have too many CEOs for each BOE (barrels equivalent to oil).
Shares of – Chevron fell by 3.7 percent. is the second largest western oil producer with a $318 billion market capitalisation. Hess shares, with a market cap of $50bn, closed 1.1 percent lower. The proposed sale price represents an increase of 10 percent over the average share price for Hess over the past 20 days. However, it is only a 5-percent premium to the close on Friday.
Oil and gas companies face an uncertain future, as developed countries try to reduce their dependence on fossil fuels. Chevron, ExxonMobil and other US energy giants have placed a lot of money on the future resilience of the oil and gas market.
This is in contrast with some European energy giants such as BP or TotalEnergies who are increasing their investments in renewable energies at a quicker pace than US counterparts.
Hess will boost Chevron’s oil and natural gas production by over 10%. Chevron produced nearly 3mn barrels equivalent per day in the second half of 2018, while Hess produced a whopping 387,000 boepd, up from 344,000 a year ago. Production in Guyana has also increased.
Alex Beeker, an analyst at Wood Mackenzie said that Chevron’s acquisition of Hess has helped diversify Chevron’s oil portfolio, which was previously very concentrated in Texas’s Permian basin and New Mexico’s Permian Basin.
He said that Chevron is underweight in deepwater assets compared to Exxon, and European majors. They have been trying to spread this concentration risk for some time.
Wirth, in an -interview, held last month, defended Chevron’s plans to increase its oil and gas production, saying that the company “is not selling a bad product.” We’re selling good products.
He criticized forecasts by the International Energy Agency (IEA), the energy watchdog of the developed world, which showed that fossil fuel demand would peak before the end this decade.
Wirth replied, “I don’t believe they are remotely right.” “You can create scenarios, but in reality, we have to allocate resources to meet the demands of real life.”
Hess has a 30% stake in an offshore oil exploration project in Guyana, where ExxonMobil leads the way. It also owns a 465,000-acre Bakken Shale Project.
John Hess of Hess, whose chief executive is expected to join the board of Chevron, said that the merger will create a “premier, integrated energy company”.
Analysts say that the relatively low premium paid by Hess is due to its stock being near an all-time record high. Another reason could be John Hess changing his mind about a possible sale.
Mark Kelly, MKP Advisors, said that Hess had been a target for supermajors since a long time. It was primarily John Hess’s non-sale attitude that had been perceived as the main reason this hadn’t happened. It seems that as he enters his 70th birthday, he is at a point where he feels the transition of Hess into a new ownership model is appropriate.
Analysts did not expect any significant antitrust issues to arise from the merger, due to the limited overlap of assets between the two companies.
According to the US Energy Information Administration (EIA), Guyana’s oil production has increased from zero before 2019 to 260,000 barrels per day on average last year. It is expected to reach 480,000 barrels per day next year. Wood Mackenzie predicts a peak production of 1,5mn barrels per day by 2033, which is more than many Opec nations.
Chevron announced that it would be issuing 317mn Chevron shares as part of the transaction, which should close in the first quarter of 2019. Both companies expect to save about $1bn in the first year after closing. Chevron, meanwhile, said that it would increase asset sales, and generate between $10bn and 15bn before taxes by 2028.
Capital expenditures for the combined company would range between $19bn to $22bn.
Wirth told the press that large deals are “more difficult” today, noting that companies are better managed than when Chevron purchased Texaco in 2000 for $36bn.
Could it happen? He said that he thought it was possible, but highlighted the challenges of integration and regulatory issues associated with large deals.