Chevron's Acquisition Of Hess Corp. Sends Ripples Through Energy Sector: Reasons Behind Stock Price Dip

Chevron Corp. CVX, the second-largest oil company in the United States after Exxon Mobil Corp. XOM, sent shockwaves through the market with its announcement of a planned acquisition of Hess Corp. HES on Monday. However, the market’s initial response has been far from enthusiastic.

On the day of the announcement, Chevron’s shares experienced a drop of 3%, making it one of the day’s worst-performing U.S. energy stocks, as tracked by the Energy Select Sector SPDR Fund XLE.

Chart: Price Action of Chevron Corp. Following the Announcement of Hess Acquisition

Why Are Chevron Shares Falling?

The acquisition offer unveiled by Chevron specifies a purchase price of $171 per share for Hess Corp. Shareholders of Hess will receive 1.025 shares of Chevron for each Hess share they hold. This offer represents a 5% premium over the closing price of Hess shares, which stood at $162.64 the previous Friday.

The deal’s estimated value stands at a substantial $53 billion, coming close in scale to Exxon’s recent acquisition of Pioneer for $60 billion, securing its position as the second-largest deal of the year.

In a press release, Chevron stated, “The acquisition of Hess upgrades and diversifies Chevron's already advantaged portfolio.”

Hess operates in two segments: oil exploration and production, and midstream. The company primarily conducts production operations in the United States, Guyana, the Malaysia/Thailand Joint Development Area, and Malaysia. In addition, it engages in exploration activities primarily offshore in Guyana, the U.S. Gulf of Mexico, and offshore Suriname and Canada. The company also plays a role in gathering, compressing, and processing natural gas, as well as fractionating NGLs.

Chevron’s Chairman and CEO, Mike Wirth, commented, “This combination positions Chevron to strengthen our long-term performance and further enhance our advantaged portfolio by adding world-class assets.”

Chevron is scheduled to release its third-quarter earnings results on Friday, Oct. 27.

Read also: Chevron, Hess CEOs See ‘A Lot Of Upside’ For Shareholders Following $53B Deal

The Wider Impact On Oil & Gas Sector

Chevron’s underperformance on Monday is reflective of a broader trend within the energy sector, where negative price movements were observed.

The primary factor behind the weakness in energy stocks is the decline in oil prices.

The West Texas Intermediate (WTI) crude benchmark saw a 2% drop, trading at $86 per barrel. This decline is attributed to concerns over an economic slowdown due to the ongoing crisis in the Middle East, as well as the United States considering easing sanctions on Venezuela, a move expected to boost its oil production.

Occidental Petroleum Corp. OXY experienced the most significant decline of the day, falling by 3.5%. Within the Energy Select Sector SPDR Fund, Schlumberger N.V. SLB was up 0.5%, Baker Hughes Company BKR was trading 0.8% lower, and Diamondback Energy Inc. FANG was flat at the time of publication Monday.

Now read: S&P 500 Breaches 200-Day Average As Treasury Yields Hit 5%: Analyst Says The Primary Trend Is ‘Down’

Photo: Shutterstock