Chevron to Buy Unocal
ChevronTexaco Corp. on Monday agreed to buy Unocal Corp. for $16.4 billion -- a move that would combine two California-bred energy companies in a deal partly spawned by record oil prices.
The proposed acquisition speaks volumes about the state of the oil industry, which is flush with cash from high oil and gasoline prices but faces unprecedented challenges in finding the petroleum to meet skyrocketing demand around the globe.
The pact between ChevronTexaco, the second-largest oil and natural gas company in the U.S., and Unocal, once known for its Union 76 brand of gasoline, capped months of rumors that a bigger rival would swallow Unocal to acquire reserves that are becoming harder to reap by drilling into the ground.
With the acquisition of Unocal, ChevronTexaco’s oil and natural gas reserves would increase about 15%, to the equivalent of 13 billion barrels of oil.
Beyond that, ChevronTexaco, headquartered in San Ramon, believes Unocal “is a tremendous fit” because both companies have extensive projects in the Asia Pacific region and the Gulf of Mexico, ChevronTexaco Chief Executive David O’Reilly said.
El Segundo-based Unocal, which unloaded Union 76 in 1997 along with its refineries, acknowledged that it needed more financial muscle to effectively compete in the business of searching for oil and gas. ChevronTexaco is 19 times as large as Unocal in terms of revenue.
“The competitive playing field now is a global playing field,” and that means “scale has become a lot more important because the size of projects [is] so much bigger,” said Daniel Yergin, chairman of Cambridge Energy Research Associates and author of a Pulitzer Prize-winning history of the oil industry.
If the acquisition is approved by antitrust regulators, Unocal stockholders will receive about $62 a share in cash and ChevronTexaco stock.
The deal was announced as crude oil prices settled just shy of Friday’s record high.
The U.S. benchmark grade of oil for May delivery touched $58.28 a barrel, the highest price since oil futures contracts began trading in 1983. It then slipped to $57.01 a barrel, down 26 cents on the New York Mercantile Exchange from the exchange’s closing record of $57.27 a barrel. (Prices remain well below levels reached in the early 1980s when inflation is taken into account.)
Motorists are feeling the pinch as gasoline prices also have soared to record highs. The average price of self-serve regular in California jumped 8.8 cents to a record $2.464 a gallon in the week that ended Monday, the Energy Department said.
Lofty prices made conditions ripe for ChevronTexaco to end Unocal’s 115 years of independence.
The prices have swelled ChevronTexaco’s cash hoard and lifted its stock price, providing the currency to make the deal. In turn, Unocal -- which had turned a deaf ear to takeover offers in the last two decades -- became more receptive as the value of its shares surged, making a buyout harder to resist.
Unocal also agreed to the deal because it needs ChevronTexaco’s deep pockets and technical expertise to fully develop its growing projects, Unocal Chief Executive Charles Williamson said.
“The assets we have built up really belong in a portfolio like the one managed by ChevronTexaco, and our board understood that,” he said. Williamson and O’Reilly said the California-based cultures of their companies was another factor that influenced their pact.
The deal marks a strategic shift for ChevronTexaco, which, like most major oil companies, had been reluctant to step up spending in its quest for new oil and gas reserves.
Huge exploration projects take years to reach fruition. Despite today’s high prices, Big Oil has spent cautiously for fear that prices could tumble as they did in the late 1990s. Instead, they have distributed much of their recent windfall to investors in the form of higher dividends and stock buybacks.
To many on Wall Street, ChevronTexaco’s planned payout for Unocal looked somewhat stingy.
Unocal’s stock has soared 75% in the last 12 months amid speculation that several companies besides ChevronTexaco were looking at Unocal, including China National Offshore Oil Corp., Royal Dutch/Shell Group and Italian oil company Eni. Unocal closed Friday at $64.35 a share, and there was talk that Unocal might fetch $65 or more a share in a buyout.
In all, ChevronTexaco said the transaction was worth $18 billion based on Friday’s market prices and including the assumption of $1.6 billion of Unocal’s debt.
After the deal was announced, Unocal dropped $4.75, or 7.4%, to $59.60 a share. ChevronTexaco’s stock fell $2.33, or 3.9%, to $56.98 a share. Both trade on the New York Stock Exchange.
A Unocal shareholder would be “disappointed on the takeout price,” analyst Rehan Rashid of investment firm Friedman, Billings, Ramsey & Co. told the companies’ executives during a conference call.
The proposed acquisition calls for Unocal shareholders to receive either 1.03 shares of ChevronTexaco or $65 cash for each of their shares. But the payout would be prorated so that, overall, ChevronTexaco would pay about 75% of the total purchase price with stock and the balance with cash.
ChevronTexaco and Unocal executives defended the offer, and some analysts liked it.
“We think ChevronTexaco offered a fair price,” said Aliza Fan, a senior analyst with energy investment firm John S. Herold Inc., noting that for years Unocal’s stock had underperformed compared with its peers.
She said it was “unlikely that another suitor will emerge” with a rival bid for Unocal, though it was “not impossible.” The similar cultures of ChevronTexaco and Unocal, the geographic fit of their oil fields and the buyout price probably would dissuade another bidder from entering the picture, she said.
O’Reilly confirmed that the two companies had agreed to a “breakup fee” aimed at discouraging other offers. He declined to specify the size of the fee, which typically is paid by one of the companies to the other if their deal falls apart.
The CEO said there would be layoffs at Unocal, whose headquarters would be phased out after the deal is completed in the next few months. He declined to be more specific. About 125 of Unocal’s 6,600 employees work in El Segundo.
ChevronTexaco was formed by the $35-billion merger of Chevron Corp. -- which began 125 years ago as Pacific Coast Oil Co. in Southern California -- and Texaco Inc. in 2001.
ChevronTexaco’s revenue was $155.3 billion last year and it has about 47,000 employees.
Both companies are coming off their best year ever. ChevronTexaco’s profit in 2004 soared 85% to $13.3 billion from $7.2 billion in 2003. Unocal’s profit jumped 88% to $1.2 billion from $643 million, and its 2004 revenue rose 26% to $8.2 billion from $6.5 billion.
Unocal was founded as Union Oil Co. of California in 1890 in Santa Paula in Ventura County. It joined Chevron as a major player in California’s oil and gas markets during the 20th century.
Now it is focused on development projects in Thailand, Indonesia, Bangladesh, Myanmar, the Caspian Sea region and the Gulf of Mexico. About 66% of Unocal’s production comes from foreign sites.
Williamson spearheaded that strategy, but it’s unclear whether he will stay with ChevronTexaco after the merger is completed. The Unocal CEO said he would help with the transition but declined to comment about his plans after that.
As part of the buyout, ChevronTexaco would acquire potentially lucrative Unocal patents on cleaner-burning gasoline sold in California. But other oil companies, which would have to pay royalties to Unocal, have repeatedly challenged the patents in court. Still, the patents remain in force.
O’Reilly said the patents would be included in the purchase, but he declined to comment further because they are involved in litigation.
Unocal recently settled a landmark human-rights lawsuit that had accused the company of being responsible for forced labor, rapes and a murder allegedly carried out by soldiers along a Myanmar natural gas pipeline in which Unocal has an interest. Monetary terms of the settlement were not released.
The acquisition is subject to approval by Unocal’s stockholders and regulatory agencies such as the Federal Trade Commission. Analysts said the FTC was unlikely to raise antitrust objections because the companies’ far-flung operations had little overlap and represented only a small percentage of world oil reserves. An FTC spokeswoman declined to comment.
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Companies at a glance
Unocal
*--* Headquarters: El Segundo Founded: 1890 Employees: 6,600 Oil and gas reserves*: 1.75 billion barrels 1-year return on stock: 63.18% CEO: Charles Williamson 2003 revenue: $6.5 billion 2003 profit: $643 million 2004 revenue: $8.2 billion 2004 profit: $1.2 billion Areas of Nine countries, including operation: the U.S., Indonesia, Azerbaijan, Myanmar and China *--*
ChevronTexaco
*--* Headquarters: San Ramon Founded: 1879 Employees: 47,000 Oil and gas reserves*: 11.3 billion barrels 1-year return on stock: 31.97% CEO: David O’Reilly 2003 revenue: $121.3 billion 2003 profit: $7.2 billion 2004 revenue: $155.3 billion 2004 profit: $13.3 billion Areas of 180 countries, including operation: the U.S., Australia, Nigeria, Thailand, Kazakhstan and the Netherlands *--*
*As of Dec. 2004
Source: Company reports, Times research
