Hess Buy Accelerates Trend of Consolidation and Big Money Deals

The big money acquisition of Hess by Chevron accelerates the trend of consolidation and big money deals.

That’s what Matthew Wilks, Rystad Energy’s Senior Upstream Analyst, said in a special market update, which was sent to Rigzone following the announcement of the acquisition. 

“Since the beginning of 2019, Chevron has been involved in 10 deals valued at over $500 million,” Wilks highlighted in the update.

“These include three company acquisitions – Noble Energy in 2020 for $13 billion, PDC Energy earlier this year for $7.6 billion, besides the latest Hess deal,” he added.

“Its divestitures over the same period have totaled around $11 billion. Following the Hess announcement, Chevron has stated that it expects to increase asset sales and generate between $10 billion and $15 billion in proceeds before tax by the end of 2028,” Wilks continued.

Looking at Chevron’s latest deal, Wilks stated in the update that, “although it continues the story started by the recent Exxon-Pioneer deal, the motivation and impact of this acquisition are significantly different”.

“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 added.

Thanks to this deal, Chevron will have access to more than 3.4 billion boe of these Guyanese volumes, Wilks noted in the update.

Wilks highlighted in the update that Chevron’s Hess buy will add 400,000 barrels of oil equivalent per day (boepd) in net production in 2024. Of this, almost 50 percent will come from Hess’ Bakken tight oil operations, 33 percent from offshore deepwater assets in Guyana and the Gulf of Mexico, and the remaining 18 percent from the offshore shelf in southeast Asia, Wilks outlined in the update.

“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 percent year on year to 3.9 million boepd,” Wilks said in the update.

In the special update, Wilks described Stabroek as one of the most successful oil blocks in the world since 2015.

“Since the first discovery in 2015 through the Liza-1 well, the block partners have made another 30 discoveries,” Wilks said.

“Given the deepwater block’s size, breakeven and low-carbon intensity, its partners have accelerated its overall development. So far, five schemes have been sanctioned for development, and a sixth floating production, storage and offloading (FPSO) unit is lined up for approval in the next months,” he added.

“ExxonMobil and its partners are also reported to be working on a seventh FPSO that could secure a final investment decision (FID) over the next year,” he continued.

For Chevron, the Guyana portfolio provides a significant boost to both greenfield investments to be sanctioned and annual greenfield capital expenditure, Wilks said in the update.

“In the short term, its greenfield sanctioning budget would balloon from nearly $3.6 billion to over $9 billion,” Wilks added.

“Similarly, the annual greenfield capex would also increase from an average of $2 billion per year between 2024 and 2030, to $4 billion. These investments exclude the FPSO capitalization costs, which would be incurred when the project partners buy the FPSO from the supplier(s),” he continued.

“As the FPSOs start producing, Chevron’s gross output will see a substantial increase. Rystad Energy expects Hess’ share of gross crude oil volumes in Guyana to grow from the current 120,000 bpd to over 360,000 bpd in 2030 and to over 550,000 bpd in 2035,” Wilks went on to state.

Bakken Shale, Malaysia, GOM

Looking at the Bakken shale, Wilks highlighted in the update that Chevron will enter the region for the first time, “gaining a large footprint in another of the country’s ‘big five’ tight oil plays”.

“The acquisition will complement its existing acreage in the Permian and DJ Basins. It will assume 465,000 net acres, primarily in Williams, Montrail and McKenzie counties, North Dakota, that will make it the fourth-largest acreage holder in the play,” Wilks noted.

“For wells put on production (POP) between the start of 2022 and the third quarter of this year, Hess has managed to achieve a P50 half-cycle breakeven oil price of $51.5 per barrel, thus making it one of the best-performing operators in the play over this period,” he added.

“This price sits lower than Chevron’s current benchmark in the DJ Basin of $58.2 per barrel, but above those in the Permian of $42.3 and $43.4 per barrel in the Midland and Delaware, respectively,” he continued.

“Hess has operated a four-rig program for the majority of 2023 in the Bakken that, if continued by Chevron, should allow oil production to grow around 17 percent to 122,000 bpd by the end of the decade,” Wilks went on to state, adding that this is based only on a rig sensitivity model, ignoring DUC inventories and productivity constraints. It also assumes flat rig efficiencies and well productivity to be equal to completions from 2022-23, Wilks highlighted.

“In a $65 per barrel WTI price environment, the Bakken acreage will provide 1,900 net locations of commercial inventory,” Wilks said in the update.

“At $10 above or below that mark, the number decreases to 1,210 locations or increases to 2,130. This will increase Chevron’s total U.S. tight oil inventory to around 19,200 locations at $65 per barrel, of which half will be located in the Permian Delaware and almost a quarter in the DJ Basin,” he added.

“At the rate of drilling for 2023, this suggests that the pro forma company will have around 37 years of drilling inventory in the Permian and 22 years outside of it,” Wilks continued.

Looking outside Guyana and the Bakken, Wilks noted in the update that Hess has a net production of around 380 million cubic feet per of gas (MMcfd) in Malaysia, including the Malaysia/Thailand joint development area, and around 160,000 bpd of liquids in the U.S. Gulf of Mexico.

“The Malaysian production majorly stems from the North Malay integrated development fields,” Wilks said.

“The Malaysia/Thailand JDA production stems from the A-18 block, which includes the legacy Cakerawala, Bulan, Bumi, and Suriya fields. In the U.S.-Gulf of Mexico, Hess’ major production comes from its operated stake at the Conger, Tubular Bells, and Stampede developments,” he added.

“Given Chevron’s expertise in deepwater GOM, and with the major partnering Hess in the latter two projects, more operational synergies and improvements on the strong cash-generating assets can be expected,” Wilks continued.

Upgrade and Diversify

On October 23, Chevron Corporation announced that it had entered into a definitive agreement with Hess Corporation to acquire all of the outstanding shares of Hess in an all-stock transaction valued at $53 billion, or $171 per share, based on Chevron’s closing price on October 20.

Under the terms of the agreement, Hess shareholders will receive 1.0250 shares of Chevron for each Hess share, Chevron said in a statement posted on its site, adding that the total enterprise value, including debt, of the transaction is $60 billion.

“The acquisition of Hess upgrades and diversifies Chevron’s already advantaged portfolio,” Chevron said in the statement.

“The Stabroek block in Guyana is an extraordinary asset with industry leading cash margins and low carbon intensity that is expected to deliver production growth into the next decade,” it added.

“Hess’ Bakken assets add another leading U.S. shale position to Chevron’s DJ and Permian basin operations and further strengthen domestic energy security,” it continued.

“The combined company is expected to grow production and free cash flow faster and for longer than Chevron’s current five-year guidance,” Chevron went on to state.

In the Chevron statement, Mike Wirth, the company’s Chairman and CEO, said “this combination positions Chevron to strengthen our long-term performance and further enhance our advantaged portfolio by adding world-class assets”.

“Importantly, our two companies have similar values and cultures, with a focus on operating safely and with integrity, attracting and developing the best people, making positive contributions to our communities and delivering higher returns and lower carbon,” he added.

Pierre Breber, Chevron’s CFO, said, “building on our track record of successful transactions, the addition of Hess is expected to extend further Chevron’s free cash flow growth”.

“With greater confidence in projected long-term cash generation, Chevron intends to return more cash to shareholders with higher dividend per share growth and higher share repurchases,” Breber added.

Also commenting on the deal in the Chevron statement, Hess CEO John Hess said, “this strategic combination brings together two strong companies to create a premier integrated energy company”.

“I am proud of our people and what we have achieved as a company, which has one of the industry’s best growth portfolios including Guyana, the world’s largest oil discovery in the last 10 years, and the Bakken shale, where we are a leading oil and gas producer,” he added.

“Chevron has a world-class diversified portfolio of assets and one of the industry’s strongest balance sheets and cash return profiles. I believe our strategic combination creates a company that is stronger in every respect, with the leadership, asset portfolio and financial resources to lead us through the energy transition and deliver significant shareholder value for years to come,” Hess continued.

To contact the author, email andreas.exarheas@rigzone.com