Exxon would love to own more of its offshore development in Guyana or at least keep it out of Chevron's hands.
ExxonMobil (XOM 1.39%) and Chevron (CVX 1.30%) are behemoths in the oil patch. The integrated oil giants have operations that span the globe and the entire oil sector value chain -- upstream, midstream, and downstream. While they're peers, they are also fiercely independent and competitive. They routinely benchmark their results against each other.
Their competition isn't always friendly. The oil companies currently find themselves on opposite ends of a major dispute stemming from Chevron's pending acquisition of Hess (HES 1.51%), which it made as a countermove following Exxon's mega-deal for Pioneer Natural Resources. Exxon is maneuvering to grab Hess' crown jewel and keep it out of Chevron's hands.
Move and countermove
Last October, Chevron agreed to buy Hess in an all-stock deal valuing the oil and gas company at $53 billion, or $60 billion including debt. That deal announcement came less than two weeks after Exxon unveiled its mega-merger agreement with Pioneer Natural Resources. The all-stock deal valued Pioneer at $59.5 billion, or $64.5 billion, including debt.
Chevron noted that acquiring Hess would upgrade and diversify its already advantaged resource portfolio. The company highlighted that buying Hess would add the Stabroek block in Guyana, which the company called "an extraordinary asset with industry-leading cash margins and low carbon intensity that is expected to deliver production growth into the next decade." Chevron also noted that buying Hess would add Bakken assets to the company's shale positions, which also include the DJ and Permian Basins. In addition, the energy company would pick up some complimentary Gulf of Mexico assets and a Southeast Asian natural gas business that generates steady free cash flow.
Overall, the deal would enable the combined company to "grow production and free cash flow faster and for longer than Chevron's current five-year guidance," according to comments in the deal press release. Chevron sees it extending its production growth outlook into the 2030s and more than doubling its free cash flow by 2027, assuming $70 oil. So, while the merger might have come in response to Exxon's Pioneer acquisition, it wasn't a deal just to get something done to counter Exxon's move. It would really move the needle for Chevron.
Semantics
Much of the production and cash flow growth Chevron expects from the Hess deal will come from the Exxon-operated Stabroak block offshore Guyana. That joint development agreement between Exxon, with 45% interest; Hess, with 30%; and a third partner, China's CNOOC, with a 25% stake, features a change of control provision giving the other partners the right to make a pre-emptive bid if one party tries to sell their stake.
Exxon believes Chevron's pending acquisition of Hess triggers this clause. Chevron disagrees with that view because it's buying all of Hess, not just its stake in Stabroek. While the companies tried to negotiate their differences, they ultimately decided to seek arbitration in the matter. That ruling won't come until later next year.
At issue is the value of Guyana in relation to Hess' other assets. Exxon believes the acquisition is an asset purchase disguised as a corporate merger. According to a report by Reuters, analysts estimate that Guyana makes up 70% of the value of Chevron's $53 billion bid for Hess. Driving that value is its growth and profitability. The development is on track to grow its output to around 1.3 million barrels per day by 2027, tripling its production from last year, with the potential to continue growing until 2033. The highly profitable partnership produced $6.3 billion in earnings last year.
If Exxon wins, it could make an offer for Hess' Guyana stake to grab more of this development's production growth and profit. However, Hess has said it would simply remain an independent company, since the Chevron deal would probably fall apart, rather than sell its interest in that development to Exxon. Meanwhile, if Chevron wins, it will acquire a major production and cash flow growth driver, along with three other complementary cash-flowing assets. In a sense, Exxon has nothing to lose from the arbitration process, and potentially much to gain if it wins. Chevron's stakes are much higher. Depending on the arbitration outcome, it would either win big or suffer a major loss.
An interesting battle to watch
Exxon and Chevron are engaged in an epic battle over Hess' lucrative stake in the Stabroek block offshore Guyana. If Exxon wins, it will likely prevent Chevron from buying Hess and could end up adding to its position in a world-class oil resource. Meanwhile, a victory by Chevron would enable it to complete a needle-moving deal that would put it in a stronger position to compete against Exxon in the future. The high stakes are making this an interesting battle to watch over the next year.
Matt DiLallo has positions in Chevron. The Motley Fool has positions in and recommends Chevron. The Motley Fool has a disclosure policy.
