In a long-awaited development, Chevron (CVX) successfully concluded its arbitration dispute with ExxonMobil (XOM), paving the way for it to finalize its acquisition of Hess. This significant deal will shape Chevron into a leading integrated oil and gas company, promising increased production and free cash flow throughout the 2030s.
Let’s examine the impact of this groundbreaking deal on Chevron, and if the resulting modifications make the oil stock an attractive investment opportunity.
A long, hard-fought legal battle
In the latter half of October 2023, I witnessed Chevron’s decision to take over Hess for a whopping $60 billion. This development occurred merely two weeks subsequent to Exxon’s grand unveiling of its own acquisition – a staggering $64.5 billion deal with Pioneer. Unlike Exxon, which finalized its megadeal in the following May, Chevron ran into complications while wrapping up the Hess transaction, these difficulties being orchestrated by Exxon itself.
The main point of contention revolved around Chevron’s ownership of a 30% stake in the Stabroek block offshore Guyana, which is operated by Exxon. Exxon argued that the agreement initiated a “change-of-control” condition. If true, this would grant Exxon and its partner, China’s CNOOC, priority to acquire Chevron’s share in the oil field before any other party. The disagreement was resolved through arbitration. The decision favored Chevron, declaring that these rights were not applicable to corporate mergers. This ruling allowed Chevron to finalize its acquisition of Hess last week.
A bigger and better oil giant
After completing the Hess acquisition, Chevron has grown significantly and is now considered one of the top oil companies. The most valuable aspect of this deal lies in its ownership stake at the productive Stabroek block offshore Guyana. Exxon and its partners have discovered over 11 billion barrels of recoverable oil equivalent (BOE) in the region so far. This year, they are set to launch their fourth floating production, storage, and offloading vessel named Yellowtail in Guyana, increasing their combined output and free cash flow. They have also given the go-ahead for Uaru and Whiptail projects, scheduled for 2026 and 2027 respectively. With more projects in the pipeline, Guyana is expected to drive growth for Exxon and Chevron throughout the initial years of the next decade.
Chevron had additional reasons for purchasing Hess beyond Guyana alone. This acquisition significantly strengthens Chevron’s influence in the Bakken region of North Dakota, enhancing its footprint in the United States onshore. Furthermore, the deal grants Chevron valuable assets in the Gulf of Mexico (often referred to as the Gulf of America within the U.S.) and Southeast Asia, providing complementary resources for their portfolio.
In a press statement, Chevron’s Chief Financial Officer, Eimear Bonner, predicted that this merger will boost substantial free cash flow and output expansion throughout the 2030s. The goal is to swiftly combine the two companies, aiming to achieve $1 billion in annual cost savings by the end of the year.
This upcoming transaction significantly strengthens Chevron’s strong projected growth trajectory over the short term. The company anticipates that recently finished projects in Kazakhstan, the Gulf, and the Permian will contribute approximately $9 billion in extra cash flow next year, assuming an oil price of around $60 per barrel. Since oil is currently hovering around this price point, Chevron’s existing assets are on track to generate even more cash flow next year, not accounting for the additional benefit from the Hess deal yet.
Over the next five years, the predicted acquisition of Hess is expected to boost Chevron’s production and cash flow growth rates, positioning the company effectively to enhance shareholder value. This could lead to the continuation of their substantial dividend payouts, currently standing at 4.5%. Notably, Chevron has consistently increased its dividends for 38 consecutive years and grown them faster than industry average over the last decade. Moreover, the company intends to continue purchasing a considerable number of shares, with an annual target of $10 billion to $20 billion. The acquisition of Hess is expected to aid in reaching the higher end of this projected range.
A very compelling investment opportunity
Through the acquisition of Hess, Chevron has further improved its standing as a leading oil company. This transaction is expected to bolster and extend Chevron’s growth trajectory for the coming decade. With this increased growth, Chevron gains greater agility to distribute additional funds back to its shareholders. This heightened potential for return makes it an even more alluring oil stock to invest in at present.
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2025-07-21 10:22