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Energy Firms Leverage Stock Deals Amid Market Volatility

Published 2023-10-24, 10:14 a/m
Updated 2023-10-24, 10:14 a/m
© Reuters.

In the wake of ongoing market volatility and geopolitical events such as Russia's war in Ukraine, energy companies are increasingly turning to stock transactions for acquisitions. CEOs of these firms are favoring stock deals, which allow shareholders to reap the benefits of the combined company growth and defer taxes.

The trend has been exemplified by Hess Corporation (NYSE:HES)'s sale to Chevron (NYSE:CVX), orchestrated when both companies' share trajectories aligned. This deal promised a significant post-deal dividend increase for Hess shareholders, from $1.75 to $6 per share. Energy giants like Exxon (NYSE:XOM) and Chevron are seeking such deals to sidestep the risks associated with exploring unproven reserves. Instead, they target peers operating in lucrative oil and gas regions such as the Permian basin and Guyana, one of the world's fastest-growing oil provinces.

According to Morningstar analysts, the Hess deal represented a 4.9% premium due to high valuation. Similarly, Exxon paid an 18% premium for Pioneer's shares in an all-stock deal based on Pioneer's undisturbed share price. Chevron had initially offered a larger 39% premium for Anadarko in 2019 but eventually withdrew when outbid by Occidental Petroleum (NYSE:OXY)'s $38-billion offer.

The increasing use of stock transactions raises questions about Exxon and Chevron's strategies for their growing cash piles. One approach is returning excess cash to shareholders through dividends and share buybacks, compensating for dilution from all-stock acquisitions.

Chevron has announced plans for an 8% dividend increase in the first quarter and annual stock buybacks worth $20 billion. Exxon has hinted at annual share buybacks worth $17.5 billion over the next two years. Enverus energy consultancy noted that these generous buyback programs support all-stock deals by reducing share counts over time after issuing new equity.

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