Hess Corporation (CVX) Earnings Call Transcript & Summary

Good morning. My name is Katie, and I will be your conference facilitator today. Welcome to Chevron's conference call to discuss its proposed acquisition of Hess. [Operator Instructions] As a reminder, this conference call is being recorded. I will now turn the conference call over to the General Manager of Investor Relations at Chevron, Jake Spiering. Please go ahead.

Thank you, Katie. Good morning, and welcome to this special call to announce a significant proposed combination. I'm Jake Spiering, General Manager of Investor Relations at Chevron. And with me today are Chevron's Chairman and CEO, Mike Wirth; Hess' CEO, John Hess; and Chevron's CFO, Pierre Breber. We'll refer to the slides and prepared remarks that are available on Chevron's website. Before we begin, please be reminded that this presentation contains estimates, projections and other forward-looking statements. Please review the cautionary statement on Slide 2. Now I will turn it over to Mike.

Thanks, Jake. Good morning, everyone. I'm pleased to announce that Chevron has entered into a definitive agreement to acquire Hess, a premier exploration and production company with ownership in the industry's most attractive, long-lived growth asset in Guyana and a focused portfolio elsewhere that complements Chevron's. This combination is aligned with our objective to safely deliver higher returns and lower carbon. We expect the transaction will become accretive to cash flow per share in 2025 after achieving synergies and start-up of the fourth FPSO vessel in Guyana. We've identified $1 billion of run rate cost synergies that we expect to realize within a year of closing. In addition, Hess increases Chevron's estimated production and free cash flow growth rates over the next 5 years and is expected to extend our growth profile into the next decade, supporting our plans to increase our peer-leading dividend growth and share repurchases. Equally as important, the combination will further strengthen our most important resource, the people who safely deliver energy to the world every day. We look forward to combining Hess' talented workforce with ours. Hess shareholders will receive 1.025 Chevron shares for each Hess share as consideration, which represents a 10.3% premium over the 20-day average closing price. This is Chevron's third upstream deal since the pandemic with a premium around 10%, showing consistent discipline. The first two were immediately accretive. This transaction transforms our portfolio and is expected to generate longer-term free cash flow growth that supports increased return of capital and outweighs short-term earnings per share dilution in the low- to mid-single digits. And I'm very pleased that John Hess is expected to join Chevron's Board of Directors. John is a highly respected industry leader with a record of value creation and strong relationships with governments and partners. I look forward to working with John as we bring our 2 companies together and safely deliver lower carbon energy to a growing world. The Stabroek block in Guyana is a world-class resource with over 11 billion barrels of oil equivalent of gross discovered recoverable resource from the industry's largest oil discovery in the last decade. Hess' share of net production is approximately 110,000 barrels per day at industry-winning cash margins with low carbon intensity, a winning combination. And that's just from the first 2 FPSOs with 3 more currently under development. There's potential for up to 10 FPSOs which is expected to drive production growth into the next decade. And there's exploration upside potential with 10 to 12 wells planned for 2024. Given past success, this bodes well for further resource growth. We intend to continue partnering with the government of Guyana to create shared prosperity and value for the country and its people. In the Bakken, Hess holds a strong acreage position with a long queue of economic future drilling locations that will be added to Chevron's advantaged shale and tight portfolio. Hess' assets in the Gulf of Mexico are complementary to Chevron's in a basin we know well, and we foresee a long future underpinned by more exploration success. Southeast Asia assets provide predictable financial performance from natural gas contracts with oil-linked pricing. This combination will further strengthen and diversify our already advantaged portfolio. Guyana is an exceptional and differentiated asset that adds significant resource inventory in the deepwater, complementing Chevron's existing deepwater assets around the world. The Bakken adds another prolific U.S. shale basin to our leading positions in the DJ and the Permian. We expect it will benefit from Chevron's advancements in technology and performance as a way to further improve recoveries and enhance returns. Southeast Asia brings a regional gas business where we have a long history, adding to our advantaged gas positions in Australia and the Eastern Med. The resulting portfolio is deep with projected high cash margin and lower carbon intensity production, diversified across asset types and geographies balanced between short- and long-cycle investments and durable with fields in both plateau and growth stages. More than 75% of our upstream CapEx is expected to be focused on these 8 assets positioning Chevron to deliver durable free cash flow growth into the next decade. With a stronger combined portfolio, we expect to further high grade and generate about $10 billion to $15 billion in before tax proceeds from asset sales through 2028. Some of the asset sale candidates generate high returns, and the step-up in Hess' book value will also affect ROCE. After closing, we'll target to sustain a double-digit ROCE at mid-cycle prices. Since walking away from Anadarko in 2019, through the expected closing of the Hess transaction next year, Chevron will have created new, significant reserve and resource positions in the DJ Basin, Eastern Mediterranean, Bakken and Guyana, building on our positions in Australia, Kazakhstan, the Permian Basin and offshore Gulf of Mexico. These low premium deals have diversified and strengthened Chevron's upstream business. Going forward, Chevron's production growth rate is expected to be higher than our current guidance, and we also expect it can be sustained for longer. We'll provide updated guidance after developing a combined business plan post-closing. Also, we will have acquired each of these assets when they were free cash flow positive or on the cusp of it. After we add projected free cash flow growth through investments in TCO, the Permian and Gulf of Mexico and renewable fuels and pet-chem facilities, we expect free cash flow to more than double by 2027, and Guyana is expected to underpin further growth into the 2030s. At Chevron, we believe the future of energy is lower carbon. And this combination adds low carbon intensity assets that are expected to be accretive to our 2028 oil and gas targets. Hess has lowered their carbon intensity over the past several years, and Chevron intends to remain one of the most carbon efficient producers. We are continuing to find ways to meet today's demand with both traditional and new energy supplies that have lower carbon intensity and are still affordable and reliable. Portable energy is vital for economies to flourish. Reliable energy is essential for national security, and we all have a stake in a lower carbon future. With higher expected free cash flow growth, Chevron intends to return more cash to shareholders, consistent with our long-standing financial priorities. Over the past 5 years, Chevron has grown its dividend per share by a 6% compounded annual growth rate, more than double the rate of the closest integrated peer. In January, and subject to the Board of Directors' approval, we expect to recommend an 8% increase to our first quarter dividend per share to $1.63, supported by immediate free cash flow from PDC Energy and longer-term projected free cash flow growth from Hess. Post closing, we also intend to increase our buyback to the top of the guidance range of $20 billion per year or $5 billion of the quarter. This reflects an even bigger and better upstream and is consistent with our Investor Day upside price scenario. Under SEC regulations, share repurchase volumes would be restricted for a period of time prior to closing. The midpoint of the CapEx range equals the consensus outlook for both companies. We will maintain our commitment to capital discipline with CapEx about half the levels from a decade ago and as a larger and more diversified company following 4 acquisitions. Post closing, we will continue to maintain a strong balance sheet and Chevron will remain built for $50 Brent, projected to cover both CapEx and dividend at that level. While we're currently in an upside price cycle, we will remain well prepared and positioned for a downside scenario. Before I turn it over to John, I want to close with the final point. The Upstream is a resource depletion business, where fields grow, mature and then decline. John and I know this for many decades in the industry. Chevron has led its integrated peer group in reserve replacement for the past 3, 5 and 10 years. And Hess has been part of the greatest series of discoveries in the industry's recent history with unmatched growth and duration potential. The combined company is expected to have resource inventory depth into the next decade, much further than we can usually see with confidence in our business and the operational, technical and financial capabilities to continue to safely deliver lower carbon energy to a growing world. Now I'll hand it over to my friend and future Board member, John Hess.

Thank you, Mike. I'm honored to be here with you today, and I'm very excited about the strategic combination of our 2 great companies, and I look forward to the opportunity to join Chevron's Board. Our company is celebrating our 90th anniversary this year. We have a proud long history that started with my father delivering fuel oil with a second-hand truck during the Depression. Over the last 90 years, we have always been guided by making the right long-term decisions for our company and our shareholders. This strategic combination is compelling and the right decision for our future. Hess has the best growth portfolio in the industry, including Guyana, the world's largest oil discovery in the last 10 years with a low cost of supply and a low carbon intensity and the Bakken Shale, where we are a leading oil and gas producer. Chevron is one of the world's largest and most respected energy companies with a world-class diversified portfolio of assets, one of the industry's strongest balance sheets and one of the industry's highest cash return profiles. Also Chevron has one of the best CEOs in the industry, my friend, Mike Wirth. Like Hess, Chevron is also a values-led company. There is a strong cultural fit for our people, and we share a deep commitment to making a positive social impact in the communities where we do business and to investing in the energy transition. I believe our strategic combination creates a company that is stronger in every respect with a leadership, asset portfolio and financial resources to deliver significant shareholder value for years to come. Mike, thank you. I look forward to working with you in the years ahead. And I'll now turn the call over to Jake.

That concludes our prepared remarks. We are now ready to take your questions. Please limit yourself to only one question to enable everyone in the queue an opportunity. We will do our best to get all of your questions answered. Katie, please open the line.

[Operator Instructions]. We'll take our first question from Neil Mehta with Goldman Sachs.

Yes. Great. And congratulations, John, and congratulations to Mike and John, thank you for all the guidance over the years and wish you well in the next role. My question is, in the appendix you break out a little bit here on synergies and would love you guys to dig into that. It looks like there's a put option dynamic, a little bit around NOLs and G&A. So if you could just talk about confidence interval around synergies and how we should be thinking about opened.

Sure, Neil. Thanks for the kind comments. We've identified about $1 billion in cost synergies 1 year after the close. More than half of that is through the typical corporate costs, things you would expect insurance, public company costs, exploration, et cetera. And then the remainder, as you mentioned, is related to some tax items and savings on put options. The tax benefits are expected to result from the combined companies' ability to use some net operating losses that are carried forward and improve cash flow of the combined company. So a real cash impact there. And then we plan to discontinue the use of put options to hedge some commodity price volatility that's as a company of our size, we've got a balance sheet that is in a position where we can be fully exposed. So that's just a cost that we won't incur as we put the 2 companies together. So those are based on public information and the diligence that we've been able to do here, as always, once we close, we'll continue to look for additional opportunities as we get into the integration.

We'll go next to Sam Margolin with Wolfe Research.

So I'm just looking at the pro forma CapEx guidance here, and it's more or less kind of expectations for the 2 companies independently added together. But how do you think about kind of competition for capital within the pro forma Chevron and where you see CapEx getting directed in different types of scenarios?

Sure, Sam. So one of the things that I think is important here is both Chevron and Hess have very focused and high-return capital programs already. And Guyana has got more than half of the [ 23% ] upstream capital guidance in the Hess budget, of Bakken another 30%, both really strong assets that deliver the returns and cash that you would expect. And you're familiar with the way we've been focusing on the Permian finishing our big project in Kazakhstan and development projects in the deepwater Gulf of Mexico, et cetera. So there's not a lot of obvious overlap or areas where you would say we would reduce CapEx. So what we've done is really looked at the combined outlets for the 2 companies, top end of our range, $16 billion, I think consensus on Hess for next year is about $4.5 billion. So that gives you $20.5 billion. We've put a range around that. So it's about the midpoint of the range. And interestingly, that range is really where we were, Chevron, stand-alone before the pandemic, when we got a little affiliate CapEx that would be in addition to that. But I mentioned in my prepared comments, it's half of what we were spending a decade ago with Chevron alone. And we're a much better company today, a bigger company with the acquisitions. And so we intend to continue to be very capital-disciplined going forward. I mentioned the 8 assets that will draw 75% of our capital spending. And then, of course, we do have a couple of petrochemical projects under development and some other things that are going to be in that balance. So that's the guidance today. Of course, once we put the 2 companies together, this is a significant enough transaction that a combined business plan is where we'll really start to optimize the trade-offs and the choices. And we'll be back up to talk to you about that once we get past the close.

We will go next to Doug Leggate with Bank of America.

Mike, there's a lot of things we've talked about over the years. This fit is extraordinary, and I congratulate you both. I do have a question, however, relating to the timing, I guess, from Hess standpoint. And I guess my question is, when you look at the inflection pending for Hess free cash flow, the value accretion is extraordinary, at least in our view. So that's certainly something that could be afforded on your part, Mike. But there's also $1 billion of synergies if you annualize that is basically the premium you're paying for Hess, which basically looks like you're not sharing any of those synergies. So my question is, how do you think shareholders are going to respond to this? And what is your commitment in the event, Mike, that the transaction terms are not good enough.

Well, the large shareholder from Hess speak to that question.

Yes, Doug, thank you. And Doug, you know our company as well as anyone. One, I think some context here is important. You're right about the accretion with each FPSO coming on each year, delivering about $1 billion of cash flow as each one comes on each year at current prices. But the context is we have had 5 years where our company has the highest total shareholder return in the industry. In the energy industry, whether you compare us to a major or an independent last year. As you know, our stock went up 94% and was #2 in the S&P. So this strategic combination is an exchange of stock merger, so we still get to participate in the upside, to your point, this value accretion will go to Chevron shareholders, of which I and my family are going to be one, and intend on holding the stock for a long time. And I think another key point is while Hess provides the growth to Chevron, both in resource growth, production growth and cash flow growth, Chevron contributes to Hess strong financial strength in terms of the diversified portfolio of assets in terms of a stellar balance sheet and in terms of very high cash returns. And specifically, the Hess dividend will go from $1.75 a share to $6 this year and $6.50 next year, and there is a major share repurchase program. So when you look at our strategic combination, I think it's strong in every way, has a great future ahead of it. We're going to be the oil company to own and also the best company to work for. So we're very excited about it. And I think the value accretion you're talking about, we still continue to participate in, given that this is a stock-for-stock deal. So we're very excited about this strategic combination and we believe we're creating the premier oil and gas company, exceptionally well positioned for the energy transition.

We'll go next to Roger Read with Wells Fargo.

Yes. Thank you and congrats to both of you. John, it's been a heck of a ride, watching [indiscernible] come along. So excited to see Chevron take it on to the second chapter here. The question I have, I think you a little bit addressed it on the last one is the all equity versus some combination of equity and cash. The other question I have probably directed mostly to you Mike. Your comments on the impacts on ROCE as well as the step-up in asset sales. Kind of give us an idea of how you expect that to kind of initially be impacted? And then maybe as you move down the road, get back to that double digit? Like what are some of the key things we should really watch there?

Yes. Roger, in this deal and in others, you look for the optimal mix and it's a negotiated outcome. Using equity and commodity industry transactions is really helpful because at any given point in time, you got an oil market that you're doing. And when you close 6 or 9 months later, you may find yourself in a very different world. And a deal that has a substantial amount of cash in it, you now have a valuation that looks very different at close and shareholder vote than it did when the deal was transacted, whereas an equity deal, you're both naturally hedged. And so as the commodity prices cycle up or down, you're not exposed to one side feeling like they're winning and the other side feeling like they're not. So that's really the key thing. The other reality here is given the magnitude of our buyback program, which we will continue to execute and as I mentioned, actually at an even higher level than we're currently at, we'll be buying those shares back and effectively converting it into a cash transaction through the cycles of the market, whatever those may be. And so it's a structure that we think makes sense for both sides and really provides a fair and balanced consideration. On return on capital employed, you're right, this is going to be slightly dilutive. There's, as John mentioned, Hess has just had a tremendous track record. And so we will put some of that onto the balance sheet. Pierre can comment a little bit about the structure of that and then how we'll continue to drive returns higher as we go forward.

Yes. I mean it's purchase accounting, as you know, Roger. So Hess has created a lot of value purchase accounting, we put that historical book value, we have to market value, and that's going to be a step up in our capital employed. We also talked about high-grading our portfolio and selling $10 billion to $15 billion of assets that tend to be also high returns. So both of those factors will weigh on short-term, see the difference of transaction that's about long-term growth, long-term inventory and duration and free cash flow growth, cash flow per share accretion. So we think there are more than enough offsets. But as Mike has said, we are -- our intent is to maintain a double-digit ROCE at mid-cycle prices. And we know that the hill is a little steeper to climb, but that's what the combined company is going to do.

Okay. Can I ask one quick follow-up on that. Future exploration...

We were trying to get to everybody, right. You can cycle back around in the queue. If I can just ask you to that. I want to be sure we get everybody.

We'll go next to Josh Silverstein with UBS.

You mentioned a step-up in the buyback of the $20 billion level in a higher price environment. This is something Chevron could do on their own to see if they really wanted to. So we think about this as a potential step up in the range, like a few billion dollar step up? Or how will we think about this in a, call it, a $50 environment just given the growth [indiscernible]?

Josh, it's Pierre. So I think you should think about it as an incremental $2.5 billion tied primarily to the Hess transaction, but also the PDC, but in any price scenario. So we're in the upside price scenario. We laid that out at our Investor Day. That average is about $85 over the next 5 years, and then that's kind of near the top of the range. And so that's sort of the range you've been in. But you're right, if we, for some reason, and we're prepared for lower prices and that happened next year, we could adjust our buyback down, but it would still be higher by the $2.5 billion. So there's an incremental $2.5 billion of buyback that's kind of underpinned by the free cash flow accretion and again, in the short term from PDC and the longer term from Hess. And that's part of also the cash flow per share accretion. That's part of the math that you have to do, and that's part of what Mike was saying, there's cash in this transaction, just not cash up front. The cash comes in over time, and that helps the accretion. So the concept is whatever we would have done standalone will be $2.5 billion higher as a result of this transaction.

We'll go next to Paul Cheng with Scotiabank.

Maybe let me add my congratulations. On the office sales, maybe Pierre, can you give us a bit maybe not granular which asset you're going to sell, but you're saying that your high margin, can you give us some more additional characteristic? Should we assume that anything outside the 8 asset that you identified in the presentation that will be [indiscernible] for sale and also whether it's back-end loaded or that it's going to be more for [indiscernible]?

Yes, Paul, I'll take that. I wouldn't assume that anything that's not in those 8 we identified is up for sale. It's not quite that simple and clean. And if you look at a portfolio like ours, there's always a tail of assets that may not fit as well for you as they would for somebody else. And as you know, we've done a lot of portfolio high grading over the last decade or so. And so I wouldn't characterize any of our assets as weak or unattractive. But if we're going to remain capital disciplines to Sam's question about how are we going to allocate capital, we need to invest in the best. And so that's what we'll do. And there will be some assets we have that in the company 2 years ago, 4 years ago, would have attracted capital that with a stronger portfolio with the multiple transactions we've referred here today are just going to find that other assets are preferentially want to draw that capital. And so we'll look for opportunities to move those to somebody else where it's a better fit in their portfolio and that they can fund the ongoing capital it will need. When we get to a point where we put both companies together and come out with some further guidance, we'll give you a little more color around the types of assets that might be considered. And then obviously, as we enter into agreements, we'll talk about them specifically. So stay tuned for more color on that, Paul.

We'll go next to Nitin Kumar with Mizuho.

First all, congratulations to both of you. Mike, I want to touch a little bit on the Bakken. It's not seen as a more mature play within shale. So how does that fit with your Permian and DJ positions that you have enhanced over the last couple of years. Is there any technology that you could bring to bear to unlock more reserves there or anything you would talk about?

Yes. So one thing I would say, Nitin, is we're going to rely very heavily on the good people at Hess that have been involved in the Bakken for many, many years. As we added the DJ Basin to our portfolio, we were pleasantly surprised. It was a basin that we hadn't previously been exposed to, so we have the big Permian position. And it turned out that both -- the people that joined us from Noble and from PDC were doing a better job than we might have imagined in terms of developing that resource. They understand it very well. The performance benchmarks within our portfolio very well across any number of metrics. And I'm certain that the same will be true as we come together with Hess and see what they've been doing in the Bakken. We do have a large technical organization. We're working hard on any number of technologies that can improve fracture geometry and improve the mechanics down at kind of a nano level of loosening the hydrocarbons from the rock matrix and getting those to flourish. So we're focused on a suite of technologies, many of which we're piloting in the field this year in the Permian that are intended to improve recoveries out of shale. And as those mature and prove up, we would apply those across our entire portfolio, including the Bakken. And so I do believe that the likelihood that we're going to leave 90% of these molecules behind is low. We're working hard to find ways to improve recoveries. And this gives us another nice large position with a lot of running room to not only operate at the current level of high productivity, but over time for technology to unlock even more value. And so we're really pleased to add the Bakken to our portfolio. From our diligence, it looks like there's at least 15 years of inventory at that 4 rig level. So 1.5 decades, again, I talked out into the 2030s. This is a very attractive asset that can deliver kind of plateau production and strong cash flow for many, many years to come and has that technology upside that we'll be looking online.

We'll go next to Ryan Todd with Piper Sandler.

Congratulations on the great deal. Maybe if I might ask that at a high level, Mike, we've seen -- it feels like there's kind of a wave of consolidation going on right now in the industry. We've seen 2 out of you just this year. Now what do you view as driving this current wave of M&A activity in the space? And then specific to this why Hess for you at this time? I mean, maybe it's fairly obvious, but I would just be curious within this, what's driving it and why Hess in the fit?

Sure. I mean in the broader context, Ryan, and I think I've said this with many of you on the phone here. I think ours is an industry, particularly as you get into the shale patch that was due for some consolidation. And you all know the history of the last decade or so, we've got a lot of companies out of our peers sitting here, famously a few years ago, used a quote that I still like to repeat, which is I think we've got too many CEOs per BOE when you look across the whole spectrum. And so some consolidation, I think, is natural, when and where and how it happens is a little bit harder to call. But you have seen some transactions and perhaps we'll see some others. For us, I would tell you, Hess is a very unique combination. It's aligned with our objective of delivering higher returns and lower carbon of continuing to extend the duration of our cash flow growth and production growth in order to underpin our return of cash to shareholders. And it's really a unique combination of research, quality and durability, high cash margins, low carbon intensity, and it strengthens the long-term performance of our company in many ways, diversifying our portfolio, upgrading the asset base and extended growth, as I said. And so there are not many as there are no assets or companies out there that offer quite that same combination with us. And I might ask John, so from your point of view, the same question to add in here, for Ryan.

Well, as I said, while we feel that our growth in resource and production and cash flow strengthen Chevron, Chevron's diversified portfolio of assets, the strong balance sheet and their high cash returns, I think, uniquely position us for the energy transition. We're going to be the oil stock to own. And the combination, I think, is a very powerful one.

We'll go next to John Royall with JPMorgan.

Congratulations on the deal. Maybe you can -- Mike can talk about the past 2 deals, having very little Permian footprint between the two, only the small piece from PDCE. Can you talk about the diversity in the portfolio? And is there a thought that you don't want to be too big in the Permian as a proportion of your overall mix?