Chevron (CVX 0.01%) recently received some long-awaited news: The oil giant won its arbitration case against ExxonMobil (XOM 0.44%), enabling it to close its acquisition of Hess. The transformative transaction will create a top-tier integrated oil and gas company. Chevron now has visible production and free cash flow growth into the 2030s.
Here's a look at how this transformative transaction will reshape Chevron and whether these changes make the oil stock a buy.
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A long, hard-fought legal battle
Chevron agreed to acquire Hess in late October 2023 for $60 billion. The deal came less than two weeks after Exxon unveiled its $64.5 billion purchase of Pioneer. While Exxon closed its megadeal the following May, Chevron encountered a roadblock in completing the Hess transaction, caused by Exxon.
The dispute centered on Hess' 30% stake in the Exxon-operated Stabroek block offshore Guyana. Exxon claimed the deal triggered a change-of-control clause. That would enable Exxon and its partner, China's CNOOC, to exercise rights of first refusal to acquire Hess's interest in the oil field. The dispute went to arbitration. The panel ultimately ruled in favor of Chevron, stating that these rights did not apply to corporate mergers. That ruling let Chevron close its purchase of Hess last week.
A bigger and better oil giant
Now that Chevron has finalized the Hess transaction, it's even bigger and arguably a much better oil company. The crown jewel of the Hess deal is its stake in the prolific Stabroek block offshore Guyana. Exxon and its partners have found more than 11 billion barrels of oil equivalent (BOE) in recoverable resources. The partners are launching their fourth floating production, storage, and offloading vessel in Guyana, called Yellowtail, this year. That will boost their combined production and free cash flow. They have also approved Uaru and Whiptail, starting in 2026 and 2027, respectively. With more projects planned, Guyana should fuel growth for Exxon and Chevron through the early part of the next decade.
Guyana wasn't Chevron's only motivation for acquiring Hess. The deal also adds a leading position in the Bakken of North Dakota, expanding Chevron's U.S. onshore presence. Chevron also gains complementary assets in the Gulf of Mexico (also known as the Gulf of America in the U.S.) and Southeast Asia.
"This accretive transaction is expected to drive significant free cash flow and production growth into the 2030s," stated CFO Eimear Bonner in a press release announcing the deal's completion. Chevron plans to quickly integrate both companies. That move should drive $1 billion in annual cost synergies by year's end.
This transaction enhances Chevron's already robust near-term growth profile. The company expects recent project completions in Kazakhstan, the Gulf, and the Permian to help fuel $9 billion in additional free cash flow next year, assuming an average oil price of $60 a barrel. With crude currently in the mid-$60s, Chevron's legacy portfolio is on pace to generate even more free cash next year, even before considering the incremental impact of the Hess deal.
With the Hess acquisition expected to increase Chevron's production and free cash flow growth rates over the next five years, the company is in a stronger position to create shareholder value. It should be able to continue raising its high-yielding dividend, which currently sits at 4.5%. Chevron has increased its payment for 38 straight years and grown it at an industry-leading pace over the past decade. In addition, Chevron plans to continue buying back a meaningful amount of shares, targeting $10 billion to $20 billion annually. The purchase of Hess enhances its ability to reach the high end of that forecast.
A very compelling investment opportunity
Chevron has become an even better oil company by buying Hess. The deal will enhance and extend its growth profile well into the next decade. With this growth, Chevron will have even more flexibility to return additional cash to shareholders. That enhanced return potential makes it an even more attractive oil stock to buy now.
