Major oil and gas news broke this month as Chevron announced it has completed negotiations to purchase Hess Corp. for $53 billion. While monetarily, this is not the biggest acquisition by major producers this month, it sets Chevron up to own one of the largest oil fields in the coveted country of Guyana.
As oil prices surge, this acquisition represents a collective trend for super majors to make significant moves. Chevron’s acquisition of Hess comes less than two weeks after ExxonMobil announced the decision to acquire Pioneer Natural Resources for $60 billion earlier this month.
A Critical Time For the Super-Majors
Chevron negotiated the acquisition with Hess Corp. amidst the current ultra-high costs per barrel. Oil prices rose significantly in 2022 with Russia’s invasion of Ukraine and are around $90 per barrel, an approximate 9% increase from last year. Additionally, with the uncertainty of the Israeli-Palestinian conflict, the energy sector could experience further upward pressure on oil prices.
With the ongoing Russian invasion and the potential of broadening conflict in the Middle East, cutbacks on oil production have left the market inflamed. Chevron’s acquisition of Hess could not come at a more critical moment for the economy and the energy sector. Not only does this deal include the massive oil field in Guyana, but it also advances US-based production through the Bakken Formation in North Dakota.
As the market teeters on the edge of extreme costs and potential supply shortages, Chevron’s acquisition of Hess Corporation represents a new frontier with hope on the horizon.
The $53 Billion Deal
The negotiations to acquire Hess Corp. represent a major move on the part of Chevron. Not only does this allow the major oil producer to acquire Hess’s massive oil production in the United States and abroad, but it also allows Chevron to “safely deliver higher returns and lower carbon,” according to Chevron Chairman and CEO Mike Wirth.
Naturally, this deal will increase Chevron’s free cash flow and production output over the next five years. Mike Wirth estimates this will increase Chevron’s growth profile into the next decade, supporting further share repurchases and impressive dividend growth.
Interestingly, Chevron is paying Hess in stock rather than cash. Although Chevron likely has the cash on hand, shares are less volatile than current oil costs. As uncertainty with global conflicts continues, oil cost per barrel could drastically increase or diminish when the deal is complete. So, instead of a set monetary price, Chevron will pay in stock shares, estimated to be worth $53 billion. In exchange, Hess shareholders will receive 1.0250 shares of Chevron for each share they own. Chevron estimates the deal is worth around $60 billion, including debt and stocks.
Of course, environmental concerns have been raised about the continued oil drilling as temperatures continue to smash records. However, current energy demands have required continued and increased drilling to maintain market stability.
Why the Guyana Oil Field Matters
Chevron is adding a massive oil field in Guyana to its collection through this acquisition. In fact, Guyana is set to be one of the largest offshore oil producers on the planet, outpacing nations the United States, Mexico, Qatar, and Norway. Although it’s a relatively small country in South America, Guyana is poised to become a major exporter of offshore oil. Boasting a massive oil reserves of more than 11 billion barrels.
While the Guyana reserves are not the largest in the world, it is on track to become one of the largest oil producers per capita. With a relatively small population of less than 1 million people, Guyana may seem unobtrusive globally. However, thanks to its massive oil deposits, Guyana has become the apple of many super-majors’ eyes. Chevron now joins ExxonMobil, among others, seeking to cash in on the gigantic potential Guyana offers.
Regarding oil reserves, 11 billion barrels is nothing to sneeze at. While nations like the United States and Saudi Arabia far outpace Guyana in oil reserves, the potential growth and profit to be made in Guyana’s oil fields are enticing, to say the least. Through acquiring Hess, Chevron now elevates its potential by taking over Hess’s Guyana oil facilities.
Among Guyana’s vast potential, the oil is said to be lighter, sweeter, and of higher quality than other suppliers in the region. This lightness makes Guyana oil easier to refine and process than Venezuela’s and Brazil’s heavier oils. However, Brazil has held the top spot for potential crude over the last several years, which has now flipped to Guyana.
Additionally, Guyana offers political stability that Brazil and Venezuela cannot provide, making it a much more reliable option for future prospects.
ExxonMobil already had a significant footprint in Guyana when they discovered the gargantuan oil basin off the coast of South America. Hess quickly tapped into the resources Guyana had to offer. However, now that Chevron has acquired Hess, Chevron can reap the benefits of the massive potential Guyana poses for oil supply.
Acquisition Advances Shale in North Dakota
Guyana is not the only place that will benefit from the acquisition, however. The Bakken Formation in North Dakota is among Hess’s many facilities now belonging to Chevron. This oil field is located in Western South Dakota, Eastern Montana, and Southern Saskatchewan, Canada. The Bakken Formation is a part of the Goliath Williston basin, which extends to Southeastern Manitoba.
Since 2013, over 11,000 wells have been drilled within the basin. This substantial amount of drilling has increased production and expanded knowledge about the basin’s resources.
Recently, Ukrainian refugees have found help and work in the North Dakota oil fields, like the Bakken Formation. As the conflict in Ukraine continues, the Bakken formation is providing humanitarian aid and creating new jobs for Ukrainian refugees needing help. This program presents a win-win for both oil companies and immigrants, as the increased energy demand has led to more drilling and the need for more workers.
Chevron acquiring Hess facilities in the Bakken formation has the potential to ramp up Chevron’s production, as well as potentially aid the victims of Russia’s invasion of Ukraine. Dramatically increasing Chevron’s US-based facilities, this acquisition represents a prominent step for the US economy and the global oil market.
Six Months of Negotiations to Strike a Deal
Of course, a major deal like this does not happen overnight. Negotiation for Chevron’s acquisition of Hess took place over six months while executives ironed out the fine details. Among those negotiations, Hess CEO John Hess will move to a board member position at Chevron Corporation. Additionally, Hess shareholders will gain stock in Chevron in exchange for their shares. The acquisition is set to be finalized in the early half of 2024. While the deal still needs to be approved by Hess shareholders, Chevron and Hess are confident it will be completed early next year.
A Pattern Of US-Focused Oil Field Acquisitions
Chevron’s acquisition of Hess Corporation is part of a running trend of major mergers in October. ExxonMobil Corporation announced earlier this month they’re merging with Pioneer Natural Resources in an all-stock transaction. The transaction is valued at 59.5 billion dollars, based on median share prices. Putting that another way, 50 that’s $253 per share based on the closing price on October 5th.
ExxonMobil’s merger with Pioneer Natural Resources more than doubles the company’s Permian footprint and is set to create high returns over the next decade. This acquisition includes massive acreage for ExxonMobil in both US-based and abroad oil basins. As part of the acquisition, ExxonMobil dramatically increased its acreage in the Midland and Delaware Basins.
In the summer of 2020, Chevron announced buying Noble Energy for $5 billion. This acquisition brought high-quality assets to Chevron’s global portfolio, as well as expanded its United States facilities. At this time, oil prices were down by a whopping 30%, so the deal came at a providential time for the super-major.
Also, in 2020, ConocoPhillips bought Concho Resources in an all-stock transaction for $9.7 billion. The combination of these two premier companies is one in a long string of US-focused mergers, producing critical advancement for the US economy and growth.
As turmoil overseas increases, the more the super-majors can turn to US-based oil fields, the better. With both major oil acquisitions happening within the month of October, US-based oil production could see a more stable future.
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