Dear Editor,
Much has been said and written about the assets of the Stabroek Block partners in Guyana. Despite the pellucid explanation by the Vice President, Dr. Bharrat Jagdeo on the distinction between the net book value of the companies’ asset versus their market value, the confusion exhibited by a certain media entity’s publisher deepens. In this regard, the entity’s publisher convincingly argued that the proposed acquisition of Hess by Chevron, a deal valued at US$53 Billion, has nothing to do with the valuation of the Guyana’s Stabroek Block Assets.
As of December 2022, ExxonMobil Guyana (EMG) and their Co-Ventures (CoVs) total assets (consolidated) in the Stabroek block stood at G$4.018 Trillion or US$19.3 Billion reflecting an increase of 56.5% or G$1.45 Trillion compared to the previous year’s (FY 2021). Total assets are comprised of non-current assets and current assets. Non-current assets include property, plant, and equipment (PPE), net intangible assets and related party receivable.
Under the non-current assets, PPE include: buildings and vehicles, wells, and facilities (work in progress), producing assets (wells and facilities), Right of Use (FPSO), and Right of Use: Drill Rig and others. Intangible assets represents acquisition costs for interests in the offshore Stabroek, Canje and Kaieteur blocks. The current assets are comprised of inventory (materials and supplies), inventory (crude oil), deferred receivable, trade receivable, other assets, and cash and cash equivalents. Other assets include motor vehicles, office equipment, non-residential buildings, and IT equipment.
In accounting terms, the book value recorded in the balance sheet represents the actual acquisition cost of the assets. Whereas net book value represents the book value adjusted (a deduction) for depreciation (net of depreciation).
Market value of a company is distinctly different from the book value. The market value reflects the price the market is willing to pay for same. There are mainly three broad methods of valuation for companies. These are the asset approach (fair market value (FMV) of net assets), the income approach (intrinsic value) and the market approach (relative value).
The Proposed Chevron/Hess Acquisition Deal
Chevron has proposed to acquire all of the assets of Hess for the sum of US$53 Billion. As of 2022, Hess’ total assets stood at US$21.7 Billion, annual revenue of US$11.6 billion, with an earnings after tax of US$2 Billion, and earnings per share (EPS) of US$6.8.
For the same period, Chevron closed 2022 with a total asset of US$257.7 Billion, revenue of US$246.2 Billion, with an earnings after tax of US$35.5 Billion, and an EPS of US$18.4. Chevron’s asset base is nearly 12x the size of Hess’, and Chevron’s EPS nearly 3x that of Hess.
Hess shares was traded at US$145 (at the time of writing), resulting in a price-to-earnings (P/E) ratio of 21.32. Considering that a P/E ratio of between 20-25 is considered decent, this means that the Chevron/Hess acquisition deal is a fair deal in terms of the market value of the company. This range is also typically in line with the industry’s average.
At the current proven estimated reserves (11 billion barrels) in the Stabroek block and at current price (US$84/per barrel), Chevron is effectively seeking to tap into 30% (3.3 billion barrels) of the Stabroek block resource as part of its future growth strategy, which is worth US$277.2 Billion.
Yours respectfully,
Joel Bhagwandin
