Chevron’s Hess Buy Dubbed a Deal of Historic Significance
by Andreas Exarheas
click here to read the original article at Rigzone.com
*this article was not written by Roseland Oil & Gas
Andrew Dittmar, a Senior Vice President at Enverus Intelligence Research (EIR), has dubbed Chevron’s purchase of Hess as a deal of “historic significance” in a statement sent to Rigzone.
“Just weeks after ExxonMobil acquired Pioneer Natural Resources, another deal of historic significance has been announced with Chevron buying Hess at $171 per share, or a $60 billion enterprise value,” Dittmar said in the statement.
“Besides the scale, which slots it into the fourth-largest upstream deal ever by enterprise value, just behind Pioneer and ahead of Occidental’s purchase of Anadarko Petroleum, the sale is a closing chapter for a company that has been led by the Hess family for 90 years,” he added.
The common thread connecting these deals is majors looking to refill their pipelines to maintain production against a declining asset base as they anticipate their legacy businesses staying profitable into the 2030s, Dittmar noted in the statement.
“In addition, both Exxon and Chevron are using all-stock consideration, which cuts across the idea that majors’ vast cash hordes would incite another round of M&A,” he said.
“Although, in an indirect way, the cash is still supportive of these deals as generous buyback programs allow the companies to trim share counts over time after issuing the new equity,” he added.
“While the premium for Hess is modest at just 10.3 percent, based on a 20-day average and five percent based on prior-day close, the deal still looks like a significant win for Hess shareholders as they role their equity into Chevron at a time Hess has seen significant gains in its share price fueled by enthusiasm around its Guyana asset,” Dittmar continued.
A further similarity from the Exxon and Chevron deals is that the newly acquired assets will provide significant growth for the buyers, Dittmar said in the statement.
“While Pioneer was following the model of other shale companies and targeting flat or minimally growing volumes, Exxon plans to ramp production in the Permian,” Dittmar stated.
“Hess was already on a growthier trajectory than Chevron, so incorporating those assets into the Chevron portfolio will weigh the company further towards growth even without a change in Hess’ standalone plans,” he added.
However, the underlying asset basis purchased by Exxon and Chevron are quite different, Dittmar said in the statement.
“Exxon redoubled its focus on U.S. unconventional production, and in particular the Permian Basin, while Chevron is making a balanced bet that includes increased exposure to the Williston Basin but is much more tilted towards international exposure with the premier asset in Hess’ portfolio its interest in the Stabroek block in Guyana,” he added.
Dittmar highlighted in the statement that Enverus views around 80 percent of the total deal value as being allocated to Guyana. He also noted that Exxon already owns a significant stake in the Guyana projects and operates the assets.
“Besides the lack of cash, a surprising component of the deal is Chevron being willing to strike a transaction that is near-term dilutive to EBITDA and free cash flow,” Dittmar said in the statement.
“That runs counter to other upstream M&A, which buyers have sought to keep accretive to free cash flow from the start,” he added.
“Chevron says the deal will be accretive to free cash flow per share by 2025, although that includes capturing synergies which the company estimates at $1 billion per year. That indicates buyers are starting to place a higher focus on growth after years of solely looking to grow shareholder distributions,” he continued.
Dittmar noted in the statement that Chevron is raising its divestment targets, “with at least a portion likely to come from Hess’ asset base”.
“For Hess’ non-Guyana assets, the Williston position is likely to be retained and Chevron will keep the Hess team to manage a position in a basin where it lacks existing operations,” he said.
“Hess’ Gulf of Mexico position should be a strong strategic fit in Chevron’s portfolio as the region remains a key area for the major. More likely to be targeted for sale after close is Hess’ Asian assets,” he added.
In a separate statement sent to Rigzone addressing Chevron’s acquisition of Hess, David Clark, Wood Mackenzie’s Vice President of Corporate Research, said, “three weeks ago, Chevron was the leader among majors 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-ranked by Permian volumes and inventory,” he added.
“Two deals later, Chevron, ExxonMobil and the M&A landscape in oil and gas have a very different feel,” he continued.
In that statement, Clark said ExxonMobil now has “easily” the highest upstream portfolio concentration among the majors and noted that it 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,” he added.
“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 percent of Wood Mackenzie’s Hess valuation,” Clark continued.
“Multi-play potential and prospects beyond existing discoveries offer future upside,” he went on to state.
Clark noted in the statement that Chevron’s 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,” he said.
“Both targets have premium portfolios, trading at premium prices. These are not opportunistic deals, but strategic moves to realign portfolios for the coming decades,” he added.
In Wood Mackenzie’s statement, Alex Beeker, the company’s research director of corporate research, said, “both ExxonMobil and Chevron have chosen to deploy supermajor equity strength rather than bullet-proof balance sheets”.
“An all-stock deal allows Hess shareholders to participate in future upside and receive immediately higher distributions. Just like the ExxonMobil deal the week before, it also protects Chevron from price downside, with both parties sharing the risk until the deal is closed,” he added.
“Using equity to do these huge deals also leaves the buyers’ balance sheets in strong shape to weather potential unexpected downturns, develop portfolios without new funding and look at other opportunist bolt-on deals when they become available,” he continued.
Clark noted in the statement that 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,” Clark said.
“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,” he added.
by Andreas Exarheas
click here to read the original article at Rigzone.com
*this article was not written by Roseland Oil & Gas