What do we know about the Chevron-Hess and Exxon-Pioneer acquisitions?
Exxon and Chevron, the two largest US oil and gas producers, both announced major acquisitions valued at more than $50 billion each in October.
News broke in late October that Chevron, the number two oil and gas producer in the US, struck a deal to acquire Hess for $53 billion. The agreement comes at the heels of Exxon’s own $60 billion acquisition of Pioneer, giving the two largest US oil producers even greater stakes in domestic oilfields and ensuring low-cost production in the near future.
The deals give both firms a larger share of North American shale regions, which has become the preferred strategy for expanding business operations instead of investing in new research and development opportunities.
This strategy is different from UK rivals like Shell and BP, who are investing heavily in renewables as the transition to green energy continues to gain political and economic support.
US companies are focused on maintaining profits and increasing shareholder value through consolidation, share buybacks and increased dividends. It’s a viable strategy for decades to come, even as the sector approaches what the International Energy Agency calls “the beginning of the end of the era of fossil fuels.” The agency predicts energy consumption will remain above 100 million barrels per day (bpd) for more than a decade, meaning US firms have ample time to drive up shareholder profits.
Keep reading as we examine both deals in more detail and evaluate implications for the oil and gas sector as a whole. Want to trade more business news including mergers, acquisitions and IPOs? Visit our IPO trading page.
Chevron announced its deal to buy Hess Corp for $53 billion on October 23. The all-stock deal, expected to close in early 2024, will also transfer over the smaller company’s $15 billion in net operating losses from previous years. This strategic acquisition will allow Chevron to lower its tax rate significantly as allowed by the 1918 Revenue Act.
The act allows companies to carry losses forward as tax benefits. It’s an advantage Hess wasn’t able to take itself, as its low profits weren’t large enough to garner tax bills big enough to qualify for the deal. According to Reuters, the additional operating income and tax benefits secured through the acquisition could net Chevron an estimated $400 million annually in additional cash flow.
In addition to tax benefits, the Hess deal also diversifies Chevron’s asset portfolio. The Hess acquisition provides expansion into the Stabroek block of Guyana, and other recent mergers with PDC Energy and Noble Energy expand Chevron’s region in the US Gulf of Mexico and North Dakota.
Chevron has stated intentions to increase share buybacks to $20 billion annually and its dividends by 8% if oil prices remain high. CEO Mike Wirth stated he expects the free cash flow for both Chevron and Hess to “more than double over the next five years.”
Exxon Mobil’s deal to buy Pioneer Natural Resources, a US rival, was finalised on October 11. The all-stock deal was valued at $59.5 billion and is expected to close in early 2024.
Exxon claims the acquisition will increase output by 700,000 bpd by 2027, bringing the company’s total bpd to 2 million. It’s Exxon’s biggest deal since acquiring Mobil Oil for $81 billion in 1998.
The Exxon acquisition is just another element of the oil giant’s strategy to generate new oil and gas opportunities by acquiring existing productions rather than investing in new research and development projects.
Pioneer is the biggest producer in the Permian basin, accounting for 9% of gross production in the US’s largest oilfield. Prior to the acquisition, Exxon is the fifth largest with 6% of gross production. Post-merge, Exxon will sit well above its competitors in terms of Permian shale production.
How to trade the Chevron and Exxon Mobil acquisitions:
While neither deal has closed yet, you can trade both Chevron and Exxon Mobil with FOREX.com via these easy steps:
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What’s next for US oil and gas?
The acquisitions announced last month mean both companies gain access to new oil reserves and larger market shares that will allow these companies to uphold profits, increase dividends and continue share buybacks.
Firms like Exxon and Chevron are already so invested in the oil industry, it would be costly to transition to renewables—a new field cluttered with flashy, new energy firms and, so far, lower profits.
While political and economic pressure is moving towards green energy, demand for oil and gas is surging due to geopolitical conflicts affecting supply and demand following Russia’s invasion of Ukraine in 2022 and the Gaza-Israel conflict.
Chevron’s recent acquisitions of Hess, PDC and Noble will expand the firm’s total output to 3.7 million bpd, with its shale output expanding 40% to 1.3 million bpd. Meanwhile, Exxon’s shale output is expected to rise by 700,000 bpd within four years.
Chevron CEO Michael Wirth told Reuters more acquisitions should be expected in the industry, “We’ve got too many CEOs per barrels of oil equivalent, so consolidation is natural.” Market analysts advise both deals remain below guidance thresholds set by anti-trust regulations, increasing the likelihood they’ll close.
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