A $10bn wager by merger arbitrageurs on Chevron’s $53bn acquisition of Hess Corp is approaching a pivotal juncture, as ExxonMobil’s legal challenge to the deal enters a critical phase this week, according to a report by Bloomberg.
At the heart of the dispute is Exxon’s claim to a right of first refusal over Hess’s 30% stake in Guyana’s Stabroek oil block, one of the most valuable undeveloped offshore reserves in the world. The outcome could reshape the merger landscape and deliver material gains – or losses – for the hedge funds holding the largest arbitrage position of the year.
A closed-door arbitration hearing, overseen by the International Chamber of Commerce, begins Monday in London. Exxon argues the deal structure triggers its right to pre-empt Chevron’s takeover, while Chevron and Hess counter that the merger – structured as a corporate transaction, not an asset sale – does not fall within the scope of the agreement. A ruling is expected within 90 days of the hearing’s conclusion.
“The outcome is more important for Chevron than it is for Exxon,” said Fernando Valle, Managing Director at Hedgeye Risk Management. “Chevron has a gap in their portfolio and adding Guyana would be a home run for them.”
The stakes for event-driven hedge funds are equally high. As of Q1 filings, arbitrage investors controlled around $10bn in Hess shares – roughly 22% of its public float – according to Morgan Stanley’s Matthew Mitchell. That dwarfs the next most crowded arbitrage trade and reflects high conviction across the space. Top holders include Citadel, HBK, Pentwater, and DE Shaw, according to Bloomberg data.
Despite the litigation overhang, many hedge funds have opted to maintain exposure, viewing the deal spread – around $9 per share, or a 20% annualised return through an expected close in late summer – as a compelling risk/reward opportunity.
“It’s the largest arbitrage position we’ve held in a long time, because the spread is extremely wide and we believe that it would be a negative development for Chevron to lose this arbitration,” said Roy Behren, Co-Chief Investment Officer at Westchester Capital Management. Westchester holds 2.1 million Hess shares, worth approximately $270m.
Exxon’s claim hinges on language within a joint operating agreement signed over a decade ago. While Exxon CEO Darren Woods has asserted confidence in the company’s interpretation, Chevron and Hess have maintained that the documents do not apply to corporate control transactions.
“We wrote these documents, we understood the intent of those documents,” Exxon CEO Darren Woods said in December. “And so we’re pretty familiar with the language and the requirements in that.”
The transaction has already cleared shareholder and regulatory hurdles, including approval from the Federal Trade Commission. Chevron is expected to close the deal swiftly if the arbitration breaks in its favour. If not, it may walk away entirely.
Funds playing the spread have typically paired long Hess positions with shorts in Chevron, a strategy that could mitigate losses if the transaction collapses. In that scenario, Hess would retain its Guyana asset, offering valuation support, while Chevron’s strategic setback could weigh on its stock – benefiting the short leg.
Crude oil’s rally last year helped buttress Hess’s standalone value, though recent price softness has moderated those gains.
