Hot on ExxonMobil's heels, Chevron's (NYSE:CVX) acquisition targets one of the world's hottest growth plays in Guyana and addresses the US major's portfolio concentration risk. Significantly, it also underscores how the divergence between US Majors and Euro Majors strategies just got wider regarding the energy transition as the US Majors lean harder into oil and gas.
"Three weeks ago, Chevron was the leader among Major's in the Permian, was underweight deepwater, and faced rising concern over portfolio concentration risk. ExxonMobil had a highly diverse portfolio, stronger deepwater exposure, but ranked just fifth by Permian volumes and inventory," noted David Clark, vice president, corporate research for Wood Mackenzie, an energy research company.
"Two deals later, Chevron, ExxonMobil and the M&A landscape in oil and gas have a very different feel. ExxonMobil now has easily the highest upstream portfolio concentration among the Majors and has locked up a dominant position in the Permian Midland Basin. Chevron has addressed its portfolio concentration concerns and is now the IOC leader in deepwater," said Clark.
Hess brings Chevron a material interest in one of the world's hottest growth plays in Guyana. With high returns and low Scope 1 and 2 emissions intensity, Guyana accounts for 70% of Wood Mackenzie's Hess valuation. Multi-play potential and prospects beyond existing discoveries offer future upside too.
"The deal follows too quickly in the footsteps of ExxonMobil's Pioneer takeover to be a reaction - they must have been negotiated concurrently - but it's difficult not to draw parallels. Both targets have premium portfolios, trading at premium prices. These are not opportunistic deals, but strategic moves to realign portfolios for the coming decades," added Clark.
A new wave of oil and gas megamergers?
Matthew Wilks, an upstream specialist, at consultancy Rystad Energy, said the Chevron-Hess deal will accelerate the trend of consolidation and big-money deals.
Wood Mackenzie's Clark said "the consensus view calls for the beginning of a major wave of consolidation. The scale of these two deals, has certainly been a major step, and a handful of other deals that have prompted media buzz. We don't think a flood of deals is a certainty, but it is fair to presume that the parameters of C-suite discussions have been broadened by the events of the last two weeks."
"Most large deals over the last two decades have been ‘unanswered'. There were no major M&A reactions to ExxonMobil buying XTO, or Shell buying BG. But trends have sporadically broken out, for example "Permania" in 2015, and the creation of the Supermajors in the late 1990s," added Clark.
ExxonMobil's latest acquisition marks the largest upstream deal, in nominal terms, since Shell acquired BG for US$82 billion in 2015.
Different rationales
Although it continues the story started by the recent Exxon-Pioneer deal, the motivation and impact of Chevron's acquisition are significantly different, said Wilks.
"Chevron is betting big on the future output of Guyana and Hess' stake in the offshore Stabroek block, which since 2015 has seen discoveries of more than 11 billion barrels of oil equivalent (boe) of recoverable resources," he said.
"Thanks to this deal, Chevron will have access to more than 3.4 billion boe of these Guyanese volumes," added Wilks.
The assets that will change hands include a 30% working interest in the offshore Stabroek block in Guyana that is operated by ExxonMobil, Hess' tight oil position in the Bakken shale, complementary assets in the US Gulf of Mexico and natural gas exposure in Southeast Asia.
According to Wood Mackenzie analysis, Chevron currently has the most concentrated upstream position in the Majors peer group. Adding Hess' position in deepwater Guyana and a mature large-scale, cash-generating operation in the Bakken - both new regions for Chevron - immediately reduces concentration risks. Conversely, ExxonMobil post-Pioneer, will have the most concentrated upstream portfolio in the peer group - but unlike Chevron, has full value chain integration on the US Gulf Coast as a counterweight.
Following the addition of Hess, Chevron will become the leading IOC in deep- and ultra-deepwater by value, overtaking Shell. The Stabroek block will become Chevron's second most valuable international upstream asset, larger than its stake in Kazakhstan's giant Tengiz project, noted Wood Mackenzie.
Chevron will acquire all outstanding shares of Hess in an all-stock transaction valued at US$53 billion, or US$171 per share, based on Chevron's closing price on 20 October.
In return, Hess shareholders will receive 1.025 shares of Chevron for each Hess share.
The independent's owner John Hess is expected to join Chevron's board once the deal closes, which is forecast in the first half of 2024.
With a stronger portfolio after closing, Chevron expects to increase asset sales and generate US$10 billion to US$15 billion in before-tax proceeds through 2028.
Analysis from Rystad shows the acquisition will add 400,000 barrels of oil equivalent per day (boepd) in net production in 2024, of which, almost 50% will come from Hess' Bakken tight oil operations, 33% from offshore deepwater assets in Guyana and the Gulf of Mexico and the remaining 18% from the offshore shelf in Southeast Asia.
These additions, combined with a full year of production from the corporate buyout of PDC Energy, which closed in August, will increase Chevron's total output base next year by approximately 25% year on year to 3.9 million boepd.
Energy Transition: the divergence between US Majors and Euro Majors just got wider
"Chevron and ExxonMobil have both demonstrated confidence in a sector that is grappling with how to respond to the energy transition," said Wood Mackenzie's Clark. "The US Majors are investing in low carbon solutions, including CCUS, biofuels and hydrogen, but have so far avoided utility-scale wind and solar investments.
"In contrast, the Euro Majors have taken a more aggressive approach to investing in new energies. Despite recently signalling that oil and gas will be part of their portfolios for longer than some previously planned, stakeholder alignment concerns and lower valuation multiples would make deals of this size very challenging."
According to Wood Mackenzie, the acquisitions of Pioneer and Hess have widened the strategic divergence between the US Majors' and Euro Majors, with the US Majors leaning harder into oil and gas. Chevron and ExxonMobil are now guiding for 4.5 million boe/d and 5 million boe/d of production respectively by 2027. At that scale, both will be producing at least 50% more than the largest upstream portfolio of the Euro Majors.
