Chevron‘s (NYSE:CVX) recent acquisition of Hess Corp. for $53 billion marks the second major buyout in the energy sector this month, driven by the surge in oil prices. Crude prices have seen a significant increase in early 2022, primarily due to the Russia-Ukraine conflict, and they are currently around $90 per barrel, having risen 9% this year. This surge in prices has left major oil producers with substantial cash reserves, prompting them to seek investment opportunities.

The Chevron-Hess deal comes shortly after Exxon Mobil’s announcement of its acquisition of Pioneer Natural Resources for approximately $60 billion.

Several factors are contributing to the upward pressure on oil prices. The conflict in Ukraine, along with production cutbacks by Saudi Arabia and Russia, has strained oil markets. Additionally, the ongoing tensions between Israel and Hamas in the Middle East raise concerns about the potential for broader regional conflicts, although these attacks do not directly disrupt global oil supply.

Chevron’s acquisition of Hess includes valuable assets such as a significant oil field in Guyana and shale properties in the Bakken Formation in North Dakota. Guyana, a South American country, is poised to become the world’s fourth-largest offshore oil producer, competing with countries like Qatar, the United States, Mexico, and Norway. In recent years, Guyana has attracted major oil companies, including Exxon Mobil, China’s CNOOC, and Hess, in a competitive race for lucrative oil fields in northern South America.

Chevron’s Chairman and CEO, Mike Wirth, stated that this acquisition aligns with the company’s objectives of delivering higher returns and reducing carbon emissions. The deal is expected to boost Chevron’s estimated production and free cash flow growth rates for the next five years, extending their growth profile into the next decade. It also supports their plans to increase dividends and share repurchases.

Chevron is financing the acquisition with stock, with Hess shareholders receiving 1.0250 shares of Chevron for each Hess share. Including debt, the deal is valued at $60 billion.

Despite growing concerns about climate change, high energy prices have driven increased exploration and drilling, resulting in significant returns for investors.

This acquisition follows a series of consolidations in the energy sector, with a focus on U.S. shale fields, which began during the pandemic as major producers aimed to cut costs. Notably, Chevron’s acquisition of Noble Energy for $5 billion occurred when crude prices were down more than 30% due to the pandemic.

The deal is expected to enhance cash returns to Chevron’s shareholders, with plans to recommend an 8% increase in the first-quarter dividend to $1.63 in January, pending board approval. The company also anticipates increasing stock buybacks by $2.5 billion to reach the top end of its annual guidance range of $20 billion once the transaction is finalized.

Both Chevron and Hess boards have approved the deal, which is scheduled to close in the first half of the next year, pending approval by Hess shareholders. John Hess, CEO of Hess Corp., is expected to join Chevron’s board. His family holds a significant stake in Hess.

The stock prices of both Chevron and Hess saw fluctuations in response to the announcement, with Chevron declining more than 2% before the opening bell, and Hess’s stock also experiencing a slight decline.

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