Hedge funds bet on Chevron amidst ExxonMobil’s claim to Hess’ stake in prolific oil field offshore Guyana
(Bloomberg) – Hedge fund managers that wagered billions on Chevron Corp.’s October deal to buy Hess Corp. are sticking to their bets despite another roadblock that could potentially torpedo the acquisition.
Exxon Mobil Corp. said last week it has the first right to purchase Hess’s stake in a lucrative offshore oil development they jointly own off the coast of Guyana, the crown jewel of Chevron’s $53 billion acquisition. It follows escalating tensions between Guyana and neighbor Venezuela that have prompted some to reassess the likelihood of the takeover going through.
That’s increasing the risks for hedge funds like Millennium Management, Pentwater Capital Management, Balyasny Asset Management and others, which scooped up almost an eighth of Hess’s shares by the end of December, more than $5 billion total — making it one of the most popular merger-arbitrage positions for the group, according to data compiled by Bloomberg.
Millennium, Pentwater and Balyasny declined to comment, while a representative for Adage Capital Management didn’t respond to requests for comment.
“I am not denying that this is a fly in the ointment,” said Roy Behren, co-chief investment officer at Westchester Capital Management, one of the institutional investors with a significant position in Hess’s shares. “But despite the noise surrounding this and the Venezuela situation, we still believe the deal is more likely to be completed than not.”
Investors at two hedge funds with large merger-arbitrage wagers on the deal echoed the sentiment. They asked not to be named because they aren’t authorized to speak publicly. The difference between Hess’s trading price and the value of the takeover offer has narrowed to about $7, from as wide as $11 following the Exxon announcement, another sign of growing market confidence that the deal will get done.
The risks involved with the Hess deal illustrate the complexities of betting on the outcomes of large corporate takeovers. Merger-arbitrage investors are already navigating a tougher antitrust environment under the Biden Administration, and dealmaking is only just starting to bounce back after a steep slowdown last year.
Despite sticking to their bets, some of the big hedge funds are still more cautious about the deal now than they were when it was announced given the recent developments.
Part of the complication for arbitrage traders was that the stake dispute stemmed from Exxon and Chinese oil giant Cnooc Ltd.’s joint operating agreement with Hess regarding the Guyana asset. Because the contract isn’t public, it’s hard for investors to assess how it may play out, and its impact on deal’s closing timeline, which is scheduled around mid-2024.
“Chevron has made it clear that it doesn’t think the right of first refusal issue is applicable, and most investors seemed to have gotten around to that view,” said Frederic Boucher, a risk-arbitrage analyst at Susquehanna Financial Group, which is a market maker in Hess’s securities. Chevron said last week that it’s “fully committed” to the Hess deal and doesn’t believe the contract or discussions with Exxon will prevent its completion.
The possibility that Exxon might eventually make a bid for Hess outright might have contributed to the spread narrowing, Boucher added.
“We owe it to our investors and partners to consider our preemption rights in place under our Joint Operating Agreement to ensure we preserve our right to realize the significant value we’ve created and are entitled to in the Guyana asset,” Exxon said in a statement.
Geopolitical tensions — another key uncertainty — have also abated after Venezuelan President Nicolas Maduro exchanged gifts with Guyana’s President Irfaan Ali on the sidelines of the recent Community of Latin American and Caribbean States meeting.
The market now appears to be pricing in anywhere between a 65% to 75% likelihood of the deal going through — up from 55% to high-60% last week, according to several market specialists, based on varying assumptions of Hess’s standalone value if the merger fails.
Many hedge funds also owned sizable options positions that appeared to protect against a drop in Hess’s share price, though it’s not possible to discern from regulatory filings how much of a decline they’re shielded against.
Roller-coaster ride. The Chevron-Hess deal was a welcome relief for merger-arbitrage investors who had struggled for much of last year to find attractive opportunities because of a slowdown in dealmaking. They reckoned the acquisition was less likely to face the intense regulatory scrutiny that Microsoft Corp.’s takeover of Activision Blizzard Inc. was confronted with. Because it was the second largest oil merger announced last year, gains were touted to be hefty if the deal went as planned.
The first signs of trouble came in December, when Venezuela threatened to seize mineral-rich regions in Guyana. Hess’s stock fell to about $14 below the value of Chevron’s bid, the widest gap since the deal was announced.
Concerned hedge fund executives from London and New York flocked to the Guyana Energy Conference & Supply Chain Expo in Georgetown last month as geopolitical tensions between the two South American countries simmered, according to people with knowledge of the matter.
Georgetown’s top hotels were fully booked due to the surge in demand, and some fund managers ended up having to share rooms, the people said, asking not to be identified discussing a private matter. Prices for round-trip business class tickets from London to the capital city of Guyana surged to more than £10,000 at the time.
Now, fund managers are waiting to see whether the stake dispute gets resolved via negotiations. Chevron said that it would cancel the takeover if the dispute does go to arbitration and Exxon wins.
Brett Buckley, an event-driven strategist at Wallachbeth Capital, called it a “high-consequence, low-probability event,” adding that while the preemptive rights dispute with Exxon and Cnooc adds an extra layer of risk for arbitrage investors, it’s unlikely that it would impact the deal outcome.
“These disputes can arise during transactions like this,” he said. “It should be amicably resolved by the relevant parties.”
