Chevron's $53B Hess Acquisition Faces Proxy Split, Exxon Arbitration

Key Takeaway

• Chevron's $53 billion acquisition of Hess faces mixed recommendations from proxy advisory firms, with Glass Lewis supporting and ISS advising against it.
• The deal's complexity is heightened by Exxon's arbitration claim over Hess's Guyana oil stake, potentially delaying the merger until 2025.
• Chevron plans to sell its 19.4% North Sea stake as part of a $15 billion asset sale strategy to fund high-return projects and optimize its portfolio.

Proxy Advisory Firms Split on Chevron-Hess Deal

Chevron Corp.'s proposed $53 billion acquisition of Hess Corp. has elicited mixed reactions from proxy advisory firms, underscoring the complexity and potential risks associated with the deal. Glass Lewis & Co. has recommended that Hess shareholders vote in favor of the merger, highlighting the opportunity for shareholders to benefit from the future upside of the combined entity through newly issued Chevron shares. They described the merger's merits as "sound and reasonable," despite acknowledging some less-than-ideal aspects of the deal.

Conversely, Institutional Shareholder Services Inc. (ISS) advised Hess shareholders to withhold their votes, raising concerns about the transaction's valuation and the uncertainty surrounding the arbitration case between Exxon Mobil Corp. and Chevron over a stake in a Guyanese oil project. This divergence in recommendations from leading proxy advisory firms has introduced uncertainty into what would be Chevron's largest deal in decades.

Strategic Implications and Arbitration Uncertainty

The acquisition is strategically significant for Chevron, aiming to secure Hess's 30% stake in a major oil field off Guyana, considered one of the world's largest and most profitable crude discoveries in the past decade. However, the deal is complicated by Exxon's arbitration claim, filed in March, asserting a right of first refusal over Hess's stake in the Guyana project. This legal challenge has cast a shadow over the merger, with the outcome of the arbitration likely to influence the deal's final terms and timeline.

ExxonMobil's CEO, Darren Woods, has indicated that the arbitration could extend to 2025, suggesting a prolonged period of uncertainty. The arbitration will hinge on the precise wording and interpretation of the joint operating agreement (JOA) between the parties, which remains confidential. Chevron and Hess argue that the structure of their corporate merger does not trigger Exxon's pre-emption rights, but this will ultimately be decided through arbitration.

Divestment and Acquisition Strategy

As part of its broader strategy and in preparation for the acquisition, Chevron has announced the sale of its 19.4% stake in the UK's Clair oilfield, marking its exit from the North Sea after 55 years. This divestment is part of a $15 billion asset sale strategy aimed at reallocating resources towards more competitive and strategic assets. The proceeds from the North Sea asset sale are expected to fund high-return projects, aligning with Chevron's focus on optimizing its portfolio for future growth and sustainability.

Chevron's plan to sell its North Sea assets is intended to support its strategic growth focus and fund high-return projects. This move aligns with the company's broader strategy to optimize its portfolio and ensure future growth and sustainability.

Street Views

• Institutional Shareholder Services (ISS) (Bearish on Hess):

  "Shareholders cannot make an informed decision without knowing the arbitration outcome, which could be dragged till 2025."

• HBK Capital Management (Bearish on Hess):

  "HES shareholders bear the arbitration risk and should be compensated accordingly."

• Glass Lewis (Bullish on Chevron-Hess merger):

  "The merger offers a reasonable valuation and potential upside for Hess shareholders despite the arbitration uncertainty."

Management Quotes

• Darren Woods, CEO of ExxonMobil:

  "The arbitration could extend to 2025, suggesting a prolonged period of uncertainty."