(Bloomberg) -- Merger-arbitrage funds’ biggest wager of the year faces a crucial test in the coming days, as a private arbitration panel begins hearing Exxon Mobil Corp.’s challenge to Chevron Corp.’s $53 billion takeover of Hess Corp.

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The dispute — centered on Exxon’s claim to Hess’s stake in a prolific oil field off the coast of Guyana — has been a major overhang on the deal since it was announced in 2023. Now, after over a year of claims and counterclaims, the saga appears to be nearing a conclusion.

On Monday, the International Chamber of Commerce kicks off a multiple-day, closed-door hearing in London to weigh Exxon’s claim that it has a right of first refusal to acquire Hess’s 30% stake in Guyana’s massive Stabroek block, which is operated and 45% controlled by the Texas oil giant. Hess and Chevron claim the right doesn’t apply because the deal is structured as a corporate merger rather than an asset sale. A decision is expected within 90 days of the end of the hearing.

“The outcome is more important for Chevron than it is for Exxon,” said Fernando Valle, managing director at Hedgeye Risk Management LLC. “Chevron has a gap in their portfolio and adding Guyana would be a home run for them.”

Arbitrage funds also have a lot at stake in the outcome. They scooped up roughly $10 billion worth of Hess shares, or 22% of the company’s publicly traded float as of the end of March, according to calculation by Morgan Stanley’s head of Special Situations Matthew Mitchell citing 13F filings. That makes Hess the most widely held merger-arbitrage position in the market, more than double the amount in another popular name, Kellanova. Firms like Citadel Advisors LLC, HBK Investments LP, Pentwater Capital Management LP and DE Shaw & Co. are among top holders, Bloomberg data show.

Many hedge funds continue to stick to their positions ahead of the make-or-break hearing, betting that the deal will ultimately close. The potential payoff is significant: The spread between Hess’s current trading price and the value of Chevron’s stock offer is approximately $9 — representing a nearly 20% annualized return if the deal completes by the end of August. But the wide gap also indicates the risk involved.

“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, which manages the $2.3 billion merger fund. The firm holds 2.1 million Hess shares in total, worth some $270 million as of Thursday’s close, Behren said.

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The case is likely to rest on a few key words in the Stabroek Block’s joint-operating agreement that Exxon originally signed more than a decade ago. Mike Wirth and John Hess, the CEOs of Chevron and Hess, respectively, have repeatedly expressed their confidence in their interpretation of the contract while Exxon insists it will prevail.

“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 Chevron-Hess deal has already received approval from shareholders and the Federal Trade Commission, and Chevron plans to close the Hess deal soon after the result if it wins the case. It will walk away if it loses.

Arbitrage traders betting on the deal, including Westchester’s Behren, see their downside risks as limited, given that many have gone long Hess while shorting Chevron. In the event the transaction is terminated, Hess would retain its prized Guyana asset, helping to support its standalone value. Meanwhile, Chevron could face a blow for missing out on a strategic opportunity, making the short leg profitable.

Traders are also closely monitoring the crude price, which rallied last year and seemingly mitigated Hess’ downside risk. That surge has reversed in recent months.

Chevron didn’t respond to a request for comment. A spokesman for Exxon referred questions back to previous comments made by the company’s CEO. Hess declined to comment.

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