Hess is in the process of being acquired by Chevron. A Chevron gas station in Las Vegas.
Bridget Bennett/BloombergHess offers investors a cheap way to get exposure to Chevron.
There are risks since the payoff hinges on Chevron’s pending acquisition of Hess, but the odds of the deal getting completed around midyear look good.
Hess stock trades at a roughly 7% discount to the current value of Chevron’s all-stock offer for the energy company.
Chevron announced its deal for Hess—initially valued at $60 billion—on Oct. 23, with the company agreeing to swap 1.025 of its shares for every Hess share.
The arbitrage spread initially was tight as Hess stock traded at $161, a slight premium to Chevron, which then changed hands at $160.
Hess now trades at a $6 a share discount to Chevron with Hess up 0.7% Thursday to $141.50 and Chevron 0.3% higher at $147.89. The current value of the deal is about $151.50 per Hess share (1.025 times $147.89), Barron’s calculates. Hess holders stand to make about $10 a share, or a 7% gross return, assuming the deal closes and the two stock prices remain the same, Barron’s estimates. Arbitragers would buy Hess and sell short Chevron to capture the spread.
The annualized return of the arbitrage trade is considerably higher than 7% assuming the deal closes around June 30 since the investor would earn that return in less than six months. Chevron said in announcing the deal that it aims to complete the transaction in the first half of this year.
The Hess/Chevron arbitrage spread is wider than on the other big oil merger around the same time— Exxon Mobil’s deal for Pioneer Natural Resources. Pioneer stock, which fell 0.6% to $228.55 Thursday, trades at a roughly 4% discount to the value of Exxon’s all-stock offer, Barron’s estimates. Exxon’s stock was down 0.4% Thursday to $102.42.
The Hess/Chevron arbitrage spread has widened in part because of threats from Venezuela’s leader, Nicolás Maduro, against Guyana, the country where sits Hess’s most valuable asset, a 30% interest in a giant offshore oil field managed by Exxon Mobil.
“We believe it is mispriced,” Roy Behren, co-manager of the Merger fund, tells Barron’s in an email, referring to the Hess/Chevron arbitrage. He says the current price of Hess implies a roughly 65% chance of the deal being completed. He thinks the actual chances are higher than that.
Figuring out implied odds of merger completion is an art rather than science because it involves an estimate of where Hess would trade if the deal falls apart.
Behren is assuming about $116 a share, which is considerably below Hess’ pre-deal price of about $163 a share. Assume a higher “break” price for Hess of say, $130 a share, if the deal doesn’t happen and the and the risk/reward of owning Hess tips more toward the investor.
Chevron’s deal for Hess failed to impress Wall Street where investors worried about the high price for what amounts to a single asset company—especially after Venezuelans approved a resolution in December that asserted sovereignty over much of oil-rich Guyana.
Behren wrote that the Merger fund has consulted with several international experts who say that Venezuela likely won’t take military action against Guyana. After the Venezuelan resolution, the leaders of the two countries met and pledged to maintain peaceful relations. Behren doesn’t see antitrust problems with the deal.
In announcing the deal last October, Chevron called the Guyana oil field an “extraordinary asset with industry leading cash margins and low carbon intensity that is expected to deliver production growth into the next decade.” Exxon Mobil has estimated the Guyana field reserves at more than 8 billion barrels of crude equivalent, making it one of the largest in the world.
Chevron reports its fourth-quarter results Friday and CEO Mike Wirth could address the merger on the company’s conference call.
Write to Andrew Bary at andrew.bary@barrons.com
