Chevron’s Second Quarter Challenges and Hess Acquisition Delay

153

Chevron Corp (CVX.N) recently reported a significant decline in its second-quarter earnings, and the oil major’s CEO, Michael Wirth, indicated that the anticipated $53 billion acquisition of Hess Corp (HES.N) might not close before mid-2025. This announcement led to a 3% drop in Chevron’s shares, with a total decline of 9% since Wednesday when the potential delay was first disclosed. Investors are concerned about the prolonged timeline and the possibility of the deal being blocked entirely.

The acquisition of Hess is pivotal for Chevron as it aims to establish a presence in Guyana, which boasts the largest oil discovery in nearly two decades. This deal is expected to help Chevron manage risks related to its underperforming projects in Australia and Kazakhstan, where operational issues have again impacted production, causing maintenance work to extend into the third quarter.

However, the company had already warned investors that oil output for the quarter would decrease alongside refining margins, but the scale of these declines caught many by surprise. Quarterly earnings dropped by 19% to $2.55 per share, falling short of both last year’s figures and Wall Street’s consensus estimate by 38 cents. “This quarter was a little light due to some operational and other discrete items that impacted results,” CEO Michael Wirth explained to analysts.

Chevron’s plan to enter Guyana’s offshore oil fields is facing challenges, particularly from Exxon Mobil. The arbitration process concerning Exxon’s challenge to the Hess acquisition could delay the deal’s closure well into 2025. When asked about a possible compromise with Exxon, CEO Wirth noted that it would be “sensible,” but no successful agreement had been reached. “It doesn’t appear that is how this is going to end up,” he stated.

Exxon maintains that its joint operating agreement with Hess and China’s CNOOC Ltd grants it the right of first refusal to Hess’ Guyana properties. This ongoing legal dispute further complicates Chevron’s efforts to secure its strategic position in Guyana.

Chevron reported a sharp decline in earnings, with profits falling to $4.4 billion, or $2.43 per share, in the quarter, down from $6 billion the previous year. Adjusted earnings were $4.7 billion, or $2.55 per share, compared to $5.8 billion, or $3.08 per share, a year ago. In contrast, Exxon exceeded Wall Street estimates due to strong oil production in U.S. shale and Guyana’s oil fields.

Chevron’s earnings from oil and gas production decreased by 9.4%, primarily due to weakness outside the U.S. Meanwhile, earnings from fuels and chemical operations plummeted by about 60%. The refining segment also suffered from weak margins, a challenge shared by rivals Exxon and Shell.

Overall, oil refiners experienced reduced profits from gasoline sales in the second quarter as demand softened after production soared earlier this year. The industry had enjoyed two years of exceptional profits following increased production during the post-COVID-19 travel boom. Despite these setbacks, CEO Wirth expressed optimism, stating, “Despite recent operational downtime and softer margins, we remain poised to deliver significant long-term earnings and cash flow growth.”

Chevron announced on Wednesday that the arbitration panel reviewing Exxon’s challenge to the Hess acquisition is expected to reach a decision between June and August 2025. Exxon’s Chief Financial Officer, Kathryn Mikells, informed Reuters that a hearing is anticipated in late May, with a decision on the dispute expected by September 2025. Chevron had initially expected to finalize the deal by the end of this year.

In a strategic move, Chevron revealed plans to relocate its headquarters from California to Texas, continuing a trend of oil companies leaving California due to higher taxes, stricter climate regulations, and declining oil fields. Chevron plans to transfer all corporate functions to Houston over the next five years, although positions supporting its California operations, including oil fields and two refineries, will remain in San Ramon.

CEO Michael Wirth and Vice Chairman Mark Nelson are set to relocate to Houston by the end of 2024. Currently, Chevron has approximately 7,000 employees in the Houston area and about 2,000 employees in San Ramon.