BP Shows It’s Serious About California Link

Within the next day or two, Union Pacific will sell its oil refinery in Long Beach for more than $400 million to one of the oil companies bidding eagerly to buy it--among them Exxon, Unocal and British Petroleum.

But whether British Petroleum wins or loses the Long Beach bidding, it is determined to acquire sizable operations in California and on the West Coast. A BP acquisition of Unocal is constantly suggested by oil industry analysts.

In fact, the British company that has become the largest oil producer in the United States through its discoveries in Alaska and subsequent acquisition of Standard Oil of Ohio has ambitions to expand everywhere.

Bold Moves

“In a mature industry, we are acquisitive,” says Rodney Chase, group treasurer of BP and president of its international finance company. “We recognize that the outlook is gloomy for some time ahead; that there are companies in our industry who will not survive.” But that means opportunities for BP, he says, “particularly on the West Coast of the United States.”

In the last year, the company that was taken into British government ownership in 1914 by Winston Churchill and sold back to private hands last fall by Margaret Thatcher has made some bold moves. It paid $7.8 billion in June, 1987, to buy the 45% of Standard of Ohio it didn’t own and then paid more than $4 billion to buy a company named Britoil in its own country, making it the largest producer in the North Sea as well as on Alaska’s North Slope. At roughly $56 billion in annual revenues, BP is now the world’s third-largest oil company--after Exxon, of the United States and Royal Dutch Shell, the Anglo-Dutch giant.

So what does this global power want in California? It wants more operations on the West Coast so that it can efficiently sell oil from Alaska that it now pipes across Panama to sell in its gas stations in the Midwest and South. BP pays $2 to $3 a barrel to ship oil across Panama, money it could save if it had outlets on the West Coast.

Furthermore, with its holdings in Alaska expanding because of new drilling and with a big stake in whatever future oil can be produced from the Arctic National Wildlife Refuge, BP’s destiny increasingly is linked to the American West.

That’s why the company bid eagerly for Union Pacific’s Long Beach refinery and why it is sure to press on with efforts to acquire refineries and gas stations in California.

Combination Looks Ideal

Which to many oil industry analysts means only one thing: a BP acquisition of Unocal, the company with three refineries and a large chain of Union 76 stations throughout California. BP’s Chase responds with a dutiful “no comment” to the question of whether his company will make an offer for Unocal. And rumors of such a marriage have been around so long that they draw only bored yawns from Unocal.

But the combination looks so ideal that some observers expect it will happen sooner or later. “Unocal could be bought for $55 a share,” says analyst Frederick Leuffer of the brokerage firm C. J. Lawrence, Morgan Grenfell Inc.

Which sounds very interesting considering that Unocal sells today for less than $36 a share. Why aren’t the markets jumping in anticipation of a BP-Unocal deal?

Two reasons at least. One is that Fred Hartley, the redoubtable oilman who three years ago held off T. Boone Pickens’ raid, remains chairman of the Los Angeles-based company, although he has handed the management reins to a successor. Hartley would take a lot of persuading to sell or merge the oil company he led for more than two decades.

And another drawback is BP’s own stock situation. Although it does more than half its business in America, BP has few U.S. shareholders and still trades predominantly on the London market. There it sells at a low price relative to other international oil companies, despite strong earnings growth and a high dividend. One problem is that the Kuwaiti government picked up 22% of the oil company in the aftermath of the British government’s stock sale last October--and that casts a cloud of uncertainty over the market. Another is that warrants and other special shares confuse pricing of BP’s stock--which sells only in American Depositary Receipt form on the New York Stock Exchange.

The confusion makes it difficult for BP to use its stock in an acquisition. And, otherwise, the company’s debt is currently high as a result of the Britoil and Sohio purchases.

So what will happen? Within the next year, by one means or another, BP is going to increase U.S. ownership of its stock. And it will reduce its debt by, among other things, the sale of part ownership in a Nevada gold mine. It may even sell part or all of its Kennecott Copper subsidiary.

Then it will be even more prepared to pursue acquisitions on the West Coast. “We are doing our homework on this market,” says BP’s Chase, a history graduate of the University of Liverpool who has been 24 years with the company. “We know what the opportunities are.”