Hess-Chevron merger vote appears ripe for narrow approval

By Sabrina Vale

HOUSTON (Reuters) – Hess Corp Chief Executive John Hess has until Tuesday to quell a shareholder rebellion over his handling of what could turn out to be one of the biggest mergers in the history of the oil industry: a proposed sale of the oil producer for US$53 billion to Chevron. Corp.

Hess, 70, has spent the last month visiting or calling dozens of investors for support. A sale seemed all but certain last fall and Hess still appears poised to win, based on Reuters interviews with major investors. But support has waned in recent weeks, with more investment funds voicing concerns about the deal.

A lengthy U.S. federal regulatory review and a surprise arbitration challenge by Exxon Mobil have put about 40% of outstanding shares on the fence, interviews show.

That could make it harder for Hess to get approval for more than 50% of the 308 million shares outstanding, although he can count on his family’s shares, along with other directors and managers, for about 10%.

Hess has lost about $5 billion in market value since the deal was announced. Every quarter that the merger is delayed, its shareholders lose the opportunity to receive dividends from Chevron – a great incentive, since Chevron’s dividends are four times larger than Hess’s payout.

“This is the mother of all embarrassments,” said a London-based investor who declined to be named, adding that if Hess shareholders approve this deal, the chances of a higher bid will disappear.

TIGHT SCOREBOARD

Three firms – HBK Capital Management, DE Shaw & Co and Pentwater Capital Management – ​​have stated that they are not ready to give the green light. Together, they own almost 6% of Hess.

Three other investors filed lawsuits to delay or block the vote, backed by a flood of letters to Hess management complaining that it failed to disclose legal and regulatory issues that could delay the transaction by up to a year.

Six major investors who spoke to Reuters on condition of anonymity estimate that companies holding about 40% of the company’s shares have decided or are strongly considering abstaining, essentially a no vote.

“The longer this goes on, the more I will start to question the value proposition of this merger,” said Roy Behren, co-president of Westchester Capital Management, which holds $317 million in Hess shares and is considering an abstention.

The delays cut into the expected profits of arbitrage funds that attacked Hess shares after the deal was announced, betting it would close in the first quarter.

Fayez Sarofim & Co, Invesco and Barrow Hanley, which hold about 3% of the outstanding shares worth about $1.5 billion, are expected to vote yes, according to people familiar with the matter. The three companies declined requests for comment.

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Influential proxy consultant Institutional Shareholder Services (ISS) recommended abstaining to allow more time for details of the arbitration case to emerge. Rival Glass Lewis recommended a vote in favor, saying the merits of the Chevron deal are solid and offer a premium to Hess shareholders.

Leading investment firm Vanguard Group, with 10% of Hess shares, holds the largest single stake. Your portfolio managers’ votes may influence the outcome. Vanguard declined to disclose its vote.

EXXON AS A POSSIBLE SPOILER

This year, Exxon and partner CNOOC Ltd filed an arbitration claim claiming they have the right of first refusal to purchase Hess’ Guyana assets. Chevron and Hess say the right of refusal does not apply to the sale of the entire company. If Exxon’s arbitration is successful, Chevron could back out of the deal without paying a termination fee.

In recent private meetings, John Hess told investors he didn’t know Exxon’s end game with arbitration. If Exxon is successful, Hess and Chevron say they would cancel the deal, and Hess said that would mean Exxon would not be able to exercise its right of first refusal on Guyana’s assets.

If the arbitration is successful and Chevron pulls out, Hess will have few alternative buyers with rights of first refusal for any future deal, said Biraj Borkhataria, an energy analyst at research firm RBC Capital Markets.

Chevron urgently needs the deal to keep up with rival Exxon, which this month completed its $60 billion acquisition of shale producer Pioneer Natural Resources.

The lucrative Hess oil fields in Guyana would help Chevron cover geopolitical risks associated with the TengizChevroil project in Kazakhstan, which transports most of its oil through Russia to a port on the Black Sea. It would also help balance surpluses at Chevron’s Australian liquefied natural gas (LNG) projects, which have been hit by labor and operational problems.

A spokesperson said Chevron “expects Hess to obtain a successful shareholder vote and complete the transaction under the terms of our merger agreement.” Last month, CEO Michael Wirth said Chevron would be in good shape regardless of the acquisition.

Some Hess shareholders wonder whether Exxon would make a higher offer for the Guyana assets than they would get from Chevron’s offer for the company. There are no legal impediments to an Exxon bid before Tuesday, but Exxon said it wants its rights to the Guyana asset confirmed before making any decision on a bid.

Exxon also said it does not intend to acquire Hess as a whole.

“I don’t see how Exxon can make a bid (for Hess) when they said they wouldn’t,” said oil analyst Paul Sankey of Sankey Research. “Unless they wait a while and things change a lot. I mean years.

(Reporting by Sabrina Valle in Houston and Svea Herbst-Bayliss in Boston; Editing by David Gregorio)