Chevron's(NYSE: CVX) share price has underperformed oil prices and other energy stocks over the past few months. A big factor driving that relative underperformance is the uncertainty surrounding its massive acquisition of Hess(NYSE: HES). That's after rival ExxonMobil(NYSE: XOM) launched an arbitration case to assert its rights to buy Hess' stake in the Stabroek block offshore Guyana, which Exxon operates.
Chevron doesn't think Exxon's case has any merit, and it's confident it will close the Hess deal later this year. That acquisition could really move the needle for the oil stock in the coming years.
Delayed but still on track
During its recent first-quarter conference call, Chevron's management team discussed the progress made in closing the Hess deal. CEO Mike Wirth stated: "The merger with Hess is advancing, and we intend to certify substantial compliance with the FTC second request in the coming weeks. We believe that a pre-emption right (that Exxon is attempting to establish) does not apply to this transaction and are confident this will be affirmed in arbitration."
Chevron initially expected to close its $53 billion all-stock deal for Hess in the first half of this year. However, additional information requests by the Federal Trade Commission (FTC) have pushed that timeframe back. On top of that, Exxon's interpretation of its joint operating agreement with Hess and Chinese oil company CNOOC is causing an additional delay.
Exxon believes that Chevron's acquisition triggered a provision that gave it the right to match the offer for Hess' assets in Guyana. Chevron doesn't see it that way since it's acquiring the entire company, not just its position in Guyana.
Exxon doesn't want to buy Hess; it's in the process of acquiring Pioneer Natural Resources. However, it's trying to establish it has the right to buy Hess' assets in Guyana. That could allow it to make an offer directly to Hess for those assets or force Chevron to compensate it for relinquishing those rights.
Chevron expects the arbitration tribunal to hear the case in the third quarter, with an outcome likely in the fourth quarter. The oil company believes it will win the case. That drives its view that it can close the transaction in the fourth quarter.
Building a better oil company
In wrapping up his prepared comments on the deal, Wirth stated, "This strategic combination creates a premier energy company with world-class capabilities and assets to deliver superior shareholder value, and we look forward to bringing the two companies together." The company has previously disclosed that acquiring Hess would enhance and extend its production and free cash flow growth outlook into the 2030s.
Guyana is the primary factor driving that view. Exxon and its partners recently approved a sixth development, Whiptail, that should start producing in 2027. They also have Yellowtail coming online next year and Uaru in 2026. The companies have several other discoveries that they can develop in the coming years.
Chevron believes that acquiring Hess would enable it to more than double its free cash flow by 2027 at $70 oil. That's an acceleration from its already strong organic growth rate. It believes it can grow its free cash flow by more than 10% annually through 2027 at an average oil price of around $60 a barrel.
The acquisition would also allow Chevron to further high-grade its portfolio. The deal would add a world-class position in Guyana along with a strong position in the Bakken to Chevron's portfolio. It would also enhance its Gulf of Mexico and Southeast Asia operations. With a stronger core, Chevron would be able to sell off lower-returning assets. That would enhance its returns and already strong balance sheet. The company intends to sell $10 billion to $15 billion of assets following the deal.
A meaningful catalyst on the horizon
Chevron firmly believes it will close its deal with Hess by the end of this year. That acquisition would enhance and extend its growth outlook. Since it would also enable the company to high-grade its portfolio by selling off lower-returning assets, the deal could create significant value for shareholders in the coming years.
However, even if Chevron loses, it can still win for shareholders. The company's current investment strategy has it on track to deliver meaningful free cash flow growth in the coming years. That would enable it to return more money to shareholders through dividends and buybacks. This company is still a compelling investment opportunity even without Hess.
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Matt DiLallo has positions in Chevron. The Motley Fool has positions in and recommends Chevron. The Motley Fool recommends Pioneer Natural Resources. The Motley Fool has a disclosure policy.
