Chevron (NYSE:CVX) has reached a new midstream services agreement with Hess Midstream, which will involve the exchange of its ownership in Hess Midstream and its DJ Basin midstream assets for future cost savings. The deal includes Chevron contributing all of its ownership interests in Hess Midstream, which amounts to over 77.8 million Class B units, 449,000 Class A units, and 100% of its general partner interest. Hess Midstream will cancel these units, reducing its outstanding shares by nearly 40%. Additionally, Chevron will transfer its DJ Basin crude oil midstream assets, including significant oil-gathering, gas-gathering, and storage capacities, to Hess Midstream. In return, Hess Midstream will reduce tariff rates for Chevron's oil and gas gathering and processing services in the Bakken from 2027 through 2033 and extend the agreement through 2045.
The revised contracts will reduce Chevron's Bakken unit midstream costs by about 50%, enhancing its future earnings and return on capital employed. However, Chevron expects to record a one-time, after-tax loss of between $3 billion and $4 billion as it transfers valuable midstream assets to Hess Midstream. The deal will also simplify Chevron's portfolio and balance sheet, removing around $3.7 billion of debt from its balance sheet after the deal closes.
Hess Midstream will become a fully independent entity and a multi-basin midstream company by adding the DJ Basin to its operations. This diversification will increase third-party revenue and enable Hess Midstream to pursue additional acquisitions. Despite a near-term reduction in income, the deal is accretive on a per-share basis after accounting for the 40% decline in its share count, allowing the company to maintain its current dividend level.
The transaction is seen as a win-win for both companies, with Chevron benefiting from long-term cost savings and Hess Midstream gaining independence and operational diversification. The deal is expected to enhance shareholder value for both companies over the long term.