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Chevron Stock (Ticker: CVX) fell by 6.72%, closing at $144.35 per share on October 27, 2023. This was the lowest price since October 20222. The drop was mainly due to the announcement of the Chevron-Hess deal. Some Analysts and Investors were skeptical about the deal, questioning whether Chevron was paying too much for Hess and whether the deal would create enough value for Chevron Shareholders. Chevron also reported lower-than-expected earnings for the third quarter, as higher oil prices were offset by lower production and higher costs. Chevron’s Stock performance contrasted with Exxon Mobil’s, which rose by 0.81% after reporting better-than-expected earnings and announcing a dividend increase. I want to analyze the Market reasoning behind the movement.
The Market Capitalization of Chevron and Hess is the total value of their outstanding shares in the Stock Market. According to Web search results, Chevron has a Market Capitalization of about $320 billion, while Hess has a Market Capitalization of about $53 billion (6:1). The deal between Chevron and Hess is valued at $53 billion, which means that Chevron is paying a 1:1 ratio for Hess's shares. This implies that Chevron sees Hess as a valuable addition to its portfolio, likely valuing assets in Guyana and the Bakken shale. Why did the Market react drastically, and negatively, to the announcement?
How can we measure and compare the value of different Oil Companies, regardless of their size, debt, or cash position? There are a lot of Measuring Sticks to choose-from but the first way to do this is by using a metric called Enterprise Value (EV).
EV is a measure of a company’s total value, often used as a more comprehensive alternative to Market Capitalization. EV takes into account not only the market value of the Company’s equity, but also the market value of its debt and its cash and equivalents (Current Assets).
The formula for EV is:
EV= Market Capitalization + Value of Debt − Cash and Equivalents
Using this formula, we can calculate the EV of Chevron and Hess before and after the deal, and compare them with other Oil Companies, such as Exxon Mobil. We can also use EV to evaluate the attractiveness of the deal, by comparing the EV of Hess with the offer price, and the synergies or value creation from the deal, by comparing the EV of the combined entity with the sum of the EVs of Chevron and Hess.
The current EV of Chevron, after the Stock decline yesterday
CVX: Market Cap 271.67 B + Debt 21.51 B - Cash and Equivalents 9.6 B
EV = 283.58 B $USD
The current EV of Hess
HES: Market Cap 19.67 B + Debt 6.58 B - Cash and Equivalents 1.61 B
EV = 24.64 B $USD
Combined of Hess and CVX (My anticipated or projected EV using today's numbers):
$308.22 B
Taking note of the Market move on Valuation, according to a Web Search, CVX Market Cap was 319.69 B on 10/25. just two days before the declines.
In my opinion, using EV Chevron is paying too much for Hess. This might be the reason for the Stock decline. Which leads me to perform further analysis. Another Measuring Stick I like is the Debt-to-Income (DTI). After Calculating the DTI, run Comparison's against competition.
The Debt-to-Income ratio (DTI) is the percentage of a company’s Total Debt Payments divided by its Gross Income. It is a measure of how much debt the company has relative to its gross income. A lower DTI indicates a better financial health and a lower risk of default.
I decided to compare the debt-to-income ratios of Exxon Mobil Corporation, ConocoPhillips, Marathon Oil Corporation, and Hess Corporation, respectively. These are four major oil and gas companies that compete in the Energy Sector.
The reported debt of Hess Corporation was $6.58 billion, and the gross income was $9.32 billion. Therefore, the DTI of HES was 70.6%. Which seems quite high to me.
Now I want to run comparisons against similar Companies.
Here are the DTI of XOM, COP, and MRO as of October 2023:
XOM: The total debt of Exxon Mobil was $21.51 B and the Gross Income was $64.72 B.
Therefore, the DTI of XOM was 33.2%.
COP: The total debt of ConocoPhillips was $14.17 B and the Gross Income was $24.67 B.
Therefore, the DTI of COP was 57.4%.
MRO: The total debt of Marathon Oil was $5.15 B and the Gross Income was $5.29 B.
Therefore, the DTI of MRO was 97.4%.
Using that Measuring Stick, HES seems less sound, financially, than Exxon and ConocoPhilips but more sound than Marathon Oil.
In summary, I can see why the Market priced-in a significant decline in the Stock Price. There might be something being overlooked, and it is reasonable to assume the decision makers of Chevron have an edge over myself. Personally, I will wait for the dust to settle.
This is not financial advice. I do not have positions in any of the Companies. The analysis was done because the significant decline in Stock Price caught my attention yesterday.
Sources:
(1) Chevron Deal Makes Billionaire Hess Family Even Richer - Forbes. https://bing.com/search?q=market+capitalization+of+Chevron+and+Hess.
(2) Chevron Announces Agreement to Acquire Hess. https://www.chevron.com/newsroom/2023/q4/chevron-announces-agreement-to-acquire-hess.
(3) Chevron Quickly Responds to ExxonMobil, Buys Hess in a $60 Billion Deal. https://www.fool.com/investing/2023/10/24/chevron-quickly-responds-to-exxonmobil-buys-hess-i/.
(4) Chevron to Buy Hess for $53 Billion in Latest Oil Megadeal. https://www.bloomberg.com/news/articles/2023-10-23/chevron-to-buy-hess-for-53-billion-in-latest-oil-megadeal.
(5) Chevron Deal Makes Billionaire Hess Family Even Richer - Forbes. https://www.forbes.com/sites/christopherhelman/2023/10/23/chevron-deal-makes-billionaire-hess-family-even-richer/.
