Unocal Eyed for Takeover

By James F. Peltz

Jan. 17, 2005 12 AM PT

Times Staff Writer

Perennial bridesmaid Unocal Corp. has been a rumored takeover target for years, yet it has remained independent as other major oil companies consolidated.

Now there’s fresh speculation that one or more suitors are circling the El Segundo-based company and that, this time, it might actually get hitched.

A confluence of changes in the oil industry and at Unocal -- including a rebound in its prospects, especially in Asia and the Gulf of Mexico -- make the company especially attractive, analysts said.

“There’s more meat on this bone than at any time before,” said Fadel Gheit, an analyst at Oppenheimer & Co. in New York.

With global energy demand soaring and supplies ever harder to find, Unocal offers immediate access to oil and natural gas reserves, especially in Asia, Alaska and the Gulf of Mexico.

Unocal’s moderate size also makes it relatively easy to swallow for the world’s major oil companies, which are flush with cash and enjoying high stock prices because petroleum and its products are so expensive. Unocal’s 2004 revenue, which hasn’t yet been reported, probably was about $7.5 billion to $8 billion.

In turn, Unocal -- which has fought off three hostile bids in its 115-year history, the most recent in 1985 -- might be more receptive to a buyout, analysts said.

Unocal’s stock performance has long lagged behind that of its peers. But it has traded near a 10-year peak lately because of rising oil prices and probably would fetch a premium in a takeover.

“If you’re a Unocal shareholder or a director, it might be the best time [to sell] that you can get,” said a source familiar with Unocal’s operations. Unocal executives declined to comment.

Unocal shares Friday rose 19 cents to $46.50 on the New York Stock Exchange. The stock rose 17.4% last year, but the oil group’s average gain was double that at 34.4%, Gheit said.

Among those taking a close look at Unocal are China National Offshore Oil Corp., a state-controlled operator known as CNOOC, and Royal Dutch/Shell Group, according to published reports.

CNOOC reportedly was weighing a bid of about $13 billion; Unocal’s current stock market value is $12.2 billion.

Formerly called Union Oil Co. of California, Unocal was founded in 1890 in Santa Paula and was a leading player in California’s oil and gasoline markets until the mid-1990s.

That’s when it shed the last of its California oil fields and sold its Union 76 gasoline business to focus on exploration and production in other regions, especially overseas. It now employs 6,600 people and is the seventh-largest U.S.-based oil company by revenue, according to industry researcher Energy Intelligence Group Inc.

As the 21st century arrived, Unocal was struggling to grow. Its exploration efforts had produced mixed results. Its stock trailed those of other oil companies. Its investors were frustrated.

But Unocal doggedly pursued an ambitious exploration plan that included deep-water wells in Asia and the Gulf of Mexico, which are starting to pay off. The company also shed some of its less-profitable North American assets to shore up its domestic profitability. As a result, about 66% of Unocal’s production now comes from foreign sites.

Through the first nine months of last year, Unocal’s profit more than doubled to $940 million from $463 million for the same period in 2003, aided by crude prices that hit record highs. Unocal’s nine-month revenue jumped 20% to $5.9 billion.

Unocal’s average daily production of oil and natural gas in last year’s third quarter -- the most recent figure available -- was the equivalent of about 407,000 barrels a day, and that’s expected to climb 6% to 430,000 during 2005, Value Line Investment Survey estimates.

CNOOC is said to be especially interested in Unocal’s Asian assets, which include properties in Indonesia, Thailand, Bangladesh and Myanmar.

Unocal’s West Seno field in deep water off Indonesia is particularly attractive, producing an average of 40,000 barrels of oil daily, up from 20,000 early in 2004.

Unocal also has a 10.3% interest in a Caspian Sea field being developed for Azerbaijan. The project’s average daily production this year is expected to rise to 200,000 barrels a day from 140,000 in 2004.

The properties’ locations are appealing largely because of the continued rise in Asian demand for oil and natural gas, said Aliza Fan, senior analyst in Houston for John S. Herold Inc., a consulting company.

Unocal also has natural gas fields in Alaska and operations in Vietnam, the North Sea, Canada and Texas’ Permian Basin.

It’s also active in the Gulf of Mexico. It has a 15.6% interest in one deep-water project there, dubbed Mad Dog, that’s expected to produce its first oil next month. Unocal has said it hopes several other projects in the gulf will come online by 2010.

But one source close to Unocal said the Chinese -- their economy booming and thirst for oil growing rapidly -- weren’t looking at Unocal simply in terms of its Asian properties. China wants oil and gas reserves badly enough to look at South America and the reopening of Libya’s oil fields to foreign companies, among other prospects.

The Chinese “need to import a lot of oil for their growing industry, and they’re sending their national oil companies far afield,” the source said.

The United States could be a difficult frontier.

If the Chinese did buy Unocal, “it’s very unlikely in my view that they would keep any of Unocal’s U.S. operations,” Gheit said. The United States “is virgin territory for them, and would subject them to all the U.S. rules and regulations. They want to stay away from Washington.”

If acquired, Unocal would provide the buyer with another potentially lucrative asset: Unocal’s patents on cleaner-burning gasoline sold in California.

In the early 1990s, Unocal helped develop a standard for the cleaner fuel while also securing patents on various gasoline recipes. Although Unocal sold its refineries and service stations, it held on to the gasoline patents.

Other oil companies, which would have to pay royalties to Unocal, have repeatedly challenged the patents in court, but they remain in force.

The Federal Trade Commission last fall also reinstated civil antitrust charges against the company, alleging that the patents gave Unocal “unlawful market power” to demand the royalties. Unocal denies that claim.

The FTC claims that the patent royalties would saddle California consumers with an additional $500 million a year in pump prices. Unocal’s estimate of annual royalties ranges from $75 million to $150 million.

(BEGIN TEXT OF INFOBOX)

At a glance

Unocal Corp.

Headquarters: El Segundo

Type: public

Founded: 1890

Employees: 6,600

Revenue: $6.5 billion

Net income: $643 million

Oil and gas reserves: equivalent

to 1.76 billion barrels

Production: equivalent to