Betting on Turbulence: How Hess's Legal Battles Could Unleash Profits in Energy M&A

The energy sector is bracing for a reckoning. Continental Resources’ lawsuit against Hess Corp. and its midstream subsidiary—a $69 million showdown over inflated fees—has exposed vulnerabilities in vertical integration models that could upend the $53 billion Chevron-Hess merger. Meanwhile, Exxon’s arbitration over Hess’s Guyana stake looms as a potential knockout blow to the deal. For investors, this perfect storm of litigation and regulatory scrutiny isn’t just risk—it’s opportunity.

The Legal Storm Brewing in the Bakken

The lawsuit, filed in Houston federal court, alleges Hess systematically overcharged Continental for midstream services—gas processing, oil terminaling, and water gathering—by leveraging its control over critical Bakken infrastructure. Non-operating partners like Continental, which holds interests in 483 Hess-operated wells, claim they were forced to absorb inflated costs that siphoned $34–$69 million in net revenue since 2021.

The crux of the dispute centers on vertical integration’s dark side: when energy firms own both upstream production and downstream infrastructure, the temptation to favor midstream profits over fair dealings with partners grows. Hess Midstream Partners, its 38%-owned subsidiary, reported 8% higher gas processing volumes and 9% more water gathering in Q1 2024—metrics Continental argues prove Hess prioritized boosting midstream throughput (and fees) over equitable treatment.

Vertical Integration: A Double-Edged Sword

This case isn’t just about Hess—it’s a warning shot for vertically integrated energy giants. When operators control both production and infrastructure, conflicts of interest can distort valuations and fuel litigation. The lawsuit’s success could force regulators to scrutinize related-party transactions, potentially reshaping how energy companies structure deals.

For Hess, the stakes are existential. If the court rules in Continental’s favor, it could force Hess to:
- Repay $34–$69 million in disputed fees (a direct hit to cash flow).
- Revise midstream agreements to ensure transparency, potentially capping revenue growth.
- Face shareholder lawsuits or rating agency downgrades, further depressing valuation.

Hess’s stock has already dipped 12% in 2025 amid merger uncertainty and litigation risks.

Chevron’s $53B Gamble: Why This Deal Hangs in the Balance

Chevron’s bid for Hess hinges on acquiring its 30% stake in the Stabroek Block, Guyana’s oil-rich jewel estimated to hold 11 billion barrels of oil equivalent. But ExxonMobil—operator of Stabroek with a 45% stake—argues its joint venture agreements grant it a right of first refusal to buy Hess’s share. The arbitration hearing on May 26, 2025, could decide whether Chevron’s deal proceeds or collapses entirely.

Even if the lawsuit is resolved in Hess’s favor, Exxon’s claim remains a Sword of Damocles. A ruling in Exxon’s favor would force Chevron to either abandon the Hess deal or pay Exxon a premium to acquire Stabroek rights—a scenario that could inflate Hess’s valuation or scuttle the merger altogether.

Opportunities in the Midstream Crossfire

While Hess and Chevron face volatility, investors can profit from the chaos:
1. Bet on Midstream Independence: If vertical integration’s flaws are exposed, midstream MLPs like Enterprise Products Partners (EPD) or Enbridge (ENB)—which operate as independent service providers—could gain favor. Their transparent fee structures and lack of upstream conflicts may attract investors fleeing vertically integrated firms.
2. Short Hess Ahead of Arbitration: With the Exxon arbitration due June, shorting HES stock could yield gains if the ruling weakens Hess’s position.
3. Go Long on Competitors: Companies like EOG Resources (EOG) or Pioneer Natural Resources (PXD), which operate in the Bakken but avoid midstream entanglements, may benefit from Hess’s reputational damage.

Conclusion: Act Now—Before the Storm Breaks

The Continental lawsuit and Exxon arbitration are twin catalysts for seismic shifts in energy valuations. For investors:
- Act swiftly to position for Hess’s potential devaluation or Chevron’s adjusted bid.
- Look beyond the headlines: Midstream independence and litigation-proof business models are the new growth plays.
- Stay vigilant: A Chevron-Hess merger failure could spark a fire sale of Hess’s assets, creating arbitrage opportunities.

The energy sector’s next chapter will be written in courtrooms and boardrooms—not just in the oil fields. The time to act is now.

Chevron’s stock has traded in a tight range as markets await clarity on the Hess deal’s viability.