LatAm Insights: The impact of ExxonMobil's arbitration move on Chevron, Hess and Stabroek

Insights

/

Commentary

The impact of ExxonMobil's arbitration move on Chevron, Hess and Stabroek

ExxonMobil's move to start arbitration proceedings over Chevron's proposed entry to the prized Stabroek Block off Guyana through its $60 billion deal to acquire Hess could impact the timelines for the two latest planned developments on the prolific tract. Chevron's all-stock acquisition of Hess, announced in October 2023, hit a significant obstacle around the latter's 30% stake in Stabroek, with existing block partners ExxonMobil and CNOOC asserting their right of first refusal (ROFR) or pre-emption rights and starting an arbitration process. Hess' 30% working interest in Stabroek is undoubtedly a significant driver behind Chevron's acquisition of the US independent, as we estimate the Guyana portfolio brings in nearly 4.5 billion barrels of oil equivalent (boe) of resources valued at around $42.5 billion.

Background and possible outcomes

Chevron agreed on 23 October last year to acquire Hess for $60 billion, including $53 billion to be paid in equity and the remaining being the assumption of Hess’ debt. The key assets owned by Hess include its 30% stake in the Stabroek Block as well as its US shale assets in the Bakken play and conventional assets in the US Gulf of Mexico. In response to Chevron's acquisition plans, fellow US major ExxonMobil – which operates the block on 45% – recently filed an arbitration at the International Chamber of Commerce in Paris to ascertain its ROFR for Hess’ 30% stake as reportedly mentioned in the joint operating agreement for the block. It should be noted that the arbitration filed by ExxonMobil is to ascertain the validity of the ROFR mentioned in the joint operating agreement pertaining to the block. Only after the conclusion of this arbitration proceeding a decision from any of these parties to exercise their pre-emption rights be expected.

Meanwhile, in response to this ROFR claim, Chevron and Hess stated in a US Securities & Exchange Commission (SEC) filing that they believe the ROFR does not apply to the merger due to the structure of the merger agreement between Chevron and Hess and the language of the ROFR provisions in the joint operating agreement. However, if the outcome of the arbitration proceeding is in favor of ExxonMobil and 25% Stabroek Block partner CNOOC, Chevron’s merger agreement with Hess will be cancelled, with Hess remaining as an independent public company and retaining its stake in Stabroek. For Chevron, this could mean the company looks for growth opportunities elsewhere, with the US shale patch emerging as a strong candidate as it provides access to similar, relatively short-cycle projects and would help the company avoid such ROFR-related challenges.

Another potential scenario could be that all the parties reach a settlement allowing the Chevron-Hess deal to go through as planned. While there is no indication on this approach being the preferred solution, it could be interesting to see if and how this settlement takes shape. Should the arbitration ruling adjudge the right of first refusal (ROFR) to be valid, potential options could include existing partners in the Stabroek Block receiving a cash consideration to refrain from exercising their ROFR; or Chevron carrying some of ExxonMobil and CNOOC’s costs related to planned future developments at Stabroek.

Stabroek valuation based on comparable transactions

Of the $60 billion that Chevron is paying to acquire Hess, we estimate that around $42.5 billion is attributed to Hess’ Guyanese portfolio, which accounts for nearly 4.5 billion boe of resources – with nearly 40% of this attributed to future projects in Stabroek. According to these estimates, the value paid by Chevron to acquire nearly 4.5 billion boe of resources in Hess’ Guyanese portfolio comes out at around $9.5 per boe, which is 40% higher than the weighted average resource metric of $6.8 per boe observed across five deepwater acquisitions in South America since 2022.