Arbitration Panel Review of Hess’s Value in Chevron-Exxon Dispute

By Sabrina Valle

(Reuters) – An arbitration panel will evaluate the significant value of Hess’s oil assets in Guyana amidst a contentious situation between Exxon Mobil (NYSE:XOM) and Chevron (NYSE:CVX).

Chevron’s acquisition offer of $53 billion for Hess last October represents one of the largest deals in recent oil industry consolidation. A crucial asset for Chevron in this acquisition is Hess’s stake in an Exxon-operated Guyana oil field.

Exxon and China’s CNOOC (NYSE:CEO), both partners in the venture, have contested the deal claiming they hold a contractual first right to purchase Hess’s stake, an issue that will be arbitrated by a three-member panel.

Exxon argues that the panel’s appraisal of the Guyana asset’s value is vital to its assertion that the transaction is merely an asset acquisition presented as a merger. Exxon contends that due to the asset’s immense value, the merger would trigger a change in control, granting them and CNOOC the first refusal rights.

In contrast, Chevron and Hess assert that the valuation of the Guyana asset should not influence the arbitration process; they believe there is no change in Hess’s control over its Guyana unit.

Valuation can be a lengthy and critical phase in these disputes, stated Christopher B. Strong, an executive at the Association of International Energy Negotiators (AIEN) and a partner at Vinson & Elkins, who has worked with Exxon.

Hess’s 30% stake in the Stabroek offshore Guyana joint venture holds approximately 11.6 billion barrels of discovered oil and gas. The consortium—Exxon (45% stake), CNOOC (25%)—operates all of Guyana’s production, which yielded $6.33 billion in profits last year from 137 million barrels, and is expected to increase significantly by 2027.

Earlier this year, Exxon CEO Darren Woods indicated he would contemplate a counterbid for part or all of Hess’s stake following the arbitration’s agreement and established pricing. Analysts project that Hess’s Guyana asset comprises about 70% of Chevron’s $53 billion offer.

The arbitration’s outcome hinges on whether there’s a change of control with Hess. The deal is structured to maintain Hess intact as a Chevron affiliate according to both companies.

“Exxon and CNOOC continue to disregard the operating agreement’s clear text, while Chevron and Hess are confident the panel will find that the Stabroek right of first refusal doesn’t apply to the merger,” the companies stated.

Chevron’s CEO, Michael Wirth, recently dismissed the potential for compromise with Exxon and CNOOC, noting halted discussions post-arbitration filing. “A compromise likely won’t be the outcome,” Wirth said.

Should the panel affirm the right of first refusal, Hess has communicated it will not sell its Guyana stake to Exxon or CNOOC, intending to remain independent if the Chevron deal fails.

Chevron finds itself under pressure, as its profits have seen a downturn over the past six quarters. Its shares have dropped 8.7% compared to a 7.7% rise in Exxon’s price over the last year.

Exxon recently completed its $60 billion acquisition of Pioneer Natural Resources (NYSE:PXD), the most prominent acquisition in this latest consolidation phase, assisting Exxon in reporting substantial quarterly earnings, significantly outperforming Chevron.

Analyst Paul Sankey stated, “Exxon is in remarkable shape now, the best it’s been in decades.” Meanwhile, Wirth is recalibrating Chevron’s operations, moving their headquarters to Texas and seeking $15 billion through asset sales after the Hess deal’s completion.

Although Wirth aimed for the deal’s closure in the first half of 2024, delays hinder Chevron’s cost-saving and synergy benefits, additionally disadvantaging Hess shareholders from Chevron’s higher dividends, which incentivized the deal.

A closing pushed to the latter half of 2025 could pressure Chevron into negotiations that diminish anticipated deal advantages, analysts suggest. However, if the valuation exceeds Exxon’s expectations, it could complicate a potential counterbid.

Analyst Roy Behren noted, “Exxon’s creating uncertainties that may prompt Chevron to concede some economic benefits to resolve this matter promptly.”