Ep.130: Microsoft's AI Edge & Chevron's Biggest M&A Deal Ever

Okay, welcome back to the podcast. And if you are watching the conversation, I do go into the office. Here I am. It's not a virtual background. I, I think people are only ever used to seeing me, uh, at home, but here we are. You're at home, I'm in the office, so there you go.

Yes, yes indeed.

So we are recording this on Wednesday the 25th of October. The episode is not going out though, Piers, until Friday, so So just to give you and everyone a bit of a heads up, we are going to be talking about this episode what has been fresh off the press, at least at the point we're talking, Microsoft and Alphabet earnings. We're going to take a bit of a deep dive because they've had completely opposing reactions in terms of stock market price, in terms of their shares. One's skyrocketed and one's fallen somewhat off the cliff. And so we'll look to draw some parallels but some differences as well between what's been influencing that market reaction, at least in the short term. Um, that does then front run some of the other earnings we get. We're going to have— by the time you listen to this, Facebook and Amazon would have come out as well. But then we're also going to pivot and talk a little bit about M&A deals. There's been another mega one in the energy space in the US. So following on from Exxon's deal for Pioneer, this week we've had Chevron making its move on Hess Corporation in a $53 billion all-stock deal. So we'll talk about quite a few different things in that story actually of interest, all the way through from not just the numbers and the financials, but also the way of which the deal is being composed, and also the context that it comes in, both for each company in terms of the energy sector, but also politically as well. But to kick things off Piers, perhaps before we dive into those Microsoft and Alphabet or Google numbers, we are talking about here the mega-cap tech stocks, the Magnificent Seven. So maybe you could just provide us a bit of color again about what is the Magnificent Seven and why are they so magnificent, or i.e., so important and influential for global equities?

Yeah, I mean, so the— well, firstly, the Seven, I think most people will know: Apple, Microsoft, Meta, Amazon, Alphabet, Nvidia, and Tesla. So these have kind of been— it's not a new thing to kind of group together big tech stocks. Um, I think FANG was the first sort of foray down that path of, right, who are the big tech giants and let's group them together because whilst there's a lot of differences between what these companies actually do, although some have similarities, we're going to talk about Microsoft and Google now and certainly, you know, one part of their business is kind of direct rivals. But yeah, it's kind of just grouping together the big tech stocks. So we have 7. Nvidia and Tesla have been added. Remember, FANG used to include Netflix, which was always a little bit of a weird addition given the size of the Netflix company was way, way, way smaller than the others. And the F of FANG was obviously when Meta used to be called Facebook and so on. But so yeah, it's not a new thing to group these things together. But, you know, in the last, well, you'd probably say 20 years, big tech has risen to dominate, um, you know, the, the world of corporations and have become the biggest companies on the planet and therefore become the dominant, uh, sort of proportion of stock indices. And so when often we're kind of trying to judge, you know, even like at a macro level, how's the economy performing, you know, one of the key barometers is the stock market. Of course. Um, but because of the dominance of these tech firms, you know, when you're looking at just headline stock market performance these days, it doesn't really tell you the full story. Now, it's been well known this year, and I would say really since back, back to kind of June, it became apparent that, um, if you took the Magnificent Seven stocks out of the S&P 500 So you're left with 493 other companies, then actually that index would be down on the year. So on average, 493 companies, on average, share prices are negative for the year. Add in the 7 and fine, the stock index overall is boosted nicely higher, right? But it's just those 7. Now, what grabbed my attention was an article in the FT yesterday, which is quite sensationalist and kind of makes you go, wow, that's, that's amazing. But then kind of when you think about it, it's, it's kind of obvious. But the headline was Magnificent Seven tech stocks drive US equity domination to new highs. And there's two parts to this story. Firstly, number one is talking about the MSCI Whole World Index. Oh, sorry, that's not the right name. MSCI's benchmark all-country world index. Okay, this is taking the largest 3,000 companies, um, and you know, it's a global index, right? And it's now the same thing. So as of, um, last week, basically same thing. If you took the Magnificent Seven out of that index, the 2,000— what is it— 993 other companies on average are down on the year. But add in the Magnificent Seven and the index is nicely higher. That's number one. The other interesting point about it— so that's quite obvious, right? I mean, it's the same story of the S&P. The other interesting thing was, um, what proportion of this index is made up by US companies? Um, and so it is the case now that there's 3,000 companies in that All-World Index, but it's now 61% US. Now the thing about that is that's an all-time ever high. You go back, like, if you went back 15 years, it was like 40% and it's now up above 60% and trending higher. So it's quite interesting that just on that whole point around, well, the US is a superpower, it's peaked. And you talk about Ray Dalio's kind of big shifting cycles and how now the US is in decline and blah, blah, blah. But on that metric, from a corporation point of view, It's never been more dominant, and it's trending to become even more dominant. And obviously the Magnificent Seven, which are, which are obviously all US companies, are obviously at the forefront of that move.

Before you talk up your US exposure, can I just ask then, of what proportion of that 60-odd percent are tech-oriented names? So therefore they're getting a, a better bump, if you like, on their valuation that actually artificially makes that 60% look more buoyant than actually perhaps more spread and diversified across industry. Yeah, that doesn't change the values. No, I think that then it's not quite as like black and white.

It isn't. But, you know, technology has been the secular shift in the last few decades, and the US have been at the forefront of that innovative cycle. So yes, you could say, well, hang on, you know, not— you can't really compare like for like if all the US companies are tech and then the companies from other countries aren't tech. And so valuations are different. It's a bit unfair.

Well, it—

well, it's— yes, there is an argument to say that, but I'd counter, well, you know, it's the innovative nature of the US as an economy and, and, and the company and the— sorry, the companies and the people within it I'd say, are much more entrepreneurial and are at the cutting edge. And so you could say that's been an advantage for them in the last few decades, but that advantage is going to continue, right? So, but you're right to say that if you, but if you take the, the other point is about if you took the largest 10 stocks, um, then they now make up 19% of the index. So it's not just It's, it's, it's particularly the largest of the large that have been growing the fastest and, you know, have taken this kind of outsized portion of these kind of major indices. Um, so yeah, that's why kind of coming back to the earnings reports this week, you know, when you're looking at the earnings season as a whole, then for sure, um, you know, the tech stocks are kind of— and the big giant tech stocks, the Magnificent Seven you know, they're always at kind of top of people's lists as, right, the ones to kind of really be looking out for. And so Apple and, um, Alphabet, as in Google, announced last night. We've got Microsoft— sorry, got Meta tomorrow. Uh, hang on, Microsoft and Google last night, Meta tomorrow— Meta tonight, and then Amazon tomorrow. Yeah, so they're all kind of coming in a big dump, um, this week.

So in terms of the the numbers then. I'm not— I don't particularly want to dive into EPS and revenues. I want to jump straight into the kind of highlights. And the highlights being, I guess, around AI, around monetizing that in the case of Microsoft, and how they are first to market kind of advantage, and how is that looking at, at the moment. And then talk about cloud. Yeah, that's the, the big area, of course, that definitely AWS coming down the pipe as well, and Amazon will be in focus. So it's a good context there. And then we can talk about just, yeah, the advertising side of things as well. I mean, much more prevalent, of course, for Alphabet or Google in that respect. But to give you a quick summation of how the market's received it without even looking at numbers, the market liked Microsoft about 7% upside it saw after market once these numbers hit, whereas Alphabet dropped about 6%. Talking about kind of peak and trough in terms of those two price reactions, they obviously have seen movement thereafter, but really positive response to Microsoft, quite a negative one for Alphabet. So perhaps we could start with the, uh, cloud. Let's start with cloud, given that they both have a cloud division.

Yeah. So that's where really they're kind of direct rivals. And I was actually just kind of stepping back a sec with the cloud, the whole cloud computing thing. Amazon are the biggest, right? And so in terms of market share, AWS clocking in at about 33% of the global market is Amazon. Okay. Now Microsoft, with their Azure cloud computing service. They're clocking in at 22%. Okay, but one thing about Amazon and Microsoft, the difference between the two, they're converging. Microsoft is marching higher. They've been, and actually for the last 5 years, consistently winning more market share. Okay, Amazon's kind of They're kind of winning more market share. Yes, a little bit off Amazon. I mean, Amazon's market share has been above 30 for that whole period. Microsoft's gone from about 12% to 22%. So who are they winning market share off then? Because it's a little bit of Amazon but not much. And it's actually the kind of big giant laggards like IBM, the dying dinosaurs. Um, IBM's gone from, in that period, from 8% down to about 2%. Um, so really it's kind of IBM that are suffering against Microsoft, and then Alibaba as well. Actually, in the last couple of years they're trending down. They're pretty small though, they're down around about 3%. But, um, but yeah, Microsoft are winning market share. Um, and Alphabet, they've been winning market share as well, but they're only down at about 12%. So here's the hierarchy, just to repeat: Amazon's at 33%, dominant big player. Microsoft number 2, they're at 22%, and Amazon's about 11-12%. Oh, sorry, Google is about 11-12%. Okay, so they're kind of your big 3. And so when we look at Microsoft and Google reporting earnings on the same night, the direct comparison between the 2 businesses is their computer, their cloud computing divisions, because they both do that. They're direct rivals. And you couldn't have seen a more kind of different set of numbers that got reported last night. And what you're seeing is Microsoft very strong, beating expectations in terms of their revenue growth for cloud computing, and Google the opposite, disappointing. And there you've seen the reaction in the stock market diverging to the tune— by the way, you put some small percentages on share price moves there, but turn it into money, Microsoft are up $100 billion on their valuation. Alphabet, so Google, they're down $100 billion. So you've got a $200 billion swing here off the back of this information announced last night.

That's crazy. And though in those terms, yeah, the revenue just from Azure jumped 29% during the quarter for Microsoft. The Street was looking for a jump of just 26%. On the flip side, Google's cloud computing division was up 22%, but the street was more hungry looking for a 26% gain. So still growing phenomenally fast.

It's—

does— by being magnificent, do you have to have magnificent earnings in anything but magnificent— magnificence?

Sorry, what?

I'm trying to create words here. Anything other than being magnificent is a failure. So is the bar so high with these tech stocks now that—

that, that's the issue, right? They're up on the pedestal, and you could say there's only really one direction from there, and it's you've got to be absolutely smashing it to kind of stay on the pedestal, and anything that's not extraordinary is disappointing. It's quite interesting, I was looking back at kind of Microsoft's history. And it is a hell of a revival, this. So they've kind of gone through, you know, obviously they're a very old company. If you kind of put them alongside the Googles and the Metas, which are much newer, you know, these companies were born in this century, whereas Microsoft, of course, hails back to the 1960s even, right? So Microsoft has been around a lot longer. Microsoft kind of had its first glory days you might say, in the 1990s. And in the 1990s with Windows, you know, became the absolute dominant number one player in the market and at the same time had some outrageous revenue growth figures. Even though they were dominant and the big boys, they were growing like 30% a year during that decade and they were on fire and they were the world's biggest company. Okay. Or technology-wise anyway. Okay, biggest tech firm in the world. Then they kind of— I think with that comes a little bit of complacency. And maybe you could, maybe you could say Apple are kind of going through a bit of complacency, their iPhone dominance. You know, what have they really done since the iPhone? There's lots of analysts that would question their ability to innovate in a way that they did in the past with that iPhone thing. So you could say Apple are maybe going through their sort of period of complacency that Microsoft had in the noughties. And Microsoft got very big and a bit bloated and complacent and basically entirely missed the whole smartphone revolution and didn't get on that bandwagon at all. Okay. Now Nadella, So Satya Nadella, who's Microsoft CEO, they had this big launch. They had a big launch event back in September, on September 21st in New York. And one of his kind of opening lines at this big showpiece event, Nadella said, it's kind of like the '90s are back. And he's basically saying that, yeah, we got bloated, we got complacent, we missed out on mobile. But we— and because of that, they've kind of got this sort of attitude now of, you know, that they're kind of— I think be paranoid, I think is one of Nandella's sort of go-to sentence phrases, which is be paranoid, right? What's happening out there? It doesn't matter how big we are, how well we're doing, we've got to be worried about, right, what's next? You know, who's in the driving seat? Where can we position ourselves? How can we go again? And I think with that attitude, they've been right at the very forefront of the AI revolution. And so this is why everyone's so excited about Microsoft. And it's kind of now, you know, you would say that like from as a business. So not only with AI, of course, their cloud computing division is becoming bigger and bigger and bigger. And what that does for the company is that their operating margins really radically improved because the cloud computing business is something like 60% margin or something. It's crazy, right? So actually over the last decade, the company as a whole has gone from an operating margin of 29% in 2014 up to now 43%. So not only are they growing revenue like really strongly, the margins on those new revenues are phenomenal. So net, what does that translate to? Well, the profitability is growing even faster.

And it does seem like the, the AI kind of tit for tat has kind of come off the boil a little bit in the last couple of months. But they did say that their Azure OpenAI service now has 18,000 customers And that's up from 11,000 customers in just July.

That's paying, so that, that's paying custom, paying your $20 a month or whatever it is.

Yeah. So I, I guess that's, well, that's probably even more, I'm thinking enterprise, but kind of level packages. But yeah, the, the idea there being, I guess that at the moment it looks like there isn't really a credible competitor within that space who not only has the tech but has it integrated into an efficient ecosystem. Of which is already a matured form of work practices in most industries, i.e., office. And so they've got this foundation that's firm and this platform and ecosystem that's already there. And then they get the users in. And if you can't then as a business access AI in any other way, you get sucked into that ecosystem and then get monetized throughout the entire product suite. So you can see where the growth is coming.

It's genius. And the deal, I mean, that's right. They're so ahead of the race, like with the whole AI thing. And I think the other thing they realized, probably again from going through their bloated period, because they're a bit older, a bit longer in the tooth, they've maybe learned more lessons along the way. And another one was you don't need to do the inventing yourself. Because if you go and have a look at Google, and Google, they've been, I mean, they've been embarrassed a bit by Microsoft this year and they're really far behind on AI. But Google have that attitude, I think, well, we've got, we've got to make it, we've got to invent it, we've got to do it ourselves. And they're plowing crazy amounts of money, you know, into that. Whereas Microsoft are like, well, Do we? We can accelerate this by buying stuff like, like OpenAI, of course. And the great thing, just finally back on that, the last piece of the jigsaw for the cloud computing part. So Microsoft, because we're in that macro cycle where enterprises, companies are trying to tighten the belt a little bit and they're trying to reduce some of their cloud computing costs, which is why Google's growth is disappointing. We're going to see from Amazon later this week. They're the big boys, AWS. So their AWS figures later this week will be hugely interesting to see. But Microsoft's cloud computing numbers are, wow, great growth, faster than expected. The opposite of what we were expecting from that kind of macro point. And the thing is, the deal they did with OpenAI means that all of this kind of ChatGPT traffic, all of it, the deal they did with OpenAI was that any user of OpenAI has to use Azure. So it's that direct throughput onto the Microsoft cloud computing service. And so the, the news is that the AI uptick has outweighed that macro downtick, which is why their division has outperformed and Google's hasn't.

That's super interesting. I think you made a really good point there. Just to reemphasize about the idea of the person who creates the product or the idea, and then the person who has the business mindset to go to market and successfully develop a strategy to sell the product. You know, even Apple in history, yeah, with the Nokia having the first touchscreen phone. Thank you very much. We'll take that. And we'll make a phenomenal product out of it through our marketing engine. But let's just talk about advertising for a moment. I know not so much then. So stepping away from Microsoft a little bit, the revenue—

hang on, wait, wait, wait. Let's— can I just finish on Microsoft?

Okay.

Before we go to Google, because they did have good advertising numbers over at Google. But this, I just want to— so this, I mentioned that they had that launch event in September. Well, what were they launching? They were launching their Copilot. So this is finally getting the whole AI thing, you know, into enterprise software that kind of everyone's already using. When I say everyone's already using, well, here's a question for you, pop quiz. How many people use Microsoft 365? So Microsoft Office, they've rebranded it to Microsoft 365. How many users of Microsoft Office do you think there are? Paying subscribers, this is.

So this is individuals as well as companies you're talking?

Yeah.

It's got to be a humongous figure.

Let's have it.

1.4 billion.

Oh, it's very good. It's 1.2 billion. 1.4 billion is actually the number of Windows.

Oh, I got confused. That's all.

Yeah, obviously. But the point is, this is huge, right? Because they've launched Copilot. When I say launch Copilot, what does that mean? Well, they've got bots and AI to help with. So there's an Office Copilot, there's a Windows Copilot. So that's for the operating system, right? So you'll be able to do things like changing computer settings, generate images, summarize web pages, kind of all this stuff. They've got a Copilot for their sales software. They've just launched, they've just launched a Copilot for their human resources software. They've just launched their Copilot for their cybersecurity software. Did you know? So I was, I had no idea, but I was reading today, cybersecurity, Microsoft is the biggest player in the world. In fact, Microsoft generate more revenue on cybersecurity than the 5 next biggest providers put together. Anyway, they got a copilot for their cybersecurity stuff. Obviously, they've plugged ChatGPT into Bing. All this stuff, right? And it's just being launched. This is why people are so excited. But also, let me just add a dose of reality. It all sounds amazing. Oh my God, buy Microsoft shares. They're going to, like, quintuple or something. But it doesn't come without risk. Next year, they've committed— Microsoft, this is— to capital spending that's going to jump by over 40% compared to this year. They're going to spend about $40 billion next year, and they're going to spend it on building out their computer sort of centers. They're buying chips off Nvidia, basically. So the infrastructure to be able to support vast numbers of people using these extra services, that infrastructure buildout is going to happen. They're committed to it. But of course, what happens if they don't get the uptake that they want? Well, then you're going to have a huge cost on building out the infrastructure with then, oh, ah, didn't quite take on as we thought. Number one, why might it not take on like people thought? Because it's a bit of a no-brainer. Well, Google, whilst they're way behind in the race here, they're not out of the race. I mean, write Google off at your peril, right? They just, they got off to a bad start. So Microsoft are going to get a lot more competition further down the track. So there's a lot of spend going on here that people are aware of. It's just right now we really do need to see Copilot's out there. Well, what are the revenue figures for Copilot? Whether Microsoft actually report those, I doubt it because they don't even split out. They don't even tell us what their Azure revenue is. So they're not going to be telling us at a granular level, you know, what did the Office Copilot, you know, generate in revenue? They won't tell us that.

So, yeah, so interesting when you explain it like that and you hear numbers, incredibly large ones about the amount of money they're going to spend.

Yeah.

It makes me think not about investing in Microsoft in terms of like the future capture of more market share or anything like that. Actually makes me think about the supply chain and who's involved in supporting the infrastructure to build these facilities down to not just chips. That's like one order dimension. It's more like, okay, so what frames do they sit with?

Yeah, right.

What concrete do you need to lay? What aircon machine do you need to cool these bad boys. Like, there's got to be players in every single element, and maybe get some exposure across the breadth of that play, and that will serve then the same equipment, surely. I'm probably— if you investigate it, there's probably lead component manufacturers and all of that that support all of the Magnificent Seven.

100%. Yeah, the infrastructure build-out, that's, uh, a key investment area in the next sort of 12-24 months.

Yeah. Okay. Well, just to finish it, Microsoft did say very confidently that they're forecasting for next quarter 15% growth overall.

Hmm.

So they're still on a pretty, pretty tasty for a company that size, right? 15% for the world's basically biggest company. Yeah. Not bad.

Pretty stellar.

So advertising at Alphabet.

Yeah.

It's kind of more Google, I would say. Yeah. So revenues at Alphabet was $76.69 billion. That was above expectations. YouTube ad revenue was above expectations, clocked in at just below $8 billion. So pretty decent on that side of things. I have got a question for you though. Bit of a quiz from my side this time.

Okay.

So one of the ways of which AI is being deployed at Google or specifically YouTube, is trying to optimize their user experience in terms of how they can manipulate videos on Shorts, YouTube Shorts, but also like we've heard from Meta about optimizing for advertising opportunities as well. Yeah, and using AI. So I want to ask you, have a guess, how many, um, How many daily views do you think there are via Shorts on YouTube?

I'm gonna probably be embarrassingly way off. I've got no idea, but—

Come on, you're on Shorts.

So daily—

Just think about your normal routine when you're sat looking at Shorts on your way in to the office.

I'm gonna go, it's gonna be, well, look, there's 7 billion people on the planet. Let's start with that figure. Smartphones, probably what, 3 billion? I mean, I'm plucking numbers out of thin air here. Let's say 3.5 billion. 3 billion. No, a lot of kids in there, probably less than that. Let's just say 3 billion. Then not everyone's going to be watching that kind of stuff, but those that do will watch many. I'm gonna, I'm gonna stick at 1.5 billion as my number.

Okay, 1.5 billion. Okay.

Yeah.

So previously they had been clocking in at 50 billion per day. That figure has now gone up 20 billion to register at 70 billion daily views on Shorts on YouTube.

You are kidding.

70, 7-0, I'm saying, by the way.

7-0 billion. Yeah. Wow. That's just— I can't even compute how that's possible. But—

and just try to compute the advertising potential there.

Wow.

I mean, that's insane.

Yeah.

Um, anyway, well, we talk about—

you, you mentioned what, $8 billion from YouTube revenue, right? YouTube advertising revenue. That's exactly the same revenue as their entire cloud computing division. Just to put it into perspective.

Yeah, one of the things, um, that did come up was that obviously advertising very influenced by economic headwinds, so the current macro situation, company's ability to spend, so on. But actually one of the things that got highlighted was investors are a bit wary of an antitrust lawsuit at the moment just about Google's monopoly the US government are going after them again at the moment in regards to the online search business. Uh, and I guess the last thing that you need as a business, right, is to go into this big commitment of spending and then all of a sudden there's a disruption to that. And so perhaps that's having a little bit of an elephant in the room impeding a bit of spend at this point as well.

And, and back to the comparison with Microsoft, again, you got divergence there because Microsoft, it looks like the Activision Blizzard deal is finally going to be allowed through by the regulator. So you might say the kind of antitrust regulatory headwinds for Microsoft, they've just gone away and they're going to be a tailwind, whereas for Google, it's kind of very much still a thorn in their side.

Cool. Well, look, let's move on and let's talk a little bit about this Chevron deal where they've agreed to buy US oil and gas producer Hess Corporation. For $53 billion in an all-stock deal. That in fact would be the biggest in Chevron's history.

Mm-hmm.

If that deal does complete, um, it's not the first one in the industry in terms of that magnitude. I think it was just 2 weeks ago, Exxon announced their mega merger with Pioneer. That as well was an all-stock transaction, mm-hmm, uh, valued at just under $60 billion. So perhaps we could start there before we start talking about the specifics of the rationale behind the deal of why Chevron are targeting this firm. What's this all-stock business all about?

Yeah, right. So if you're acquiring another company, well then, right, you acquire all their shares, right, if it's a full takeover. But there's a, there's a few different ways by which you can pay for those shares. So all of the shareholders, all of the HESS, everyone who holds HESS shares, those shares are now being bought. Okay, so we— how are you going to compensate the HESS shareholders? I think the common misconception is, well, you buy it with cash, right? So, all you HESS shareholders, here you go, here's some dollars, thanks very much. Off you go, see you, we've bought your company, you're now no longer part of the story. Okay, and you might think with oil majors, while the oil price has been through the roof, you know, the energy sector has been one of the best performing sectors in, in recent months and over the last, whatever, 18 months or so, because the oil price has been so high. And right, they must be cash coming out of their ears right now, they're using this cash to buy stuff. It's not the case. This is— there's no cash in this deal at all. So how else can you do it? Well, well, you can do straight out cash. There's another way to do cash where you borrow the money, as in the acquiring firm uses leverage. They borrow money and then they buy out the HES shareholders with cash. It's just that that cash is borrowed, right? So that's a kind of leveraged or kind of fine, you know, debt-financed deal, or there's what's called a stock transaction. And sometimes these big mega deals, it's kind of a combo. It can be a combination, right? Sometimes it can be part cash, it can be part stock. With this deal, Chevron and Hess, it's all stock. So there's no cash changing hands whatsoever. And what happens is you take Chevron and you take Hess, and the two parties agree a valuation of, of, of the two at that moment in time. And that comparative valuation then sets the— well, how many Chevron shares— or sorry, how many Hess shares equals one Chevron share based on that comparative, uh, valuation. And then what happens is every Hess shareholder their Hess shares get swapped out for the equivalent amount of Chevron shares. So Hess shareholders just become shareholders in the merged larger entity. Um, so there's no cash changing hands here whatsoever.

Yeah, maybe you could tell me a little bit about then, uh, before we go again into specifics, the, um, the actual kind of price that they're paying in terms of a valuation perspective? What does this represent in terms of— it's a bit abstract when you just hear these numbers, right? It's like $53 billion is like, is that a lot of money for that company? Is that a good value? Presumably they're paying what they feel is good value. So what does that look like?

So, so yeah, in terms of value, it's where it's way better to think about valuation sort of ratios and metrics rather than just a headline $53 billion. Stephen would be better placed to talk about this, but the standout one here is their PE ratio. So their price, their share price to earnings, um, is 34 times what's called trailing PE. Trailing PE just means the last 12 months behind us in the past, what was your profit? And right, given the valuation of the company today based on your share price, what's the ratio? And it's 34 times. So Chevron are paying 34 times PE. They're basically, basically saying, right, we'll, we'll pay, we'll pay you, assuming profit stays flat. And by the way, that profit's super up because the share price— sorry, the oil price has been through the roof, right? They're basically saying we'll pay you 34 years worth of future profit today to buy your company. Um, that's really high, 34 times, if you were paying in cash, which is why the deal's not in cash, because they're paying in Chevron shares. But Chevron's share price is also through the roof, and their P/E ratio is trading at, you know, way, way higher than it was a couple of years ago. So this whole P/E ratio thing, whilst 34 sounds outlandish because it's an all-stock deal, it's less of a relevant metric, I'd say. Another thing, when— so if a company wants to acquire another one, then— so HES is the company being acquired, and right, the shareholders, they have shares, okay? And the shares are worth a certain amount of money. Well, how much? Well, right now as I speak, $154 per share. So that's the value, that's the money they've got. They could sell their shares now and get $154 per share, right? So an acquiring firm has to, has to table an offer that's better than what they could just get in the open market right now. So there's normally a premium added to the price. Okay, now the premium can often be pretty hefty, like 25%, 50% even, right, on top of today's share price. But the premium here in this deal was quite low, relatively very low. It was only 10%. So the agreed valuation, $53 billion, basically says we'll buy your company at 10% premium above the 20-day average share price going back over the last 20 trading days. So it's a 10% premium, and you're like, well, all right, that's not very much. Why have the HESS shareholders agreed to this? Well, then you go and look at the HESS share price and you go, oh my Lord, because it's trading, it's trading at 150. If you go back to, if you go back to a couple of years, was trading at 35. And not only is it, whatever that is, quintupled significantly in the last few weeks, it broke the 2008 all-time high. Remember, in 2008, anybody who knows their oil markets will know that oil hit $150 per barrel in the kind of middle part of 2008, and that's when the Hess share price peaked to its all-time ever high, and it got up to about $125. So it's in the last month or so, it's broken the 2008 high and spiked. And then Chevron have come in and said, right, we'll buy your shares 10% above the all-time ever spike, basically. So from that respect, it looks like a pretty tasty deal, except that they're paying in Chevron shares, which are also trading at an all-time high. That have also been incredibly elevated. So because it's an all-stock deal, it's not quite all as good as it sounds on paper for a Hess shareholder, but nevertheless, they got the deal, they've agreed terms, and it goes ahead.

What I always find fascinating about these kind of natural resource deals is that unlike, uh, innovation in, let's say, technology where you can come up with this absolutely brand new idea that could revolutionize things like generative AI, for example. Yeah. Now, yes, you can do that to a certain degree with perhaps the materials you use for drilling, drilling methods, but at the end of the day, it's all to achieve the same goal. There's a deposit of resource, whatever it might be, in this case oil or gas, it's in the ground. And the problem that you have with any natural resource, whether it be fat or metals or, or soft agricultural goods if they're being grown. It's about where it's located, right? And so the only way to get ahead is to either partner up or, or take over firms, rather than— you can't just create oil out of any piece of ground. And so what was really interesting about this deal was that Chevron were talking about a unique and compelling opportunity to bulk up its offshore presence. And in particular, uh, Guyana assets is what they were targeting, which is a country in South America, has a population of less than a million people.

Oh wow.

And you're like, okay, so hang about, this deal is $50 billion plus and the rationale is for a country with less than a million people? Like, what on earth is under the ground here? But here's, here's a question for you. What do you think the projected GDP rate is for Guyana this year?

What, growth rate? GDP growth. Yeah. Uh, well, I know that, um, one of the fastest growing countries is, um, is, uh, I'm not, not, not Kenya. Uh, it's one of the African countries.

Somalia.

Somalia or something. Yeah. Um, and I think that was like, I don't know, something like 15% or something. Um, so unless— but I do know, I think Ghana, they, they've just discovered this offshore oil, haven't they? So it probably has made their GDP figure fairly crazy. But I don't know, let's— I'm gonna go for But, but there's a— so it's one thing to say, I found it, found it, guys. Oh, it's another thing to go, well, actually, we've got to get it out of there, and then, and then we've got to sell it, and only then do we kind of generate any money. So I'm gonna say 20, 22% growth.

Okay, 38. 38%. So essentially, so, so one of the, I guess, countries when we're talking about oil on a global level, one of the countries that has massive resources. But as you rightly said just then, it's not just about having the natural resources, about being able to actually get out of the ground. And Venezuela is one of those countries which has the world's largest resources, but they're not the biggest oil producer on the planet by any means. Yeah, a lot of political unrest, uh, geographically, the equipment, the the deals that happen there is very different. Um, however, Guyana sits beside geographically oil-rich Venezuela. And so what's happened is there's been a new discovery. You rightly said it's called, uh, Stabroek Block. And essentially, um, it's uncovered 11— up to 11 billion barrels of black gold right there, my friend. So if you talk about winning the lottery, that is the Willy Wonka ticket right there. Um, and so yeah, to give you an idea, Chevron is gaining a 30% stake in the block, and that closes the gap with Exxon, who has about a 45% stake in, in the region. So yeah, definitely a big deal, and one that I'm sure also factoring into this price I mean, I, I guess Exxon can't be pursuing two deals of that magnitude at the same time. So perhaps there is some logic here about the timing execution of this. Get in while, while your main competitor is distracted, I suppose, strategically and monetarily on something else. Make the move while they cannot react, essentially, at this point in time. So yeah, very interesting.

And at $11 billion, I just do some quick math. Like, if, if the oil price is where it is, let's just say it's $90, right? That's a, that's a trillion dollars. That's a trillion dollars worth of goods just, just sat, sat there.

And one thing that makes this, this Starbrook block so, so interesting or compelling, um, is that it has the lowest breakeven points for any offshore supply. So it becomes profitable at a lower global oil price. That number that you just said, you can achieve a bigger margin on it, essentially.

Yeah, yeah, exactly. And the— because, yeah, notoriously the offshore oil deposits, reserves, are— is way more expensive to try and get your hands on that stuff, um, which is one of the reasons why Saudi has been such a dominant force in global oil production, because all of their reserves are onshore. And super accessible. And so the cost of extraction is way lower, which is why Saudi have been a dominant force. They've been able to drill their oil for— I think, doesn't it cost Saudi something like $6 a barrel? It's basically just sat there, just scoop it up and put it in a barrel and, and flog it, right? But yeah, this offshore stuff— but yeah, this particular reserve for offshore standards is actually really accessible. Mm.

And then just to conclude on this, in case if you're a student in the application season, you get asked about this deal, it is Morgan Stanley who's acting as the lead financial advisor with Evercore for Chevron.

Mm-hmm.

And on the Hess side, Goldman's is the lead financial advisor with JP also on the ticket.

Mm-hmm.

As well.

Yeah.

So those fees coming back to life.

Yeah. Well, yeah. It's kind of, kind of happening, isn't it? And that kind of just what you said there makes— it's an obvious point if you know, but if you don't, well, there's two companies here, right? When you're in an acquisition like this, there are two entities, both of which need advisory services from the bank. So you'll have the buy-side providers, as in the acquiring firms, so Chevrons, so the Morgan Stanleys and then Evercore. And then you'll have the sell-side of the deal, the company that's being sold. Um, yeah, so lots of fees. Yeah, cool.

Well, look, the, uh, the bandage aid has been ripped off. Bankers' bonuses are uncapped now. So yeah, they'll be enjoying this new deal flow. So yeah, we'll end it there. Thank you very much, Piers, and I hope everyone enjoyed the episode. If you did and you haven't done so, would love it if you could leave us a rating or in fact a review. Really helps get the podcast out to as many people as possible. But thanks, Piers.

No worries. Have a great weekend.