Chevron: Hess Acquisition Fills Long-Term Growth Gap With Prolific Guyana

Key Morningstar Metrics for Chevron

• Fair Value Estimate: $172.00
• Morningstar Rating: 3 stars
• Morningstar Economic Moat Rating: Narrow
• Morningstar Uncertainty Rating: High

Key Morningstar Metrics for Hess

• Fair Value Estimate: $176.00
• Morningstar Rating: 2 stars
• Morningstar Economic Moat Rating: Narrow
• Morningstar Uncertainty Rating: High

On Oct. 23, Chevron CVX announced its intention to acquire Hess HES for $171 per share, or $53 billion, in an all-equity deal (1.025 Chevron shares per Hess share) based on Chevron’s closing price on Oct. 20. With this, Chevron gains meaningful positions in Guyana and the Bakken (including Hess’ midstream assets), as well as smaller positions in the Gulf of Mexico and natural gas assets in Southeast Asia. Given its size and economics, Guyana is the most attractive of the group, and it is likely the key driver of the deal, as it adds a source of long-term growth that Chevron had been lacking.

We thought much of Hess’ potential from Guyana, including future exploration success, was already priced in, assuming $60/barrel oil in the long term. As such, we saw the shares as 40% overvalued before the announcement. Leaving our growth assumptions unchanged, the deal price implies a long-term oil price of about $80/bbl—pricey but not unreasonable. That said, it leaves less room for lower commodity prices and relies more on future exploration success from Guyana.

Despite the premium, we are not changing our fair value estimate for Chevron after incorporating the acquisition, given higher oil prices since our last update and including the value of the synergies. Based on the exchange ratio and our fair value estimate of $172 for Chevron, our fair value estimate for Hess has been raised to $176 per share.

The deal will weigh on Chevron’s return on capital employed, considering the step-up in asset value and likely sale of high-return assets. This means the company won’t achieve its prior target of greater than 12%, but it should still deliver double-digit returns. Nonetheless, our narrow moat rating is intact, as the softening in returns is offset by the addition of Hess’ assets, particularly Guyana, which adds to our confidence that Chevron will be able to deliver excess returns for the next decade.