Chevron (CVX +2.90%) quickly responded to ExxonMobil's megamerger with Pioneer Natural Resources with a massive deal of its own. It agreed to acquire Hess (HES +0.00%) for around $60 billion. These deals will likely lead to more consolidation in the sector.
I expect Chevron to continue making deals. It also bought PDC Energy for around $7.6 billion earlier this year. Given its history, its next acquisition will likely be Hess Midstream (HESM 1.09%). Here's why that deal would fit Chevron's recent pattern.
NYSE: CVX
Key Data Points
History as a guide
Chevron has a long history of making deals. Before Hess, its most notable deal was acquiring Texaco in 2001 for $38.7 billion. It has also made several smaller deals, including buying Noble Energy for $13 billion in 2020.
The Noble Energy deal could serve as a blueprint for Chevron's next acquisition. Shortly after closing its deal for Noble Energy, Chevron offered to acquire its affiliate, Noble Midstream Partners. That company operated purpose-built pipelines and other midstream assets supporting its parent's operations in the DJ and Permian basins. By acquiring Noble Midstream, Chevron was able to integrate those assets into its business. That gave it more control while saving it money.
Integration is a key aspect of Chevron's operating strategy. It's an integrated energy company with assets that span the entire oil industry value chain: upstream (oil and gas production and exploration), midstream (pipelines and related infrastructure), and downstream (refineries and chemicals). Chevron believes that its integrated business model enables it to maximize the value of every barrel of oil it produces.
It fits like a glove
Acquiring Hess Midstream would make a lot of strategic sense for Chevron. The pipeline operator supports Hess' operations in the Bakken. Hess owns 465,000 net acres in the region supported by the integrated assets of Hess Midstream:
Image source: Hess Midstream.
As that slide shows, Hess Midstream operates crucial assets to support Hess' upstream business in the Bakken. Hess and third-party customers pay Hess Midstream fees to gather and process their production in the region. As its output rises, Hess pays more fees to its midstream affiliate.
Hess Midstream returns a significant portion of that money to its investors via dividends. The company recently increased its dividend payment by 2.7%, pushing its dividend yield over 8%. The midstream operator plans to grow its payout by at least 5% per year through 2025, supported by rising fees from Hess (and eventually Chevron) as its parent expands its output in the Bakken.
NYSE: HESM
Key Data Points
Hess currently owns a 37.8% interest in Hess Midstream, which Chevron will acquire when it closes the deal. Private equity giant Global Infrastructure Partners also owns a meaningful stake in Hess Midstream, which it acquired in 2015.
Buying out the units of Hess Midstream currently owned by Global Infrastructure Partners and other outside investors makes sense for Chevron. It would enable the oil giant to integrate those assets into its business. An acquisition would save it some money and give the company complete control over those crucial midstream assets. That would allow Chevron to make development decisions based on its needs and not have to appease the outside shareholders of its midstream affiliate, who expect the company to deliver steady dividend growth supported by a visible development plan. A deal would also enable Chevron to retain all the cash flows produced by the midstream assets.
A likely next move
Chevron's acquisition of Hess will likely lead to more deals in the oil patch for both Chevron and its rivals. I expect Chevron's next move after closing its deal with Hess will be to roll up its midstream affiliate like it did when it acquired Noble Energy and then Noble Midstream Partners. That would enable Chevron to integrate those assets, giving it more control while saving it money. Because of that, an eventual acquisition of Hess Midstream would enhance Chevron's ability to create value for its investors over the long term.
