Chevron-Hess Deal on Track Despite Chevron Stock Drop

The all-stock deal was unveiled Oct. 20. Chevron is offering 1.025 of its shares for each Hess share, which was initially worth about $171 per Hess share. The agreement was notable for a small initial premium of about 5%.

The current deal value is nearly $150 a share per Hess share, Barron’s calculates, a roughly 3.4% premium to Hess’s current price.

This is known as the arbitrage spread. Assuming a closing in six months, arbs would earn an annual return of about 7% before accounting for dividends and rebates on short sales. An arb would buy Hess and sell short Chevron.

If arbs were banking on a higher bid, Hess shares might be trading higher.

CEO John Hess is publicly enthusiastic about the deal and the Hess family controls about 10% of Hess stock. It would be tough for another bidder to emerge given Hess’s size. It also looks unlikely Chevron will sweeten its bid.

The deal is expected to close in the first half of 2024, and BofA Securities analyst Doug Leggate sees little likelihood that doesn’t happen. Wall Street sees no antitrust issues given scant overlap between the companies. The Biden administration antitrust regulators, however, have taken a tough stance on big mergers and could seek to block the deal.

“We believe it is unreasonable to expect any challenge to what is ultimately an agreed acquisition between two consenting CEOs with the integrity to honor the agreement,” he wrote in a client note Monday.

Leggate noted the breakup fee is $1.72 billion. 

Roy Behren, co-manager of the Merger Fund, said in an email Tuesday the deal is likely to be completed as it is structured: “Some people are unhappy about the low premium but at this point given the strong support of management and founders we think it is unlikely” there will be a rival bidder.

Chevron stock has come under pressure since its disappointing third-quarter earnings release on Oct. 27. The adjusted earnings of $3.05 a share were down about 45% from what oil giant earned in the same period a year ago and about 20% below the consensus estimate. Chevron is facing higher costs at its big oil field in Kazakhstan and other issues.

Leggate wrote that, given the collapse in Chevron’s share performance over the past week, BofA expects some backlash from Hess investors, specifically about the deal’s announcement ahead of earnings.

Chevron unveiled the deal shortly before its weak third-quarter earning announcement and presumably knew the disappointing results were coming.

Should the company have pre-announced results to get the bad news out of the way and potentially reset its stock price? Leggate touched on this matter in his note, writing that getting out the news before the deal announcement might be expected as “normal protocol.”

While Chevron earnings missed consensus, Leggate wrote that Hess results were one of the strongest in several years, with momentum building on several fronts. “It is impossible to predict where HES & CVX relative share performance would sit today had the merger announcement come after earnings.”

Hess investors get to cash out in a tax-efficient way into a more diversified Chevron that has a 4%-plus yield against 1% for Hess.

And Hess stock has had a big run in the past five years on the back of its participation in a huge oil field off the coast of Guyana. Its stock has returned 22% annually (including dividends) over the past five years, double that of Chevron and the
Energy Select Sector SPDR ETF
(XLE).

Chevron and Hess had no immediate comment.

Corrections & Amplifications:

Chevron stock was trading near $167 before the deal for Hess was announced. An earlier version of this article incorrectly said it was trading at $145.93.

Write to Andrew Bary at andrew.bary@barrons.com