An oil-patch brawl over a $53 bn megadeal entwines the legacies of three CEOs

Darren Woods told Wirth he looked forward to collaboration in Guyana, where Exxon and Hess own portions of a buried treasure of 11 billion barrels of oil and gas. Chevron and Exxon have a long-established partnership in projects around the world, one they could expand off the coast of the rainforest-covered South American country, Woods indicated in the October phone call.

Weeks later, Exxon called with a starkly different message for Chevron and Hess: not so fast.

Exxon executives contended they and China’s CNOOC, a third partner in Guyana, have a contractual right to pre-emptively match Chevron’s offer for Hess’s stake in Guyana. Blindsided, Chevron and Hess disagreed. Both sides dug in, and private talks failed. Amid monthslong discussions, Exxon stunned its rivals again by filing for arbitration and ending talks in March. The proceedings could sink Chevron’s largest-ever deal.

Hinging on the interpretation of several lines in a confidential contract, their dispute has burst like a thunderclap in Houston, the capital of the U.S. oil industry, which hasn’t seen titanic oil companies battle like this since a court fight with Pennzoil forced Texaco into bankruptcy in the 1980s.

The clash between the two largest descendants of John D. Rockefeller’s Standard Oil monopoly has also subsumed some of Wall Street’s most influential advisers, including JPMorgan Chase, Morgan Stanley and Goldman Sachs.

Now, the fortunes of all three companies are intertwined, as are the legacies of Woods, Wirth and John Hess.

If Exxon wins in arbitration, Chevron’s acquisition of Hess would be rendered effectively impossible. For oilman John Hess, it would mean his eponymous company would likely be much harder to sell, and calls into question what’s next for a CEO about to top off his legacy with a momentous transaction.

For Wirth, it would be the second megadeal he has missed out on in the past five years, and increase the pressure on him to secure another big bounty of oil. Woods, on the other hand, would have the option to buy more of the precious Guyana project, if Hess was a willing seller.

Drillers have rushed recently to secure their future oil reserves. Many oil fields are depleting, and further exploration could take decades to pay off. Wall Street has grown averse to gambling billions on new fields as countries move away from fossil fuels. That has made Guyana’s prolific Stabroek block one of the most coveted in the world, and a crown jewel for Exxon and Hess.

Soon after Chevron’s deal was announced, Exxon’s lawyers, believing the company had a right of first refusal that applied to the transaction, combed through every line of the joint-operating contract for the Guyana project that was written decades ago—a document few have ever seen.

Joint-operating agreements are indispensable in the oil industry, where companies often partner in megaprojects to share risks and investment. The contracts usually contain a right of first refusal for existing partners when one company wants to sell out. Exxon believes that right is triggered by the corporate takeover. Chevron believes the right applies only to an asset sale.

In months of discussions, Exxon laid out a number of concerns that Chevron believed it could address. Both sides seemed to be working toward a resolution, though it’s unclear what it would have entailed, according to people familiar with the discussions. The talks ended suddenly in March when Neil Chapman, a senior vice president at Exxon, told the audience at an investor conference his company had filed for arbitration in the International Chamber of Commerce in Paris. Chevron had learned of the move only a few hours prior, these people said.

If Exxon’s argument prevails, Hess’s Guyana holdings—worth $40 billion or more, by some estimates—would turn into a sort of poison pill. It wouldn’t only blow up the merger with Chevron, per the terms of its agreement with Hess, but would likely scare off any future suitors—except for Exxon itself.

Woods and Chapman maintain their interest is in preserving the sanctity of contracts and their goal is to understand how Chevron valued Guyana—and then to decide which options to explore. Woods has said he isn’t interested in buying Hess outright, but hasn’t ruled out buying Hess’s chunk of the project or other options.

“We’ve got a very attractive resource that, frankly, we put a lot of effort into developing," Woods said in an interview. “We have an option to understand what a potential transaction for us would look like and evaluate that for our shareholders."

The dispute over Guyana is a body blow for John Hess, who runs the last major U.S. oil company controlled by a single family. The tycoon has been frustrated with what he views as a highly unusual situation, and is perplexed about what Exxon wants, according to people familiar with his thinking.

Hess and Wirth personally led the negotiations, after they first discussed the idea of a Chevron-Hess deal over dinner in summer 2021. The two disagreed on price then, but started talks in earnest last year. The deal was seen as a coup for Chevron, giving it a piece of its rival Exxon’s most important asset.

For years, Exxon and Chevron have been both friend and foe. They are partners on multibillion-dollar projects in places like Kazakhstan and Australia. But the oil giants have also competed fiercely for a shrinking pool of investors willing to park their cash in fossil-fuel companies.

Despite the competition, Woods and Wirth have enjoyed cordial relations—occasionally dining together—since their tenures began in 2017 and 2018, respectively, say people familiar with the matter.

In the eyes of many investors, Exxon has long held the role of big brother to Chevron, with larger oil production and superior profits. But the rivalry shifted in the mid-2010s when Chevron’s shareholder returns in some years began outpacing those of the industry, including Exxon’s.

Wall Street credited Wirth’s cost-conscious approach, which aligned with investors’ push for austerity and a focus on cutting carbon emissions. Investors favored Wirth’s move to walk away from a bid for shale giant Anadarko Petroleum in 2019 after Occidental Petroleum outbid Chevron with a successful offer of $38 billion. Chevron pocketed a $1 billion breakup fee.

“Chevron, under Mike’s leadership, has navigated some pretty tempestuous waters quite well, and it’s undeniable the company is better today than it was in 2018," said Dan Pickering, chief investment officer at Pickering Energy Partners.

As Chevron ascended, Exxon suffered setbacks. Woods’ plan to spend heavily to grow production turned off investors. In 2020, Chevron overtook Exxon as the largest U.S. oil company by market value. In 2021, Exxon lost a proxy challenge to a little-known activist investor who placed three directors on Exxon’s board as it pushed the company to better navigate the energy transition and cut spending.

But in the past few years, Exxon’s fortunes have risen. It collected record profits in 2022 and paid out record shareholder distributions last year. Woods’ countercyclical investments, unpopular with some investors at the time, paid off when energy prices came roaring back after the pandemic. He won the full backing of his board for this year’s $60 billion purchase of West Texas fracker Pioneer Natural Resources, a deal well-liked on Wall Street.

Woods has used the momentum to aggressively pursue Exxon’s interests, according to people familiar with the matter. While Exxon, which employs an army of lawyers, is famous for its willingness to fight, the challenge to the Hess deal has turned heads in Houston.

Though the dispute risks some reputational blowback for Exxon, the fate of the deal is more consequential for Wirth than Woods, investors and analysts say.

Wall Street sees the deal for Hess as critical to securing Chevron’s long-term oil reserves and profits. Investors and analysts said if the Hess deal falls through, and Chevron doesn’t acquire another large company or asset, they are concerned the company’s oil-production portfolio could grow thinner in coming years. At the same time, many of the biggest and most attractive companies have been scooped up in a flurry of deals over the past year.

Chevron executives have tried to reassure investors it has plenty of other prospects, including promising frontier exploration in Namibia, the potential of liquefied natural gas in the Eastern Mediterranean, its megaproject in Kazakhstan and its operations in the Gulf of Mexico and the Permian Basin in West Texas and New Mexico.

But Hess’s Guyana stake represents Chevron’s best option to grow in the eyes of many. The Guyana consortium is expected to produce 1.2 million barrels a day by 2027 and continue pumping large amounts of oil for years, having approved more than $50 billion in project spending thus far.

“If they lose it, then I think it will be a substantial blow to his reputation," said Paul Cheng, an analyst at Scotiabank.

Chevron and Hess’s advisers spotted the right of first refusal during deal due diligence, but believed it didn’t apply to the transaction and thought it was unlikely Exxon would pursue it, said people familiar with the matter. Chevron’s financial advisers included Morgan Stanley and Evercore, while Paul, Weiss, Rifkind, Wharton & Garrison served as its legal adviser. Hess’s financial advisers were Goldman Sachs and JPMorgan Chase.

Hess shareholders are due to decide whether to approve the deal or not on Tuesday. Several investors have said they would abstain from voting due to the feud with Exxon.

The sale to Chevron was supposed to be a regal send-off for the 70-year-old John Hess, allowing him to merge the firm he took over from his famously gruff father, Leon Hess, with the second-largest Western oil company. The merger agreement provides for John Hess to join Chevron’s board, a role that would give him a say in the future of the combined entity.

Legendary Wall Street lawyer Martin Lipton, a founding partner of law firm Wachtell, Lipton, Rosen & Katz advised Hess on the deal. Shortly after it was announced, he said in an interview that John Hess had concluded Chevron was the best possible buyer for his family company.

“This wasn’t digging up a deal or being forced into a deal," Lipton said.

John Hess and his family own a roughly 9% stake in Hess worth around $4.3 billion, and the CEO stands to net about $50 million in cash and stock from the change in control alone, according to company filings.

With the transaction in limbo, uncertainty has trickled down to the workforce, with Hess staffers concerned about what lies ahead, according to several employees.

An Exxon win in the arbitration would essentially give that company veto power over who Hess gets sold to—or even if it gets sold at all. It means that Hess might have to go on operating as an independent company, which raises the question of whether John Hess would remain at the helm—and if not, who would succeed him. Before the deal with Chevron, he hadn’t anointed a successor and was prepared to remain in the CEO seat for years.

Compounding John Hess’s irritation with Exxon is his view that Hess was pivotal in helping turn the fortunes of the Guyana project around.

His company bought Shell’s stake there in 2014 after Exxon and Shell logged dozens of dry wells bereft of oil. Exxon executives have told John Hess his company was essential to the venture’s success, according to people familiar with the matter. The CEO feels that his geologists played an important role in the exploration efforts that led to a prodigious find. Woods has publicly praised Hess’s work in Guyana.

Hess’s stock price soared in recent years as oil came pouring from the South American discovery. Some large Hess investors are hopeful Hess will end up being acquired by either Chevron or Exxon.

“If John Hess wants to sell, somebody’s gonna buy it," said John Levin, founder of asset manager Levin Capital Strategies and a long-term Hess shareholder.

Write to Collin Eaton at collin.eaton@wsj.com and Benoît Morenne at benoit.morenne@wsj.com