Unpacking Hess Corporation's Index Exclusions and Chevron's Acquisition: A Contrarian Opportunity for Energy Value Investors

The energy sector has long been a battleground for value investors, but recent developments involving Hess Corporation (HES) and Chevron (CVX) have created a rare confluence of structural shifts and strategic repositioning. Hess's exclusion from major indices like the Russell 3000E Growth and S&P 500, coupled with its acquisition by Chevron, has sparked a debate about undervaluation and long-term growth potential. For value investors, this represents a unique opportunity to capitalize on market dislocation while aligning with Chevron's disciplined capital allocation and Chevron's low-carbon transition.

Index Exclusions: A Catalyst for Contrarian Entry

Hess's removal from the Russell Growth indices in June 2025 and the S&P 500 in July 2025 was not merely a technical reclassification—it was a signal of a strategic pivot from high-growth energy production to cash-generative midstream operations. The Russell indices, which prioritize revenue growth, earnings momentum, and low forward P/E ratios, deemed Hess's financial profile incompatible with their growth criteria. This exclusion triggered mechanical selling by passive funds, exacerbating short-term volatility in Hess's stock. However, for value investors, such volatility often creates entry points.

The exclusion also reflects Hess's deliberate shift toward midstream assets, with Hess Midstream Partners (HESM) now part of the MLP & Midstream Energy Income portfolio. This pivot aligns with investor demand for defensive energy plays, as midstream operations offer stable cash flows and lower exposure to commodity price swings. While the immediate impact on Hess's stock price was negative, the underlying asset quality and Chevron's aggressive acquisition terms suggest a mispricing that could be corrected over time.

Chevron's Acquisition: A Win for Shareholders and a Win for Value

Chevron's $53 billion acquisition of Hess, finalized in July 2025, is a masterclass in strategic M&A. By acquiring Hess, Chevron gained access to the Stabroek Block in Guyana—a 30% stake in a project with over 11 billion barrels of oil equivalent in discovered resources. This block's breakeven cost of $25–$30 per barrel is among the lowest in the industry, ensuring resilience in both high- and low-price environments. Additionally, Hess's onshore assets, including 463,000 net acres in the U.S. Bakken shale and Gulf of Mexico operations, diversify Chevron's production base and reduce regional risk.

The merger's financial terms are equally compelling. Chevron issued 301 million shares to Hess shareholders, with cost synergies projected to reach $1 billion annually by 2025. Chevron's post-merger capital expenditures budget of $19–$22 billion will be allocated to high-return projects, while $10–$15 billion in asset sales through 2028 will fund Chevron's energy transition initiatives, including carbon capture and hydrogen. Shareholders are set to benefit from an 8% dividend increase and $20 billion in annual buybacks, underscoring Chevron's commitment to capital efficiency.

Valuation Metrics: Why Chevron Is Undervalued

Chevron's valuation metrics position it as a compelling value play in an otherwise overvalued energy sector. As of July 2025, Chevron's EV/EBITDA ratio stood at 5.8x, below the industry median of 6.32x. This discount to peers like Exxon (7.1x) and Occidental (6.1x) suggests investor skepticism about the sector's long-term viability amid ESG pressures. However, Chevron's trailing P/E ratio of 16.8x is justified by its 4.66% dividend yield and $13.57 billion in trailing free cash flow. Analysts estimate a fair value of $113.81 per share, implying a 19.9% upside from its mid-June 2025 price.

Hess's standalone valuation prior to the acquisition was even more striking. With an EV/EBITDA of 7.89x and a stock price of $148.97 compared to an estimated fair value of $72.02, the merger unlocked significant upside for Chevron. The acquisition's accretive cash flow and Chevron's disciplined debt management (debt-to-equity ratio of 0.20) further reinforce its value proposition.

Strategic Positioning for the Energy Transition

Chevron's post-merger roadmap is not just about traditional energy. The company has allocated $1.5 billion in 2025 capital expenditures to low-carbon initiatives, including its Gorgon CCS project and partnerships with CalBio and GE Vernova. By 2030, Chevron aims to capture and offset 25 million metric tons of carbon annually, aligning with global climate goals. This dual focus on profitability and sustainability is critical for attracting institutional investors prioritizing ESG criteria.

Investment Thesis: A Unique Entry Point

For value investors, the combination of Hess's index exclusions and Chevron's acquisition creates a rare alignment of risk and reward. The short-term volatility from index reconstitution and mechanical selling has depressed Hess's valuation, while Chevron's disciplined integration of its assets and focus on shareholder returns provide a clear path to value creation. Key entry points include:
1. Chevron's stock at its current P/E and EV/EBITDA discounts, with a long-term target of $113.81.
2. Hess Midstream Partners (HESM), which is now positioned as a cash-generative midstream play.
3. Energy transition ETFs that include Chevron, capitalizing on its $10 billion low-carbon investment plan.

The risks, including geopolitical tensions in Guyana and integration challenges, are manageable given Chevron's operational expertise. The reward—a company poised to dominate both traditional and emerging energy markets—justifies the risk for long-term investors.

In a sector where momentum strategies have often overshadowed value, the Chevron-Hess merger offers a blueprint for capitalizing on dislocation. For those willing to look beyond the noise, this is a rare opportunity to own a piece of the energy transition at a discount.