Unocal Readies the Breakout of O.C.-Based 76 Products
Taking steps that could add a new name to the list of Orange County’s largest public companies, Unocal Corp. on Tuesday said it plans to spin off its Costa Mesa-based 76 Products unit, which includes a six-state chain of gas stations and three California refineries.
El Segundo-based Unocal said it was setting up 76 Products as a wholly owned subsidiary as a prelude to a stock offering, joint venture or outright sale of the operation. 76 Products, until now a business unit of Unocal, accounted for 47% of the company’s $7.6 billion in revenue for the first nine months of 1996 but only 16% of the company’s total operating profit.
The announcement confirms long-standing speculation surrounding the fate of 76 Products, which has undergone an extensive make-over in the past two years. First, Unocal hired former Pepsi-Cola marketing specialist Lawrence M. Higby to manage 76 Products, and then earlier this year the unit was consolidated and moved into an elaborately renovated 12-story building in Costa Mesa.
“We’re excited particularly about the possibility of a [stock offering],” said Higby, who could become 76 Products’ chief executive in that scenario. “It gives us the opportunity to grow at a much faster rate than we could inside Unocal. We’ll clearly be one of the largest companies headquartered in Orange County.”
The assets to be transferred to the new subsidiary include the 1,200 familiar orange and blue Unocal 76 gas stations in six states, its pipelines, trucking fleet, terminals and ships, and refineries in Los Angeles, the Bay Area and San Luis Obispo County.
Unocal is the No. 3 gasoline retailer in California with 12.5% of the market, behind Arco and Chevron. It refines about 20% of the gasoline in the state. The company said it will use the proceeds of the spin-off to look for oil overseas.
Like other oil companies, Unocal has grown increasingly impatient with slim profits in its refining and marketing operations, which have been squeezed in California by environmental restrictions and overcapacity. Unocal spent $400 million over three years to modify its refineries to produce state-mandated clean burning gas.
Texaco, Shell and Aramco cited similar cost and competitive concerns when they announced earlier this month they would merge their U.S. refining and retail operations into a venture that would control about 15% of the nation’s gasoline market.
“Refining is a capital-intensive business everywhere, especially in California because of all the environmental rules we’ve got, and that’s tough,” said John Vautrain, a manager of Purvin & Gertz, a Long Beach consulting firm specializing in refineries.
Despite strong refining profits the past two quarters, they generally “are not at a high point now,” Vautrain said. “Refining margins go in cycles and through the 1980s California was gangbusters. But it has not been so wonderful in the 1990s. We got overbuilt a little bit and the California economy got soft.”
At the same time, the oil industry is moving offshore in search of more oil as U.S. reserves dwindle and become more costly to produce. Unocal has ramped up its energy projects overseas, especially in Southeast Asia, where it sees much better investment prospects. “It’s an interesting move,” said Sanford Bernstein & Co. oil analyst John Mahedy. “Unocal believes it has attractive alternatives for capital in Asia. So the plan is to de-emphasize refining and focus on the opportunities in the Far East.”
Wall Street reacted favorably with investors bidding up Unocal shares up $1.25 per share to close at $36.75 in New York Stock Exchange trading Tuesday
About 3,100 jobs--or 24% of Unocal’s total worldwide-- would be affected by the divestiture of 76 Products unit. Unocal established 76 Products in July 1994, and the unit has about 800 employees in Orange County.
Under Higby’s leadership, 76 Products has pushed hard to squeeze more money out of its network of gas stations. By year’s end, the company will have added convenience stores to 120 of its stations, and plans to add at least 50 more next year, Higby said.
76 Products is also hoping to sell more of its fuel to companies that maintain fleets of business cars or trucks. Higby said the company recently landed such an account with Federal Express, and that 76 Products is set to introduce a credit card that would guarantee a fixed fuel price for corporate customers and allow them to track their vehicles’ fuel consumption.
The sale of Unocal’s refining and retailing operations would mean the end of a tradition in California that dates to 1890 when Union Oil Co., Unocal’s predecessor, struck oil in Santa Paula. Earlier this year, Unocal completed its exit from California oil production when it sold all its statewide wells to Nuevo Energy of Houston for about $500 million.
That would leave Unocal as an oil exploration, development and production company with most of its operations in Asia, Canada, Louisiana, Texas, Alaska, offshore Gulf of Mexico and Britain’s North Sea. Nearly 46% of Unocal’s average daily production of 500,000 barrels of crude oil and crude oil equivalents come from foreign operations.
Unocal’s overseas projects include 28% ownership of a controversial $1-billion natural gas project in Myanmar, an investment that has drawn fire from human rights activists protesting the oppressive regime.
