Chevron’s Hess acquisition delivers “richly-valued” oil independent

(Bloomberg) – Chevron Corp.’s acquisition of Hess Corp. does more than give it a stake in the world’s fastest-growing oil field off the coast of Guyana and shale assets in the Bakken basin of North Dakota. It also delivers a richly-valued oil independent.

While just the size of the all-stock transaction, at $53 billion, is an eye-watering figure, perhaps even more compelling is the relative value of Hess. The shares have been trading with a multiple near 20 times blended forward earnings, far in excess of where industry behemoths Exxon Mobil Corp., ConocoPhillips and Chevron are all trading. Furthermore, Hess is trading about two times the price-to-earnings ratio of the entire 23-member S&P 500 Energy Index.

While valuations are notoriously bad signals for timing the market, these figures do suggest a lot of optimism in Hess and the potential of its South American assets. Buying Hess will give Chevron 30% ownership of more than 11 billion barrels-equivalent of recoverable resources in Guyana, where major new oil production has transformed the country’s economy into the world’s fastest-growing. The transaction also adds acreage in the Gulf of Mexico and the Bakken, a smaller U.S. shale basin than the Permian, where production appears to have peaked.