Chevron(NYSE: CVX)made a bold move last year by agreeing to acquire rival Hess(NYSE: HES) in a nearly $60 billion deal. That purchase will really move the needle for the oil giant. Management expects the transaction will help it more than double its free cash flow by 2027 if oil prices average $70 a barrel. Meanwhile, it will extend the company's production growth profile into the 2030s.
Unfortunately, the deal has hit a speed bump. However, while Chevron believes it will eventually close the transaction, it could grow just fine without Hess.
Plenty of fuel to grow
Chevron CEO Mike Wirth made it a point to highlight his company's organic growth drivers during the second-quarter conference call.
"We continue to advance growth opportunities in our traditional and new energy businesses through adding new exploration plays in West Africa and South America," he said, "achieving key milestones on the ACES green hydrogen project and commissioning of the Geismar renewable diesel plant expansion, which is expected to come online by the end of the year."
The oil company has taken an "all of the above" approach to the ongoing clean-energy transition. It continues to explore for and develop new oil and natural gas resources to ensure the world has the hydrocarbon fuels it needs in the coming decades. For example, Wirth noted on the earnings call that first oil is imminent at its Anchor development in the Gulf of Mexico. That's one of three projects the company expects will come online through 2026, adding a total of 300,000 barrels per day to its oil output.
At the same time, Chevron is investing in several lower-carbon opportunities, including green hydrogen and renewable fuels. These investments will enable the company to build new growth platforms to meet the world's growing demand for lower-carbon energy.
It will take some time for Chevron's lower-carbon investments to pay dividends. However, the company's hydrocarbon business will provide lots of fuel in the near term.
"Absent Hess, we've got a 10% growth in free cash flow," Wirth noted on the call. "We've got projects coming online in numerous basins in the world and in our chemicals business as well."
An expected accelerant
While Chevron doesn't need to buy Hess to grow, the company has no plans to abandon that delayed deal. Hess shareholders recently approved the transaction. Meanwhile, the company expects the Federal Trade Commission to conclude its review process in the current quarter. If it gives the deal a thumbs up, that will leave one last hurdle: an arbitration panel ruling scheduled for next year to determine whether Hess' partners in Guyana (Exxon and CNOOC) have preemptive rights to acquire Hess' stake in that lucrative oil development.
On the earnings call, Wirth said the company "remain[s] confident this is a straightforward matter, and the outcome will affirm a preemption right does not apply." Because of that, Chevron is committed to the merger, which it hopes to close next year.
"This is a transaction that's the right transaction for us," said Wirth. It would significantly enhance the oil company's portfolio by adding resources from the high-growth offshore Guyana and high-margin Bakken Shale to the mix. It would also add a complementary business in the Gulf of Mexico and a steady free-cash-flow-producing natural gas business in Southeast Asia. The deal would allow Chevron to high-grade its portfolio by selling non-core assets. (It plans to sell $10 billion to $15 billion worth of assets through 2028.) Meanwhile, the transaction would be highly accretive to its free cash flow, driven by cost reductions and the growing cash flow from the acquired assets.
While Chevron remains focused on closing the Hess purchase, the delay won't prevent it from making another acquisition if the right deal comes along. Wirth stated on the call that "if another opportunity were to present itself that were compelling, we're certainly in a position to consider it." However, it doesn't need to do a deal, even if the Hess transaction falls apart. That's because it can organically grow its free cash flow at a double-digit percentage rate for the next few years -- fast for a company of its size.
Chevron can win even if it loses
Chevron fully expects to close its needle-moving acquisition of Hess. However, even if that deal falls apart, the company will be just fine. It has a very strong organic growth profile, which puts it in an excellent position to grow shareholder value. Because of all that, it looks like a great oil stock to buy and hold for the long haul.
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Matt DiLallo has positions in Chevron. The Motley Fool has positions in and recommends Chevron. The Motley Fool has a disclosure policy.
