Unocal Plans Spin-Off of 45% of U.S. Reserves to Limited Partnership
Borrowing a page from the T. Boone Pickens strategy book, Unocal said Friday that its executive committee will recommend that the board of directors spin off the company’s Gulf of Mexico oil and gas reserves of its Union Oil subsidiary into a limited partnership.
Formation of a limited partnership to hold what amounts to nearly half of Union Oil’s proven domestic reserves would make the proposed takeover of Unocal by Pickens’ Mesa Partners II investor group more difficult and more expensive, analysts said.
Units of the limited partnership, to be called Union Exploration Partners Ltd., would be sold to the public, Unocal said. The company also said it is considering a direct distribution of partnership units to Unocal shareholders.
A Unocal spokesman said documentation for the limited partnership would be filed with the Securities and Exchange Commission as soon as possible, and the public offering would be made shortly after that. The spokesmen could not give a time estimate on the filing or the offering.
‘Significant Benefits’
Unocal Chairman Fred L. Hartley said the company “after extensive study” concluded that forming a limited partnership “will bring significant benefits to our shareholders.”
“Union Exploration Partners Ltd. could, over time, both increase the current return to shareholders and also allow shareholders and the public to participate more directly in the company’s oil and gas exploration and production activities,” Hartley said.
David Batchelder, a spokesman for the Pickens group, called the limited partnership plan “sugar coating the poison pill so the shareholders will swallow it, and they’ll find it won’t work.”
Unocal is attempting to block the Pickens group’s takeover bid by exchanging half of its stock for new senior notes worth $72 per share--an offer that will be completed only if Pickens is successful in his $54-per-share tender offer to buy a controlling interest in Unocal. Pickens has attacked the Unocal exchange offer as “just another poison pill in a new bottle.”
“What they’re attempting to do is to confuse the issue and to attempt to take the focus off the poison pill,” said Batchelder, financial vice president of Mesa Petroleum, the Amarillo, Tex.-based oil company headed by Pickens. Mesa Petroleum owns 90% of Mesa Partners II.
“I don’t believe it (the limited partnership) enhances shareholder values absent a distribution to shareholders,” to which Unocal hasn’t committed, Batchelder said.
Mesa has received “very good calls all day today” from institutional investors in Unocal, Batchelder said. “Institutions are very upset with Unocal for putting in the poison pill.”
By proposing to form a limited partnership, Hartley is borrowing one of Pickens’ devices. Mesa Petroleum has created two royalty trusts, buying back 89% of one of them last year, and proposed during its 1983 takeover attempt of Gulf Oil that Gulf restructure itself by placing part of its assets into a royalty trust.
Pickens has frequently said that such a trust is a good method by which oil company shareholders can directly benefit from oil and gas exploration, since profits would “flow through” to them in a trust.
Unocal is proposing to place substantially all of Union Oil’s Gulf region assets into the limited partnership. The Gulf region’s proven reserves are equal to about 45% of Unocal’s total domestic proven reserves, Unocal said.
In 1984, Unocal spent more than $300 million on exploration and development in the Gulf. Unocal spent a total of $835 million on domestic exploration and development in 1984.
More Difficult for Pickens
Placing assets in a limited partnership would have no immediate affect on the Pickens bid, but distribution of the partnership units would make the assets more difficult for the Pickens group to buy, analysts said.
“They haven’t said what they’re going to do with (the limited partnership), which is really the key,” said David Ullom, an analyst with Los Angeles-based Bateman Eichler, Hill Richards.
The Pickens group could make a tender offer for the units of the limited partnership, which would raise the cost of the offer, analysts said.
“It’s just another arrow in the (Unocal) defensive quiver,” said analyst M. Craig Schwerdt of Morgan, Olmstead, Kennedy & Gardner.
“The more you see of this the more you wonder what will be left if Boone wins,” said analyst Herbert Hart of an analyst S. G. Warburg, Rowe & Pitman, Akroyd.
