Chevron Deal Makes Billionaire Hess Family Even Richer

Oil scion John Hess will now control nearly $5 billion in Chevron stock — but not a lot of it actually belongs to him.

The Hess family is selling out on top. At least that’s how it looks from the oil giant’s surging shareprice, up 100% in two years, to a record high. Now add to that the roughly 20% premium that Chevron is set to pay in its $53 billion deal announced today to acquire Hess. It’s a 100% equity deal; Hess shareholders will get 1.025 shares of Chevron for each of theirs.

The big prize in the Hess portfolio is in the waters offshore Guyana, where it has a 30% interest in an array of big deepwater discoveries alongside ExxonMobil
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. There’s more to drill offshore nearby Suriname. Hess also enjoys large positions in the Bakken shale of North Dakota, the deepwater Gulf of Mexico, and offshore Malaysia.

The deal (valued at 7x EV/EBITDA) will enable Chevron to grow beyond 4 million barrels per day of oil and equivalent gas production — and into the neighborhood of $30 billion a year in free cash flow.

There will naturally be some redundancies within the Hess offshore engineering teams.

And redundancies in the C-suite as well. Hess himself will take a board seat at Chevron, and a backseat.

It will be an adjustment. Hess, 69, has led the family company since 1995, taking the reins from father Leon, a legendary businessman who built an oil refinery in New Jersey after the Great Depression and rolled up fuel oil distribution networks around the region. For decades Hess came out with a new collectible toy tanker truck in time for the holidays. In 1963 he was part of a group that bought the New York Jets. In 1969 Leon bought Amerada Corp and combined it with his upstream oil interests into Amerada Hess.

Son John was more reserved than his father, less optimistic about industry prospects. In 2008 as oil prices were surging to record highs Hess publicly predicted that “peak oil” supply was around the corner and the industry would soon drill itself dry. U.S. oil production has more than doubled since then.

According to SEC filings, John Hess controls nearly 10% of Hess Corp, or 29.4 million shares. Converted into Chevron stock, that will be about 30 million shares, worth $4.9 billion at $162/share.

But not a lot of those shares are actually attributable to John, who has held just 200,000 shares directly and in his retirement account. Most of the rest are earmarked for charity, with about 8 million shares held by a charitable lead annuity trust established under Leon’s will, and 6.5 million shares held by the Hess Foundation. A limited partnership managed by Hess and three family consiglieres (including former New Jersey Gov. Thomas Kean) holds about 9 million shares. There are also trusts for his sister Constance Williams and children.

As a result, the Hess family’s direct shareholding in Chevron will likely be less than 15 million shares, worth about $2.4 billion with Chevron at $162/share (market cap $320 billion).

If nothing else, John Hess has solved a lot of challenges including succession and estate planning. He’s taking a giant amount of concentration risk off of his family’s holdings.

The combined new Chevron will invest more than $20 billion a year into projects, and buy back $20 billion in shares.

Analyst David Decklebaum at Cowen
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& Company wrote in a note this morning that although the deal value seems fair, it was a surprise, as Hess still had plenty of high-margin growth ahead of it, especially with Guyana. If Hess didn’t see a future going it alone, it’s likely time for smaller, weaker players to team up in more all-stock deals. The oil and gas consolidation train will continue.