Energy investors have another sector-defining deal to absorb.
This week, California-based supermajor Chevron announced its biggest merger and acquisition in its history. The California-based supermajor will takeover energy player Hess for $53 billion in a deal valuing the target company at $60 billion.
The deal opens the door for Chevron to vast natural deposits in the small South American nation of Guyana – home to the most extensive oil discovery of the past decade. It also brings access to the Bakken shale formation of North Dakota. Chevron CEO Mike Wirth described Hess as a “unique and compelling opportunity.”
Chevron’s latest purchase will further diversify its oil portfolio, which has been highly concentrated in the Permian Basin of Texas and New Mexico, into offshore areas.
“Chevron, when compared to Exxon and the European majors, is underweight deepwater assets and they have been looking for a while to spread out this concentration risk,” Alex Beeker, analyst at Wood Mackenzie, told the Financial Times.
Despite its size, markets aren’t taking a shine to the deal. Chevron’s stock price has slipped over 6 percent over the last five trading days, down from $168 to $156. The price of Hess stock has also slipped in recent days.
Not Alone
Major maneuvers are afoot in the oil and gas sector. The Hess deal comes hot on the heels of rival supermajor ExxonnMobil’s buy up of shale giant Pioneer Natural Resources – also worth just under $60 billion.
Both acquisitions are “all-stock deals,” meaning shareholders of the target firm are compensated with shares in the acquiring company instead of a cash payment.
After seeing record profits following the conflict in Ukraine, cashed-up oil majors are aggressively buying up smaller competitors. Rystad Energy Analyst Matthew Wilks sees Chevron’s acquisition as reigning in a new era of oil megamergers and intensifying industry consolidation.
According to the latest Dallas Fed Energy Survey, the business activity for oil and gas firms increased from 0 in the second quarter to 10.9 in the third quarter, driven by exploration and production. Meanwhile, operation costs rose for an 11th consecutive quarter, with the finding and development costs index increasing from 14.9 to 18.3.
On average, survey respondents anticipate the West Texas Intermediate (WTI) oil price to end the year at $88 per barrel while predicting a Henry Hub natural gas price of $3.14 per million British thermal units (MMBtu) by year-end 2023.
‘Unsustainable’ Advantage?
A widening transatlantic gulf is opening up over the future of energy. While some European energy majors like BP and TotalEnergies accelerate their pivot to sustainable energy sources, some of their US counterparts are doubling down on fossil fuel resources.
The International Energy Agency predicts hydrocarbon demand will peak before 2030, but Chevron’s boss disagrees.
“You can build scenarios, but we live in the real world, and have to allocate capital to meet real-world demands,” Wirth told the Financial Times last month.
Investors will consider their own assessment of how long oil and gas may last in the era of renewable energy and whether Chevron and fellow supermajors can continue to deliver substantial profits over the decades to come.