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Is Chevron's (CVX) $53B Acquisition of Hess in Jeopardy?

Chevron's CVX proposed $53 billion buyout of Hess Corporation HES has encountered significant turbulence stemming from legal disputes and shareholder advisory disagreements. The acquisition, which would grant Chevron a substantial stake in the lucrative Stabroek Block offshore Guyana, is mired in uncertainty due to ExxonMobil’s XOM claims and mixed advisory opinions.

Let’s delve into the complexities surrounding the deal and assess its prospects.

Conflicting Stance by Investor Advisories

Institutional Shareholder Services (‘ISS’) has recommended that Hess shareholders abstain from voting, citing the unresolved arbitration initiated by ExxonMobil over its right of first refusal (“ROFR”) on Hess’ Guyanese assets. ISS argues that shareholders cannot make an informed decision without knowing the arbitration outcome, which could be dragged till 2025.

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Notably, HBK Capital Management, a major Hess shareholder, is also looking to refrain from voting, aligning with ISS’ recommendation. HBK argues that HES shareholders bear the arbitration risk and should be compensated accordingly.

On the other hand, Glass Lewis advises shareholders to support the deal, emphasizing the strategic and financial benefits of merging with Chevron. Glass Lewis contends that the merger offers a reasonable valuation and potential upside for Hess shareholders despite the arbitration uncertainty.

The ExxonMobil Factor

ExxonMobil’s involvement adds a significant layer of complexity. XOM, which operates the Stabroek Block and owns a 45% stake, claims it has a ROFR on Hess’ 30% stake. ExxonMobil’s CEO, Darren Woods, has highlighted that the arbitration could extend to 2025, suggesting a prolonged period of uncertainty.

ExxonMobil’s challenge is based on a joint operating agreement (“JOA”) that purportedly grants it pre-emption rights if Hess’ stake changes hands. However, Chevron and Hess argue that the structure of their corporate merger does not trigger these rights. The arbitration will ultimately hinge on the precise wording and interpretation of the JOA, which remains confidential.

Political and Regulatory Hurdles

The deal also faces scrutiny from political figures and regulatory bodies. U.S. Senate Majority Leader Chuck Schumer has urged the Federal Trade Commission (“FTC”) to block the acquisition, citing concerns that it could lead to higher gasoline prices for consumers. Schumer’s intervention reflects broader political resistance to consolidation among major oil companies, which could influence the regulatory review process.

Will the Deal Go Through?

The outcome of Chevron’s bid for HES hinges on several unpredictable factors. The main problem is the Zacks Rank #3 (Hold) company’s legal dispute with ExxonMobil, which could either delay or completely stop the merger. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Additionally, conflicting advice from two advisory firms, ISS and Glass Lewis, is confusing shareholders as they prepare to vote on May 28. Political and regulatory challenges also add to the uncertainty, especially with possible actions from the FTC. Although Glass Lewis supports the merger, the legal and regulatory obstacles cannot be ignored.

Given the current situation, the fate of the Chevron-Hess deal hangs in the balance, depending largely on the legal interpretations and regulatory decisions that lie ahead.

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Chevron Corporation (CVX) : Free Stock Analysis Report

Exxon Mobil Corporation (XOM) : Free Stock Analysis Report

Hess Corporation (HES) : Free Stock Analysis Report

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Zacks Investment Research