A Changing Landscape Is Driving Oil Mergers
When Texas oilman T. Boone Pickens proposed a shotgun wedding 20 years ago, Unocal Corp. battled ferociously to fend him off. On Monday, the landmark California oil company fell willingly into the arms of ChevronTexaco Corp.
This time, there was no war of words, no lawsuits, no protracted public battle. The relative ease of the $16.4-billion deal, in fact, shows just how much the oil industry has changed in the two decades since Unocal successfully fought for its independence.
“It’s ironic and interesting that the company that was the poster child of the scorched-earth takeover defense is entering a friendly merger 20 years later,” said Joe Quoyeser, a vice president at Charles River Associates Inc., a Boston-based oil industry consulting firm. “But the world has changed, and Unocal has changed with it. ChevronTexaco is by no means buying the same company that Boone Pickens tried to buy.”
Pickens’ hostile bid for Unocal in 1985 sparked an intensely personal battle between the Texas-based corporate raider and Unocal’s crusty chairman, Fred L. Hartley. After a two-month struggle, Unocal emerged independent but loaded down with debt.
Since then, Unocal has shed its refineries and its network of Union 76 gas stations to focus on oil production in the Gulf of Mexico and natural gas in Asia. But even though Unocal’s projects are considered valuable and its balance sheet is strong -- beefed up in part with proceeds from selling oil at record prices -- some analysts wondered whether the company was big enough to compete on a global scale with the likes of Exxon Mobil Corp., BP and Royal Dutch/ Shell Group.
In the oil business these days, heft is important. Companies once known as “the majors” have been transformed into “supermajors” courtesy of a raft of mergers in the late 1990s. Exxon teamed up with Mobil Corp., BP absorbed both Amoco Corp. and Atlantic Richfield Co., Conoco Inc. and Phillips Petroleum Co. merged, and Chevron Corp. and Texaco Inc. combined, among others.
“What the industry is doing today is so much bigger, more technologically complex and in much more challenging physical environments, indeed in physical environments that weren’t envisioned 20 years ago,” said Daniel Yergin, chairman of Cambridge Energy Research Associates. Back then, he said, “the frontier for offshore drilling was 600 feet of water; today it’s 11,000 feet.”
The biggest projects today come with price tags in the billions of dollars -- with the largest among them projected to cost more than $12 billion, Yergin said. “You don’t have to be big, but if you’re big, your scale and size enables you to handle some of these projects more efficiently and to take on more risk.”
Indeed, many of the biggest mergers were driven in part by the steady decline in production from the prolific and easy-to-tap fields like those on the Alaskan North Slope or in the North Sea, said Quoyeser, the Charles River vice president.
“When those hit peak oil and production started to decline, [the companies] needed to find the next game to play,” Quoyeser said. The mergers that followed, he said, “were a recognition that the next wave of growth was going to come from different types of plays, like liquefied natural gas or tar sands, or in different places like Russia.”
Adding to the risk: Nowadays, drilling prospects are often in politically volatile areas. Just on Saturday, for instance, ChevronTexaco was identified as one of the bidders for a 51% stake in Pakistan’s state oil company.
The difficulty and expense of finding new reserves is a challenge even for the biggest players -- leading some to boost their oil and natural gas holdings by bidding for them as well as drilling for them. Unocal’s fields in Asia and the Gulf of Mexico, for example, are seen as a prime attraction for ChevronTexaco and its chief executive, David O’Reilly.
And in this era of skyrocketing oil prices and rising global demand for oil, those reserves are more valuable than ever.
As Yergin put it: “Every day the managements of these companies wake up and the first thing that they think about is that they have to replace the oil that they produced yesterday ... and if you’re a super major, you have a lot more reserves to replace.”
Not everyone agrees that smaller companies are obsolete. Matthew Simmons, chairman of an energy investment banking firm, says you don’t have to be a major to be successful in the oil business.
“I am making the case that bigger is not necessary better, and if anything, bigger is a liability today,” he said. “It’s harder to grow.”
Still, with ChevronTexaco adding Unocal’s assets to its portfolio, there’s speculation that the deal could signal another spate of Big Oil mergers. After all, other bidders for Unocal were said to be state-owned China National Offshore Oil Corp. and Italy’s Eni, and they might still be on the prowl.
But some analysts note that Unocal’s international assets seemed especially attractive to the big players most likely to be shopping. Many of the independent takeover candidates being mentioned -- such as Anadarko Petroleum Corp., for example -- may not be worth the effort in the eyes of big industry players because of the smaller companies’ focus on less-desirable U.S. oil fields.
In fact, after initially rising Monday on news of the Unocal deal, shares of independent oil and gas companies ended mixed for the day.
“What everybody wants to know is, is this the beginning of some new round of consolidation?” said Steve Enger, an oil analyst at Petrie Parkman & Co. “I wish I knew how to predict that.”
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Oil company acquisitions: buyer, target, date of deal and price (In billions)
*--* Exxon, Mobil, 1999 $85.2 BP, Amoco, 1998 61.7 Chevron, Texaco, 2001 45.8 BP Amoco, Arco, 2000 33.1 Phillips, Conoco, 2002 25 El Paso, Coastal, 2001 22.6 ChevronTexaco, Unocal, 2005 16.4 *--*
Source: Bloomberg News