In a bold move, Exxon Mobil (XOM.N) and Chevron (CVX.N), two of the largest U.S. energy giants, have chosen stock as the sole currency for their recent acquisition endeavors. This strategic shift allows them to execute transformative deals in a volatile oil and gas market. Chevron’s recent announcement of its $53 billion all-stock acquisition of Hess (HES.N) closely followed Exxon’s declaration of its $59.5 billion stock-based acquisition of Pioneer Natural Resources (PXD.N).
These mega-deals follow a trend of smaller all-stock acquisitions over the past three years, including Exxon’s $4.9 billion purchase of Denbury (DEN.N) and Chevron’s acquisitions of PDC Energy and Noble Energy for $6.3 billion and $5 billion, respectively. The decision to rely on stock as the primary mode of payment has been influenced by various factors, including volatile energy prices and the desire to align the interests of both acquiring and acquired companies.
Navigating Choppy Energy Markets
The energy market has been marked by uncertainty, driven by geopolitical turmoil, from Russia’s war in Ukraine to conflicts in the Middle East. This turbulence has resulted in fluctuating energy prices over the past two years. U.S. oil futures experienced a 7% increase this year, following a similar gain in 2022, while U.S. gas futures plummeted by about 35% after a 20% increase last year.
Amid this backdrop, the CEOs of companies being acquired have been reluctant to accept cash deals that could lock in a price they might later regret if energy prices rebound. Instead, opting for stock-based transactions allows acquired company shareholders to participate in the potential upside of the combined entity. Additionally, holding on to new shares rather than cash can provide tax deferral benefits.
A Win-Win for Shareholders
For CEOs like John Hess, who helms a company founded by his father in 1933, the decision to sell to Chevron made sense. He noted that the value of both companies had recently aligned with the trajectory of their shares, making it a mutually beneficial move. Shareholders of the acquired companies receive Chevron stock, enabling them to enjoy potential gains and higher dividends.
Hess shared that, following the deal’s completion, shareholders retaining their shares in the combined entity would witness their dividends rise from $1.75 to $6 per share. This represents a substantial increase in returns for investors.
Acquisition Strategies for Exxon and Chevron
Exxon and Chevron are strategically embracing these stock-driven acquisitions to mitigate the risks associated with exploring unproven energy reserves. As oil and gas resources become scarcer, the pressure to acquire peer companies skilled in operating within lucrative regions, such as the Permian Basin and Guyana, intensifies.
The Hess Deal and Valuation
The $53 billion acquisition of Hess represents a premium of just 4.9% over the company’s closing share price on the preceding Friday. This modest premium can be attributed to the already elevated valuation of Hess. Over the last three years, Hess shares delivered impressive returns of 330% to shareholders, including dividends. Morningstar analysts even noted that the shares were trading 40% above their estimated fair value.
In a similar fashion, Exxon secured Pioneer Natural Resources through an all-stock deal, offering just an 18% premium to Pioneer’s undisturbed share price. In contrast, when Chevron used cash for its $33 billion bid for Anadarko in 2019, it had to accept a much larger 39% premium.
Ultimately, Chevron lost the Anadarko deal to Occidental Petroleum (OXY.N), which outbid Chevron with a $38 billion offer. Since then, neither Chevron nor Exxon has employed cash in their acquisitions.
The Fate of Their Cash Piles
Relying exclusively on stock as a deal currency raises questions about the substantial cash holdings of Exxon and Chevron. As of the end of June, Exxon possessed $29.5 billion in cash, while Chevron had $9.3 billion.
The most apparent option for these companies is to return excess cash to shareholders, including those of the acquired entities. This approach, involving robust dividends and share buybacks, serves to compensate existing Exxon and Chevron shareholders for the dilution resulting from the all-stock acquisitions.
Chevron has already announced an 8% dividend increase in the first quarter, following a consistent 6% annual growth. Moreover, the company plans to buy back $20 billion worth of stock annually, a move that could offset the new shares issued in the Hess acquisition within just three years.
Exxon, on the other hand, has not revised its dividend plans since the Pioneer acquisition but has reiterated its commitment to buying back shares worth $17.5 billion annually for the next two years. This generous buyback program indirectly supports the all-stock deals by allowing the companies to gradually reduce their share counts after issuing new equity.
In a dynamic energy market characterized by uncertainty, Exxon and Chevron’s strategic use of stock-based transactions allows them to navigate volatility while positioning themselves for growth and sustainability. These transformative deals reshape the energy landscape and open new opportunities for investors and shareholders alike.
