Chevron buys Hess in $53 billion Guyana, US shale expansion

Chevron agreed to buy US independent upstream operator Hess in an all-stock deal of $53 billion, which would add billions of barrels of resources offshore Guyana and in the Bakken Shale and substantively diversify the US major's asset portfolio, the two companies' top executives said Oct. 23.

The definitive agreement, signed off by both companies' boards, comes less than two weeks after ExxonMobil's $59.5 billion announcement of its intent to purchase Pioneer Natural Resources. That deal focused on US Permian Basin shale resources and intensified consolidation momentum in the US onshore amid mounting inventory depletion concerns.

The Hess transaction moves Chevron into the Bakken, a large shale play mostly in North Dakota where it does not currently operate, and also ushers the major into the fast-developing Guyana oil sector, where it will become a partner in the offshore Stabroek Block's oil fields operated by ExxonMobil.

"This combination [of Chevron and Hess] will further strengthen and diversify our already advantaged portfolio," Chevron Chairman and CEO Mike Wirth said during a conference call to explain the transaction which is expected to close in the first half of 2024. "Guyana is already an exceptional, differentiated asset that adds significant resource inventory in the deepwater, complementing Chevron’s existing deepwater assets around the world."

Guyana is expected to deliver production growth into the next decade, with two FPSOs already producing about 380,000 b/d of oil, a third FPSO expected to come online shortly, a fourth expected online in 2025 and a fifth in 2026. And, sizable upside potential is expected beyond the current 11 billion boe of gross estimated recoverable resource already discovered and 10-12 exploration wells planned for 2024, said Wirth.

Industry insiders point out ExxonMobil is still in the early stages of plans for commercial gas production in Guyana and potential exports, amid discussion of a possible LNG facility.

"This [acquisition] is one way to 'have a Guyana in the portfolio'," mused UBS analyst Josh Silverstein in an Oct. 23 investor note, adding the deal was done at a roughly 5% to Hess' share Oct. 20 closing price. "We see more transactions occurring as potential sellers are getting 5-15% premiums versus no premiums in 2020-2021 [and also] M&A can improve inventory depth and quality while diversifying exposures to, for instance shale/deepwater."

Chevron had in recent years faced claims it risked becoming overly concentrated on two areas: its giant Tengiz project in Kazakhstan and the US Permian, although it had moved to diversify with its purchase of East Mediterranean gas producer Noble Energy in 2020.

Bakken Shale a new basin for Chevron

That diversification will continue with the Hess buy, as its Bakken assets also comprise 465,000 net acres of what Chevron called "high-quality, long-duration [Bakken] inventory supported by the integrated assets of Hess Midstream." Hess' Q2 2023 net production from the play was 181,000 b/d of equivalent oil.

"The Bakken adds another prolific US shale basin to our leading positions in the DJ [Basin] and the Permian ... with a long queue of economic future drilling locations," Wirth said. "From our [understanding] it looks like there's at least 15 years of inventory at the current four-rig level of drilling." That is "out into the 2030s, that can deliver plateau production and has that strong technology upside we'll be looking to unlock," he said.

Also, Chevron will acquire from Hess five operated production hubs in the US Gulf of Mexico, which Wirth said are "complementary" to Chevron's own collection of producing fields in a marine basin where it is a leader in deepwater production innovations and a top Gulf producer with 185,000 b/d of oil equivalent output in Q2.

"[It's a basin] we know well, and where we foresee a long future underpinned by more exploration success," he said. Hess produced about 32,000 boe/d from the US Gulf in Q2.

In addition, Hess' assets in Southeast Asia -- an operating sphere where Chevron already has a long history -- adds a regional natural gas business to the major's already advantaged gas positions in Australia and the Eastern Mediterranean, and provides a "predictable financial performance" from gas contracts with links to oil pricing, he added.

Once the Hess deal closes, Chevron will have added eight new significant reserve and resource positions since 2019, Wirth said. That was the year when Chevron walked away from the chance to acquire Anadarko Petroleum -- also a large multibasin independent E&P operator -- was topped by Occidental Petroleum because Chevron refused to overpay for that company.

Going forward, those eight new operations combined – Guyana, the DJ Basin, the Eastern Mediterranean, the Bakken, Australia, Southeast Asia, the Permian, US Gulf of Mexico and also Kazakhstan where Chevron is nearing completion of an expansion of the Tengiz oil field – will account for more than 75% of the major's upstream capital budget, he said. Chevron's 2023 capex is 2023 is $16 billion and Hess' is $4.5 billion.

"With a stronger combined portfolio, we expect to further high-grade and generate $10 billion to $15 billion in before-tax proceeds of asset sales through 2028," he added.

Asked during the call by an analyst why Chevron didn't follow in ExxonMobil's footsteps to become a Permian behemoth, Wirth said such a deal would add bulk -- but added right now the company prefers diversity and fresh inventory where it can apply technology to improve recoveries.

Being bigger isn't necessarily being different

"We are big in the Permian, with over 2 million net acres" and nearly 775,000 boe/d of production in Q2 2023 which is on track to become 1 million boe/d in 2025, Wirth said. "I don't know that making the Permian bigger makes us a much different company to own."

Chevron continues to hunt for and close individual acreage acquisitions to keep expanding its footprint in that basin. But acquiring Hess is "a very unique and compelling opportunity to strengthen our deepwater position, to add another shale basin we're not exposed to today," he said.

Moreover, Chevron expects a repeat of what occurred earlier this year when it acquired PDC Energy, a deal which exposed it to the DJ Basin, Wirth said.

The PDC team did "a better job than imagined" with that resource; "they understand it and it's good on several levels of metrics," he said. "I'm certain the same will be true of Hess when we see what they're doing in the Bakken."

Chevron has a large technical organization that is creating technologies to improve shale recoveries in the Permian, and is piloting those projects in the field currently. As those technologies mature and are proven, Chevron intends to apply them across its entire shale portfolio, including the Bakken, Wirth said.

"This [acquisition] gives us another nice large position with lots of running room to not only operate at a current level of high productivity, but over time unlock even more value," he said.

The ExxonMobil/Pioneer tie-up has set off a rush of rumored transactions-in-waiting for such couplings as Devon Energy/Marathon Oil and Chesapeake Energy/Southwestern Energy, as the renewable energy sector has seen a recent "carnage" of asset valuations, Evercore ISI upstream analyst Stephen Richardson said.

In an Oct. 22 investor note titled, "Will The Last Of The E&P Independents Please Turn Out The Lights," issued just hours before Chevron announced its deal with Hess, Richardson noted that "one would think this would highlight the duration and viability of conventional energy for a little longer. "

"Every year of additional runway is material for valuation," Richardson said. "So while one may find the future of the independent E&P in question, the very real possibility of $90-plus/b oil prices in 2024 and a nice slug of cash flow from global natural gas prices (for some), plus confidence in the flight path of Henry Hub to $4-plus/MMBtu by 2025, all set up an inexpensive backdrop to say the least," he said.