Morgan Stanley is optimistic about Chevron Corporation's acquisition of Hess to enhance business stability, giving it a "hold" rating and a target price of $174.

Morgan Stanley has resumed coverage of Chevron Corporation (CVX.US) and given a "hold" recommendation with a target price of $174, believing that after completing the acquisition of Hess Corporation, Chevron successfully resolved long-standing uncertainties, significantly enhanced business stability, and improved growth and portfolio sustainability. Although analysts point out that its long-term growth potential is slightly behind some peers, stronger free cash flow growth by 2026 will effectively offset this gap. It is understood that Chevron Corporation officially announced the completion of the acquisition of Hess on July 18, with the transaction amounting to $53 billion. This acquisition benefited from a favorable ruling by the International Chamber of Commerce arbitration panel on a dispute over Guyana's Stabroek block interests, clearing obstacles for the transaction. Chevron Corporation stated that the post-merger capital expenditure budget is expected to be between $19 billion and $22 billion, with an anticipated $1 billion in operational cost synergies by the end of 2025. The company plans to provide the latest long-term financial and operational information and guidance, demonstrating the results of the Hess acquisition at an Investor Day in New York on November 12. In addition, Chevron Corporation's second-quarter financial report released last Friday showed adjusted earnings of $3.1 billion, earnings per share of $1.77, and cash flow per share of $4.81, all exceeding market expectations. This performance was attributed to downstream business profits of $839 million (higher than expected) and strong performance in the upstream segment. However, the profit mainly derived from oil and natural gas production revenue was $2.7 billion, slightly down from $4.5 billion in the same period last year. Morgan Stanley analyst Devin McDermott pointed out that Chevron Corporation's total production in the quarter was close to 3.4 million barrels of oil equivalent per day, slightly exceeding market expectations, with the Permian Basin production meeting the company's multi-year target of 1 million barrels of oil equivalent per day. Given the positive performance of the Permian and other core assets this year, the company expects total production for the fiscal year 2025 to be close to the upper limit of the guidance range of 3.4 million to 3.465 million barrels of oil equivalent per day (excluding Hess assets). It is noteworthy that Chevron Corporation's organic growth potential post-2026 has become a focus of investor attention as many core assets enter a plateau period. McDermott believes that the equity obtained from the Guyana project through the acquisition of Hess will effectively extend the company's growth cycle and strengthen the development outlook for the next few years. Chevron Corporation holds a 30% stake in this block through the Hess acquisition, with Exxon Mobil Corporation holding 45% and CNOOC holding 25%, this resource layout will significantly enhance Chevron Corporation's growth potential in the coming years. Despite Chevron Corporation's slightly lagging long-term growth trajectory compared to some competitors, Morgan Stanley estimates that at a WTI oil price of $60 per barrel, its free cash flow per share return on equity in 2026 will reach 8%, higher than Exxon Mobil Corporation's 6% and ConocoPhillips' 7%, this advantage is attributed to the TCO project, Gulf of Mexico operations, Permian Basin development, cost-cutting initiatives, and the $12.5 billion increase in free cash flow brought by the Hess transaction. Overall, Chevron Corporation's recent layoffs and asset integrations in Kazakhstan and the Gulf of Mexico reflect the company's flexible strategies in responding to market changes. By optimizing resource allocation and improving operational efficiency, Chevron Corporation is striving to maintain a competitive edge in the complex and rapidly changing energy market. In the future, with the full production of the Guyana project and the gradual release of synergies from the Hess acquisition, Chevron Corporation is expected to achieve stronger growth and create greater value for shareholders.