Chevron Corp. $53bn acquisition of Hess Corp

Deal Overview of the Chevron Corp. and Hess Corp deal.

General Background

Acquirer: Chevron Corp.

Headquartered in San Ramon, California, Chevron is a major competitor in the global energy industry, encompassing all aspects of operations, including production, logistics, and refining.

Main strategy:

Focused on shareholder returns through capital allocations and upstream assets, their main strategy is to pursue high-margin offshore assets and regions with rich resource reserves.

Recent Acquisitions:

• Noble Energy (2020): $13bn takeover with main drivers including shale and natural gas assets.
• PDC Energy (2023): $6.3bn acquisition to expand position to Denver-Julesburg Basin and Permian.
• Hess Corp. (2023, processing): $53bn stock for stock transaction for dominance within Guyana’s Stabroek Block.

Target: Hess Corp.

An independent upstream-focused oil and gas company with an annual revenue of ~$10.645bn (2023), 70 per cent of it being primarily sourced from crude oil sales and the rest from natural gas forms. This recently pure E&P business operator remains one of the most attractive acquisition targets of the decade due to its highly sought-after 30% stake in the Stabroek Block, an offshore oil and gas block in Guyana.
Supporting their Net income of $1.7 billion, high-margin production operations within Guyana and the Bakken shale continue to bolster their low-cost offshore efficiencies and disciplined capital deployments.

Deal Rationale

Deal Drivers and Strategy

Driving Chevron’s acquisition of Hess Corporation, a 30% stake in a highly prized oil field offshore Guyana, the Starbroek block. The high-activity oil field is currently co-owned by two other major industry competitors, CNOOC (45%) and ExxonMobil (25%), underscoring its value.

Market Expansion

The stock-for-stock transaction provides multiple layers of justification, including the guaranteed establishment and diversification of presence in the global oil industry, which aligns with Chevron’s long-term strategy of strengthening shareholder value.

The two companies' similar industries and business operations will benefit immensely from the ease of diversification into U.S. shale and deepwater offshore operations. These factors enhance the business entities’ long-term financial stability, strengthening investor relations.

Cost Savings

Through streamlining operations, capital expenditures, and processes, a successful takeover of Hess Corporation will generate annually an estimated $1 billion in run-rate cost savings. The business entity merger will lead to increases in free cash flow, reinforcing shareholder value through potential dividend increases and share repurchases. As a result, Chevron has projected the deal to be accretive to cash flow per Share by 2025, with free cash flow expected to more than double by 2027 (Noto, 2023).

Scale and Expertise

Leveraging Chevron’s large presence in the energy industry and the expertise that comes with it, the long-standing giant will strategically optimise and streamline operations within Hess Corp.’s existing asset base to serve the interests of both companies.

Future Implications

• Expected production growth
• Projected free cash flow growth into the 2030s
• Transfer of Hess’s net operating loss ($15 billion) to a lower tax rate
• Increased global presence
• Increased long-term cash flow reserves

Deal Structure

Chevron’s $53bn all-paper deal for Hess Corp. includes a considerable premium and one of the largest strategic takeovers within the oil and gas market.  The 100% stock transaction entails no further financing and the full absorption of Hess’s outstanding debt.

By structuring the transaction entirely in shares, Chevron will issue 1.025 of its shares for each Hess share, providing a valuation of $53bn. This allows shareholders to maintain exposure to the merged energy conglomerate, serving as a powerful incentive.

Behind the Scenes of Acquisition

Valuation and Premium

Comparison to Peers: 

Peer averages and Medians:

• Median Peer EV/EBITDA: 6.04x
• Average Peer EV/EBITDA: 5.84x

Conclusion: 

The valuation multiples indicate that the current deal valuation (EV/EBITDA: 8x) is on the high end of the spectrum, justified by the highly prized asset base and stakes in prolific natural resource reserves.

Valuation Methods

Comparative Companies Analysis (CCA)

Comparable Companies Analysis (CCA) provides a reliable, general estimate of Hess Corporation’s total valuation by comparing similar businesses and extrapolating financial data. Here are the main steps in coming to a feasible valuation using CCA:

Step 1: Select Peer companies
Choose viable companies for CCA by looking for companies with similar geographies and business models (preferably in the same industry), such as ExxonMobil, Occidental Petroleum, etc.

Step 2: Gather financial valuation metrics
Collect key financial metrics for each peer company, such as market capitalisation, EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortisation), Net Income, Enterprise Value (EV), as well as industry-specific metrics such as BOEPD (Barrels of Oil Equivalent).

Step 3: Build valuation ranges through Multiples and ratios
Calculate useful multiples for specific cases to gauge an idea for what ranges the company could be valued at, i.e

• EV/EBITDA for profits with an operational lens.
• Price to earnings (P/E): Market valuation to earnings.
• EV/BOE: Enterprise value over barrels of oil equivalent for reserve assets.
• EV/BOEPD: for valuing asset production.

Step 4: Use metrics to conduct Multiple analyses
Interpret these valuation ranges to determine statistics such as medians, averages,, and ranges, and assess the relevance of each multiple to Hess Corp.’s asset profile. In this case, EV/EBITDA and EV/BOEPD are relevant for oil and gas corporations such as Hess.

Step 5: Apply relevant multiples to the target company
Using the relevant metrics in our multiples analysis, we can now estimate Hess’s key metrics, such as EBITDA and production, using the EV/EBITDA and EV/BOEPD medians.
I.e, Given a median of 8x for EV/EBITDA and Hess’s current EBITDA of $6.72bn.

Implied EV  =8 x 6.72 = 53.76,
Implied EV  =$53.76 billion.

Step 6: Consider Company-Specific Factors
Consider factors which may induce a premium or discount in valuation, i.e

• Strategic assets such as Hess’s stake in the Guyana Oil fields may induce a premium
• U.S Shale operations: offer great diversification and asset base, thus a premium driver

Step 7: Put together a final number 
Create a final valuation range and use weighted averages to determine a fair value for Hess Corporation. To fully verify the valuation's feasibility, use other methods, such as DCF, as a plausibility check.

Discounted Cash Flow (DCF)

By projecting Hess’s future free cash flows over a specified forecast period and discounting them at the Weighted Average Cost of Capital, a fair value estimate for Hess Corporation can be derived.

Step 1: Forecast financials over a period (usually 5-10 years).
Using key metrics and drivers such as BOEPD, commodity prices, operating costs, and capital expenditures (CAPEX), a free cash flow number can be equated as seen below:

FCF = Revenue - Operating costs - Taxes - CAPEX + Depreciation.

Step 2: Calculate Weighted Average Cost of Capital (WACC):
Using the Capital Asset Pricing Model (CAPM), calculate the cost of equity.

Where is stock volatility

Calculate debt costs adjusted for tax:

Calculate WACC:

Where V is the total market valuation.

Step 3: Calculate terminal value
Use Gordon Growth Model (Perpetuity method) for a constant growth rate assumption:

Further reference for guidance: WSO Public Course Videos - Wall Street Oasis

Step 4: Add the discounted cash flows and the terminal value to arrive at Hess Corporation’s estimated fair value.
Use WACC to discount each projected year’s FCF and Terminal Value:

Sum all present and terminal values:

Step 5: Calculate Equity value:
Calculate Enterprise value:

EV = Present Value + Terminal Value.

Adjust for Net Debt and Liabilities:

Equity Value = EV - Net Debt.

Step 6: Use previous numbers to reach a Fair Value Per Share
Divide Equity value by the number of shares outstanding  to calculate the final total value per Share:

The Value per Share is the target company's theoretical fair value and the final step in the DCF valuation.

Post Acquisition Analysis

SWOT Analysis

Strengths: 

• Asset diversification reflecting financial stability
• increased production capacity, prompting strong growth potential
• Enhanced global presence and reserves 

Weaknesses: 

• Scaling risks revolving around large-scale Integrations
• increased financial liabilities due to premiums of the agreement
• Increased exposure to geopolitical environments

Opportunities: 

• Expansion of global footprint through Guyana
• Technological advancements and transfers
• Increases in operational ceiling and capacity

Threats: 

• Geopolitical risks surrounding Guyana and its respective lawmakers
• Oil market volatility surrounds natural trading environments and policy changes.
• Excessive Regulatory scrutiny and delays.

Deal Timeline

• Letter of intent: October 22, 2023
• Announcement: October 23, 2023
• Shareholder Approval: May 2024
• Regulatory approval: September 2024 (FTC approval)
• Expected Closing date: Second half of 2025

Announcement of Acquisition

Through a stock-for-stock merger, Chevron announces a plan to acquire Hess Corporation for a market valuation of $53 billion. Valuing the business conglomerate at $171 per Share, they’d receive 1.025 Chevron shares at the October 20, 2023, market close. 

Regulatory Approvals and Disputes

In September 2024, the U.S Federal Trade Commission (FTC) successfully approved Chevron’s merger with Hess Corporation.

In line with the acquisition plans, the co-owners of the Stabroek Block, ExxonMobil and CNOOC, assert that their joint ownership grants them a right of first refusal (ROFR) over any sales of Hess’s interest.

As a condition to combat the threat of increased oil prices, the FTC barred CEO John B. Hess from joining the board of directors due to previous communications with OPEC (Organisation of the Petroleum Exporting Countries).

The disagreement over the interpretation of ROFR in the corporate acquisition setting has escalated to the International Chamber of Commerce (ICC), with an upcoming hearing scheduled for May 26, 2025. 

In August or September 2025, an expected decision from the panel will either delay the merger or encourage its intended flow of procedures.

Stock Market Reaction

Following the announcement of Chevron’s intent to acquire Hess, the stock market immediately raised concerns about the scale of the risks for Chevron, as seen in the 3.7% decline in Chevron (CVX) stock. 

The initial investor apprehension was not evident in Hess’s (HES) shares, which rose 1.6% on the day, suggesting a more optimistic view of the deal and its outlook.

Following the announcement week, HES stock showed significant volatility, with a 1.43% decline and a 1.03% rebound five days later, suggesting an increasing potential disparity in investor opinions on the takeover.

Final Takeaways

The market-shaking merger is a transformative strategic move, boosting Chevron’s growth potential while reminding competitors of its ongoing advancements in the energy space. 

The large-scale transaction serves as a vehicle for innovation and creativity, driving industry edge and increasing shareholder value.

The deal is only the start of the consolidating trend of portfolio diversification and operational scaling,  prompting stakeholders to pay close attention to large-scale integrations and Chevron’s financial performance.

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