Energy Firms Leverage Stock Deals Amid Market Volatility
Riding the Wave of Market Volatility
Amid the ongoing market volatility and geopolitical events like Russia’s war in Ukraine, energy companies are finding solace in stock transactions for their acquisition strategies. CEOs of these firms are increasingly turning to stock deals, which offer shareholders the opportunity to benefit from the growth of the combined companies and defer taxes.
Hess Corporation’s Stock Sale to Chevron
The trend is evident in the recent sale of Hess Corporation to Chevron. Both companies seized the opportunity when their share trajectories aligned, resulting in a significant dividend increase for Hess shareholders, from $1.75 to $6 per share. This approach allows energy giants like Exxon and Chevron to mitigate risks associated with exploring unproven reserves and instead 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.
Premiums and Strategies
Morningstar analysts highlighted the Hess deal’s 4.9% premium due to high valuation. Exxon paid an 18% premium for Pioneer’s shares in an all-stock deal based on Pioneer’s undisturbed share price. Chevron initially offered a larger 39% premium for Anadarko in 2019 but was eventually outbid by Occidental Petroleum’s $38-billion offer. These stock transactions raise questions about Exxon and Chevron’s strategies for managing their growing cash piles.
Returning Cash to Shareholders
One approach is returning excess cash to shareholders through dividends and share buybacks, compensating for dilution resulting from all-stock acquisitions. Chevron has already announced plans for an 8% dividend increase in the first quarter and annual stock buybacks worth $20 billion. Exxon, on the other hand, has hinted at annual share buybacks worth $17.5 billion over the next two years. Enverus energy consultancy noted that these buyback programs support all-stock deals by reducing share counts over time after issuing new equity.
In conclusion, energy companies are leveraging stock deals amidst market volatility to acquire other firms. Shareholders stand to benefit from the growth of the combined companies while deferring taxes. Exxon and Chevron are employing strategies such as returning cash to shareholders through dividends and share buybacks. These initiatives compensate for dilution resulting from all-stock acquisitions. The energy sector continues to navigate the challenging market conditions by capitalizing on stock transactions and optimizing their cash reserves.
