By Sabrina Valle
(Reuters) – An arbitration panel that will decide a high-profile clash between ExxonMobil (NYSE:) and Chevron (NYSE:) will delve into the secret value of Hess’s (NYSE:) oil wealth in Guyana, four people familiar with the matter said.
Chevron last October offered to pay $53 billion for Hess, one of the two largest deals in the oil industry’s biggest wave of consolidation in decades. Chevron’s most coveted asset in the takeover is Hess’ stake in a Guyana field operated by top US rival Exxon.
Exxon and China’s CNOOC (NYSE:), another partner in the venture, have challenged the deal and claimed a contractual first right to buy Hess’ stake in the field, a matter to be decided by a three-member arbitration panel.
Getting the panel to consider the estimated value is central to Exxon’s claim that the deal is an asset acquisition disguised as a merger. Exxon believes its assets in Guyana are so valuable that the merger would trigger a change of control and give Exxon and CNOOC a right of first refusal on asset sales, the people said.
On the other hand, Chevron and Hess do not believe that Guyana’s valuation will have any impact on the panel’s opinion on the contract arbitration. Their position is that Exxon’s point does not apply because there has been no change in Hess’ control of his Guyana unit, people familiar with their thinking said.
Valuation can be a crucial and lengthy step in change-of-control disputes, says Christopher B. Strong, vice president at the trade group Association of International Energy Negotiators (AIEN) and a partner at law firm Vinson & Elkins, which has done work for Exxon. .
The prize in the competition is Hess’s 30% stake in the Stabroek joint venture off the coast of Guyana, with some 11.6 billion barrels of oil and gas discovered to date. The consortium, which includes Exxon with a 45% stake and CNOOC with 25%, operates all of Guyana’s production and earned $6.33 billion in profits last year by pumping 137 million barrels of oil. This production is expected to more than triple by 2027.
Exxon CEO Darren Woods told Reuters earlier this year that he would consider a counter-offer for all or part of Hess Guyana’s shares, but only after the arbitration panel accepts his first right claim and a price is set.
Woods’ position remains unchanged, people familiar with his thinking said this month. Wall Street analysts estimate that Hess Guyana represents about 70% of Chevron’s $53 billion offer.
NO COMPROMISE
The case hinges on whether there will be a change of control in Hess Guyana. The deal is structured so that Hess remains intact and becomes a subsidiary of Chevron, the two companies said.
“Exxon and CNOOC continue to ignore the plain language of the operating agreement, and Chevron and Hess remain confident that the arbitration will confirm that the Stabroek ROFR (right of first refusal) does not apply to the merger,” the companies said in response Reuters questions.
Chevron CEO Michael Wirth recently rejected the chance for a compromise with Exxon and CNOOC. The companies had held talks earlier this year, but they were halted when Exxon filed the arbitration case.
“It doesn’t seem like this is the way this is going to end,” Wirth said on August 2.
However, if the panel accepts that the right of first refusal applies, Hess has said it will not sell its stake in Guyana to Exxon or CNOOC. Hess will remain independent if the Chevron deal is quashed, CEO John Hess said earlier this year.
PRESS CHEVRON
Chevron could use a boost in Guyana. Earnings have fallen year-over-year for the past six quarters. The share price has fallen 8.7% over the past 52 weeks, compared with a 7.7% rise at rival Exxon.
In May, Exxon completed its $60 billion acquisition of the largest U.S. shale oil producer Natural resources pioneer (NYSE:), the largest acquisition in the latest wave of consolidation. The deal allowed Exxon to generate $9.24 billion in revenue in the second quarter, more than double Chevron’s profit over the same period.
“(Exxon) is in the best shape I’ve seen it in 20, 25 years. It has put itself in a remarkable position,” said oil analyst Paul Sankey.
Meanwhile, Chevron’s CEO is shaking up the company, replacing lieutenants and moving its headquarters from California to Texas. Wirth also aims to raise up to $15 billion from asset sales after the Hess deal closes.
He had hoped to close the deal in the first half of 2024, and the delay is hampering Chevron’s ability to achieve cost savings, headcount and operational synergies, in addition to a slowdown in asset sales. Hess shareholders miss out on Chevron’s much higher dividend payments, which was a lure for the deal.
A shutdown in the second half of 2025 could put pressure on Chevron for a settlement that reduces promised deal benefits, analysts and investors said. But if the valuation turns out to be higher than Exxon expects, a counteroffer could also become more expensive.
“Exxon may be creating enough uncertainty in the situation that it will be worth it for Chevron to perhaps give up some economics to get this thing resolved,” said Roy Behren, co-president of Westchester Capital Management, which has invested nearly $226 million owned. in Hess stock at the end of June, according to LSEG.
