Exxon and Chevron must decide whether they are more enemies than ‘frenemies’

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The rivalry between ExxonMobil and Chevron has plumbed a new depth. On Monday, securities filings revealed a hang-up in Chevron’s $60bn stock deal to acquire smaller rival Hess Corporation. Hess’s crown jewel is a stake in the Stabroek deepwater field located off the coast of Guyana. A controlling 45 per cent stake happens to belong to Exxon.

Exxon now claims that it has the first right to acquire the Hess stake in the project given a change of control. Chevron and Hess naturally dispute this. They say the particular legal structure deployed does not implicate the control change. Both sides are in the midst of negotiations that could end up in arbitration.

Greenfield energy projects are typically expensive, uncertain and lengthy. Bringing in partners is a way to de-risk them. But in this instance, the mitigation of financial risk has inadvertently exacerbated corporate governance risk.

The Stabroek project has been called the most important hydrocarbon discovery in a generation. It is expected to generate 110,000 barrels of oil per day for Hess and has 11bn barrels of recoverable deposits overall. The project is already enriching impoverished Guyana. It has also drawn the attention of Nicolás Maduro, leader of neighbouring Venezuela.

Hess has important oil acreage in North Dakota’s Bakken shale. But analysts estimate that its stake in Guyana fields could be worth more than half of the overall $60bn deal valuation. 

Exxon is already busy. It has its own $60bn, all-stock deal for Pioneer Natural Resources in Texas. Acquiring the Hess portion of Stabroek would involve, among other things, paying off Hess’s capital gain taxes.

Regardless, Chevron and Hess insist that even if their interpretation of Exxon’s “right of first refusal” is legally incorrect, and Exxon pursues its Stabroek purchase right, they would simply cancel the Chevron acquisition. Hess would then revert to a standalone company, albeit without an embedded takeover premium owing to the confirmed Exxon overhang.

Hess believes that the Chevron deal will close on the terms announced. That will require Exxon to stand down, lose in a legal proceeding or otherwise get some kind of settlement or payment to go away.

Even as the two companies are fierce competitors and juxtaposed by Wall Street, they co-operate and partner around the world. Expect the pair to keep that big picture in mind as they tussle over Stabroek, regardless of how valuable those particular South American deposits may be.