It didn't take Chevron (CVX 0.10%) long to respond to ExxonMobil's (XOM -0.03%) $60 billion acquisition of Pioneer Natural Resources (PXD). Less than two weeks after Exxon unveiled its megamerger with Pioneer, Chevron signed an equally sizable merger deal with Hess (HES -0.40%). The $60 billion acquisition will enhance and extend Chevron's production and free cash flow growth outlook into the 2030s.
Here's a look at the deal and how it will move the needle for Chevron in the coming years.
Drilling down into the deal
Chevron is buying fellow oil and gas producer Hess in an all-stock deal. It's paying $171 per share for Hess by exchanging 1.025 of its shares for each one of Hess. That values Hess' equity at $53 billion, while the merger's full value rises to $60 billion after the assumption of debt.
That deal rivals Exxon's acquisition of Pioneer Natural Resources. Exxon's all-stock deal valued Pioneer's equity at $59.5 billion and $64.5 billion after including debt.
However, while ExxonMobil's acquisition of Pioneer was all about bulking up in the Permian Basin, Chevron's deal for Hess will take it in another direction. In Hess, Chevron will acquire a position in the world-class Stabroek block offshore Guyana. It will become Exxon's partner in the region as its rival operates the block, which is one of its four core focus areas.
Hess also brings a high-quality position in the Bakken to Chevron's portfolio. On top of that, Hess has complementary assets in the Gulf of Mexico and a free cash flow-generating natural gas business in Southeast Asia.
Adding an exceptional asset
The acquisition of Hess will provide Chevron with a new core growth asset in Guyana. The company will own a 30% interest in the Exxon-operated field with more than 11 billion barrels of discovered oil-equivalent resources. The region also boasts low operating costs, a lower carbon footprint, and visible growth. Exxon made a final investment decision on its fourth Guyana offshore project, Yellowtail, last year, which should start producing by 2025. The company envisions eventually approving up to 10 projects to develop this vast resource base. The visible growth from adding Guyana increases Chevron's production growth profile well past the end of the decade.
Chevron anticipates that the Hess deal will be accretive to its cash flow per share starting in 2025 when Yellowtail comes online. Meanwhile, the company expects the transaction will increase its production and free cash flow growth rates over the next five years while extending its growth profiles into the 2030s. The company also anticipates capturing about $1 billion of annual cost savings within a year of closing the acquisition.
Enhancing the cash flow machine
The enhanced cash flows from Guyana and Hess' other assets will enable Chevron to return more money to shareholders. The oil company plans to increase its dividend per share by 8% next January. That's an acceleration from the 6% dividend growth the company has delivered in recent years. It would further extend Chevron's dividend growth streak, which reached 36 years last January.
Meanwhile, Chevron also plans to boost its share repurchase program. It intends to increase its annual share repurchase rate by $2.5 billion to the top end of its guidance range of $10 billion to $20 billion annually. That accelerated repurchase rate will enable Chevron to offset more of the dilution from the increase in outstanding shares from the Hess deal and its earlier acquisition of PDC Energy.
Chevron also plans to high-grade its portfolio by selling additional non-core assets. It has increased its target to sell $10 billion to $15 billion of assets by 2028. That will enhance its already fortress-like balance sheet, giving it more flexibility to continue repurchasing shares and paying dividends if oil prices decline.
A potentially value-enhancing deal
Chevron didn't waste any time responding to Exxon's megamerger with Pioneer, quickly scooping up Hess. The deal will enhance and extend its production and free cash flow growth profiles into the next decade. That will give the oil giant more cash to return to investors via a higher dividend and increased share repurchase rate. These factors make Chevron look like an even more attractive long-term investment opportunity.