Engineering News

ChevronTexaco to Buy Unocal for $16.4 Bln
Mon Apr 4, 2005 04:56 PM ET

NEW YORK (Reuters) - ChevronTexaco Corp. won a close race to scoop up smaller California rival Unocal Corp. for about $16.4 billion on Monday, pocketing prized assets in Asia and expanding its reach in the Gulf of Mexico.

The deal -- rumors of which had set Unocal shares ablaze since December -- gives ChevronTexaco a production portfolio that stretches from the waters off Indonesia and Myanmar to Congo and Brazil.

Analysts hailed the deal as a good fit for the No. 5 global oil producer's strategy to grow and a boost for its efforts to compete on the same playing field as much larger rivals like Exxon Mobil Corp. and BP Plc

"This points to something very important -- a strategic change from a focus on returns to a focus on long-term growth," said A.G. Edwards senior energy analyst Bruce Lanni. "Chevron needs to be in a competitive position with companies like Exxon, BP and Shell and the areas they were not the strongest were Asia-Pacific and the deep waters of the Gulf of Mexico."

The deal, subject to approval by regulators and shareholders, came as oil prices surged to a fresh all-time high above $58 a barrel on Monday, after a steady ascent in recent months. Surging prices have showered a cash windfall on oil companies, but declining exploration opportunities coupled with limited access to oil-rich regions such as the Middle East and Russia has left many searching for acquisitions to grow.

Of particular interest to Western majors is Asia, a region that has reshaped the energy landscape over the past year because of its burgeoning demand for oil -- and one that Unocal has the largest exposure to among its U.S. peers.

"If you look at where all the assets are they are pretty close to hot markets," said Subash Chandra, an analyst at Morgan Keegan, noting specifically Asia and North America.

"It's just a substantial oil company that is up for sale and that is rare in this business."

So much so that ChevronTexaco had to beat out Italian oil group Eni, China National Offshore Oil Corp. and other rumored suitors to acquire the No. 9 U.S. oil and gas producer.

Nevertheless, ChevronTexaco remains fifth among top oil majors even with a combined $140 billion market capitalization, behind Exxon -- the largest with $390 billion in market cap -- and followed by BP, Shell and France's Total.

The company also played down talk it was making a major acquisition at the top of the market, citing Unocal's large exposure to natural gas.

"We are not buying today's crude price," ChevronTexaco Chief Executive Dave O'Reilly told reporters on a conference call. "We're buying a company with long-term assets and with a great potential, primarily centered in Asia and the gas markets."

Terms of the deal, structured as 75 percent stock and 25 percent cash, provide an overall value about $62 per share based on the closing price of ChevronTexaco stock on April 1. Unocal investors can opt for either 1.03 shares of ChevronTexaco stock or $65 in cash for each share they hold.

ChevronTexaco will also assume about $1.6 billion in debt.

Shares of Unocal, which surged nearly 60 percent since December on expectations of a takeover, fell more than 7 percent on Monday -- based on a lack of premium in the deal from Friday's closing price.

"The stock has a 15 percent to 20 percent premium in it because it's been rumored to be for sale," said James Halloran, analyst with National City Private Client Group, in Cleveland, which manages $33 billion in assets. "Basically, ChevronTexaco paid the premium that the market anticipated."

Earlier in the day, Devon Energy Corp. also announced it had agreed to sell for $1.2 billion substantially all its U.S. oil and gas properties it had previously put on the block.

ChevronTexaco expects oil-equivalent production from the combined portfolios during 2006 to average about 3 million barrels per day. Unocal's 1.75 billion barrels of oil-equivalent proved reserves would increase ChevronTexaco's reserve base as of the end of 2004 by about 15 percent.

It also expects proceeds of more than $2 billion from asset sales after the deal is closed. ChevronTexaco sees annual savings from cost cuts at more than $325 million.

Lehman Brothers was the financial adviser to ChevronTexaco, while Morgan Stanley & Co. Inc. acted as financial advisor to Unocal.

ChevronTexaco shares fell nearly 4 percent, or $2.33, to close at $56.98 a share while Unocal shares dropped $4.75 to $59.60 a share. (Additional reporting by Michael Erman and David Brinkerhoff)

Source: Routers

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