DBRS Morningstar Comments on Chevron’s Announced Acquisition of Hess; Issuer Rating Unchanged at AA and the Oil and Gas Consolidation Wave Continues

DBRS Limited (DBRS Morningstar) notes that Chevron Corporation (Chevron or the Company) announced today that it has entered into an agreement to acquire Hess Corporation (Hess) in an all-stock transaction valued at $53.0 billion. The acquisition adds 385,000 barrels of oil equivalent per day (boe/d) of production and 1.256 billion barrels of proved reserves. Pro forma the acquisition, Chevron’s H1 2023 production increases by approximately 13% to 3.35 million boe/d and pro forma YE2022 proved reserves increase by 11% to 12.5 billion barrels. Chevron will also assume approximately $8.5 billion of Hess’s gross debt at close of the acquisition.

The acquisition diversifies Chevron’s upstream business by adding strong assets in both the Bakken Shale and offshore Guyana and strengthening its position in the Gulf of Mexico. In particular, offshore Guyana, Hess has participated in one of the largest light oil discoveries in the last decade with a long reserve life, low development costs, and a favourable emissions profile. DBRS Morningstar also notes that the Company has established a large position in the Denver-Julesberg basin through the acquisition of PDC Energy Inc. in August 2023. As a result, Chevron’s medium-term production growth rate is likely to be higher than its current guidance of 3%. While slightly positive, the acquisition is not material enough to change the Company’s business risk profile, which is already very strong. DBRS Morningstar notes that the Company expects to increase capital expenditure and shareholder distributions post-close of the acquisition. The acquisition will increase total debt. Nevertheless, the Company’s financial risk profile is strong and it has adequate headroom to accommodate the added debt. DBRS Morningstar expects Chevron to maintain a net debt-to-capital ratio within its targeted range of 20% to 25% (pro forma Q2 2023: 9.8%) and expects the Company's key credit metrics to remain supportive of the credit rating. Overall, DBRS Morningstar’s Issuer Rating on Chevron remains unchanged at AA with a Stable trend.

DBRS Morningstar notes that the Hess acquisition is the latest in a wave of significant merger and acquisition (M&A) transactions by the oil majors, following on the heels of ExxonMobil Corporation’s recently announced $59.5 billion purchase of Pioneer Natural Resources Co. The consolidation wave indicates that oil majors view oil and gas as being a key part of the energy mix well into the next decade. It also demonstrates that these companies are increasingly looking to gain scale more through acquisitions versus organic growth, and, typically, these large-scale acquisitions enable acquirers to gain efficiencies.

Moreover, DBRS Morningstar notes that the emissions profile of the assets being acquired appears to be a key consideration, with the sellers having relatively lower emissions profiles. While large, the M&A transactions have been funded primarily with equity, and the impact on credit profiles has been neutral to marginally positive. DBRS Morningstar expects consolidation in the industry to continue with equity being employed as the preferred mode of payment.

Notes:
All figures are in U.S. dollars unless otherwise noted.

Information regarding DBRS Morningstar credit ratings, including definitions, policies, and methodologies, is available on www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.

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