The big-money acquisition of Hess by Chevron and Hess accelerates the trend of consolidation and big-money deals.
Although it continues the story started by the recent Exxon-Pioneer deal, the motivation and impact of this acquisition are significantly different.
Thanks to this deal, Chevron will have access to more than 3.4 billion boe of these Guyanese volumes.
Chevron, the California-based supermajor, has announced that it will acquire US independent operator Hess in a deal valued at $60 billion, inclusive of debt.
The announcement is the second multi-billion megadeal by a major in the space of two weeks, coming on the heels of ExxonMobil’s purchase of Pioneer Natural Resources, earlier in October.
The assets that will change hands include a 30% working interest in the offshore Stabroek block in Guyana, Hess’ tight oil position in the Bakken shale, complementary assets in the US Gulf of Mexico and natural gas exposure in southeast Asia.
Chevron will acquire all outstanding shares of Hess in an all-stock transaction valued at $53 billion, or $171 per share, based on Chevron’s closing price on 20 October.
In return, Hess shareholders will receive 1.025 shares of Chevron for each Hess share.
The independent’s owner John Hess is expected to join Chevron’s board once the deal closes, which is expected in the first half of 2024.
The acquisition will add 400,000 barrels of oil equivalent per day (boepd) in net production in 2024, of which, almost 50% will come from Hess’ Bakken tight oil operations, 33% from offshore deepwater assets in Guyana and the Gulf of Mexico and the remaining 18% from the offshore shelf in southeast Asia.
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% year on year to 3.9 million boepd.
Guyana
Through the acquisition, Chevron would now enter the Stabroek, one of the most successful oil blocks in the world since 2015.
Located off Guyana, the Stabroek block spans 6.6 million acres (26,800 square kilometers) and is owned and operated by ExxonMobil (45%) and partnered by Hess (30%) & CNOOC (25%).
Since the first discovery in 2015 through the Liza-1 well, the block partners have made another 30 discoveries and unearthed over 11 billion barrels of oil equivalent (boe) of recoverable resources.
Chevron, through Hess, would get access to over 3.6 billion barrels of discovered volumes, of which 3.4 billion barrels come from Guyana alone.
This nearly triples the supermajor’s discovered volumes since 2015.
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.
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.
Collectively, over $40 billion worth of investments have been sanctioned for development, which would help take Guyana’s installed oil production capacity to over 1 million barrels per day (bpd).
For Chevron, the Guyana portfolio provides a significant boost to both greenfield investments to be sanctioned and annual greenfield capital expenditure (capex).
In the short term, its greenfield sanctioning budget would balloon from nearly $3.6 billion to over $9 billion.
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).
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.
The Bakken shale
Chevron will enter the Bakken 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.
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.
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.
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% to 122,000 bpd by the end of the decade.
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.
In a $65 per barrel WTI price environment, the Bakken acreage will provide 1,900 net locations of commercial inventory.
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 US 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.
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.
Gulf of Mexico and southeast Asia
Outside of Guyana and the Bakken, Hess has a net production of around 380 million cubic feet per of gas (MMcfd) in Malaysia, including the Malaysia/Thailand joint development area, JDA and around 160,000 bpd of liquids in the US-GoM.
The Malaysian production majorly stems from the North Malay integrated development fields.
The Malaysia/Thailand JDA production stems from the A-18 block, which includes the legacy Cakerawala, Bulan, Bumi and Suriya fields. In the US-Gulf of Mexico, Hess’ major production comes from its operated stake at the Conger, Tubular Bells and Stampede developments.
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.
Chevron’s historical M&A activities
Since the beginning of 2019, Chevron has been involved in 10 deals valued at over $500 million.
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.
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.
