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ChevronTexaco to Purchase Unocal for $16.4 Billion

Bloomberg 4apr2005

[Wall Street Journal article below]


ChevronTexaco Corp., the second- largest U.S. oil company, agreed to buy Unocal Corp. for $16.4 billion in stock and cash to increase reserves in Asia, the world's fastest-growing energy market.

The purchase, the oil industry's biggest since 2002, values Unocal at $62 a share, ChevronTexaco said in a statement today. El Segundo, California-based Unocal rose to a record $64.60 last week, up 49 percent for the year, after reports that Eni SpA of Italy and China's CNOOC Ltd. were among bidders for the company.

The Unocal purchase will add reserves in such Asian countries as Indonesia, where ChevronTexaco is the largest producer. Demand in the region is surging as the economies of China and India expand. Half of Unocal's reserves are in Asia.

``Unocal has got some significant reserves in locations beneficial to ChevronTexaco,'' said Douglas Ober, who manages $1.9 billion, including 625,000 ChevronTexaco shares, at Adams Express Co. in Baltimore.

ChevronTexaco said the purchase will be made with 75 percent stock and 25 percent cash. Unocal stockholders will get 1.03 ChevronTexaco shares or $65 in cash for each share.

Shares of ChevronTexaco, based in San Ramon, California, fell $1.82, or 3.1 percent, to $57.49 at 1:10 p.m. in New York Stock Exchange composite trading. Unocal dropped $4.45, or 6.9 percent, to $59.90.

Prices Soar

Oil and natural-gas prices over the next six to seven years may dictate whether the purchase pays off for ChevronTexaco, Ober said. The company's cash holdings swelled to $10.7 billion at the end of last year as record energy prices inflated profit.

Acquiring Unocal, which was founded in 1890 as Union Oil Co. of California, will boost ChevronTexaco's daily output by 16 percent to the equivalent of 3 million barrels of oil, halting a three-year production slide. The acquisition also will push ChevronTexaco past France's Total SA as the world's fourth- largest publicly traded oil and gas producer.

If completed, the transaction will be the biggest U.S. oil purchase since Phillips Petroleum Co. paid $25 billion for Conoco Inc. in August 2002. ChevronTexaco also will assume $1.6 billion of Unocal debt.

ChevronTexaco has been expanding exploration and production in Asia and the Gulf of Mexico as output declines from old fields in other regions.

`Fit Like a Glove'

``Unocal's assets fit into these strategies, in fact, they fit like a glove,'' ChevronTexaco Chief Executive David O'Reilly told investors today on a conference call.

Unocal has invested $5 billion in Indonesian oil and gas projects, including the offshore West Seno field. The company has agreements with the Indonesian government to produce oil and gas in the archipelago through 2028.

O'Reilly, 58, said ChevronTexaco will shed $2 billion in ``non-strategic assets'' after the Unocal purchase. He declined to identify the location of the assets to be sold. ChevronTexaco last year shed 400 of its oldest oil fields, raising $3 billion to finance exploration and refinery expansions.

O'Reilly estimated cost savings of $325 million in the first year after the acquisition closes. Two-thirds of the savings will come from trimming of overlapping operations and the rest from shedding poor-performing assets, he said. O'Reilly declined to say how many jobs may be cut.

Buybacks to Increase

Unocal shareholders won't have to pay taxes on the stock portion of the sale, O'Reilly said. ChevronTexaco will increase stock buybacks to boost its shares and make the agreement more attractive, he said. The deal is expected to close this year.

Unocal Chief Executive Charles R. Williamson, 56, said the ChevronTexaco bid represents ``fair value'' for his company.

ChevronTexaco is paying $9.37 per barrel of proved reserves from Unocal. That's 33 percent more than the company's cost of finding reserves last year, when ChevronTexaco had the highest such expense among the world's 10 biggest publicly traded oil companies. Finding costs are the amount spent to add reserves through exploration.

ChevronTexaco's oil and gas output has fallen 6.9 percent since the company was created with Chevron Corp.'s $45.8 billion takeover of Texaco Inc. in 2001. The decline came as old wells neared exhaustion and some oil and gas fields were sold to fund projects in Australia and the Gulf of Mexico.

New wells in Africa and Asia won't pump enough petroleum to stop the output decline until 2006 at the soonest, O'Reilly said during a Dec. 14 meeting with reporters in New York.

Production, Reserves Drop

ChevronTexaco's reserves declined 6 percent in 2004 after some North American fields were sold and reservoir tests showed smaller-than-expected deposits in Africa, Asia and the Gulf of Mexico. Reserves are a measure of future profit potential.

ChevronTexaco produced the equivalent of 2.509 million barrels of oil a day in 2004, down from 2.523 million barrels a day in 2003.

Unocal pumped the equivalent of 410,670 barrels of oil a day last year. About 62 percent of Unocal's output is gas, compared with 28 percent at ChevronTexaco.

``The way for major integrated oil companies to grow at this point is through acquisitions,'' said Tim Ghriskey, who helps manage $650 million at Solaris Asset Management in Bedford Hills, New York.

ChevronTexaco's ``growth rate going forward is pretty crummy,'' said James Halloran, who helps manage $33 billion, including ChevronTexaco and Unocal shares, at National City Private Client Group in Cleveland. Halloran spoke in an interview before the Unocal transaction was announced.

Unocal's oil and gas reserves declined 0.3 percent in 2004 to the equivalent of 1.754 billion barrels of oil.

Transaction Advisers

Lehman Brothers and Pillsbury Winthrop Shaw Pittman LLP are advising ChevronTexaco on the transaction. Morgan Stanley & Co. and Wachtell, Lipton, Rosen & Katz are advising Unocal.

Morgan Stanley merger bankers, led by Steve Munger and Tom Langford, probably earned about $19 million for advising Unocal, according to Bloomberg estimates. Lehman, whose team was led by Grant Porter, Carlos Fierro and Gary Posternack, probably earned $12 million for advising ChevronTexaco.

ChevronTexaco's 3 1/2 percent notes maturing in September 2007 rose 0.11 cent on the dollar to 98.78 cents on the dollar, according to Trace, the bond price reporting service of the NASD. The yield fell to 4.03 percent from 4.08 percent.

Biggest U.S. Oil Company Acquisitions Since 1997

Buyer          Target              Price          Date Completed
Exxon Corp.    Mobil Corp.         $85.2 bln      Nov. 30, 1999
BP Plc         Amoco Corp.         $61.7          Dec. 31, 1998
Chevron Corp.  Texaco Inc.         $45.8          Oct. 9, 2001
BP Plc         Atlantic Richfield  $33.1          April 18, 2000
Phillips Pet.  Conoco Inc.         $25            Aug. 30, 2002
El Paso Corp.  Coastal Corp.       $22.6          Jan. 29, 2001

ChevronTexaco to Buy Unocal for $16.4 Billion

Wall Street Journal 4apr2005


ChevronTexaco Corp. agreed to buy Unocal Corp. in a cash-and-stock deal valued at $16.4 billion, plus the assumption of $1.6 billion in debt, beating out Italian oil company Eni SpA and China National Offshore Oil Corp. in the bidding for the U.S.'s ninth-largest oil company by reserves.

Unocal has long been considered valuable mostly because of the oil and natural-gas projects it has in Asia. It is widely regarded as too small to squeeze the margins from these projects that a larger oil company could. Among its best assets are large natural-gas reserves in Indonesia and a minority stake in a giant oil field in Azerbaijan and pipeline that takes the crude to Turkey for export. It also has large holdings in Thailand and the U.S.

ChevronTexaco already has sizable exploration and production operations in Indonesia and elsewhere in Asia, making Unocal a good geographic fit. In a conference call with analysts Monday, ChevronTexaco Chairman David O'Reilly predicted Unocal would "fit like a glove" with his company. "I am very excited about this transaction, both for the immediate and long-term benefits," Mr. O'Reilly said.

The acquisition would be the largest takeover in the oil sector in years. In the late 90s, Exxon Corp. and Mobil Corp. merged, BP PLC bought Amoco Corp., and Chevron Corp. and Texaco Inc. coupled up.

Deal Initially Valued at $62 a Share

The Unocal transaction is structured as 75% stock and 25% cash, providing an initial value of $62 a share based on the closing price of ChevronTexaco stock Friday, the company said. Unocal shareholders may elect to receive either 1.03 shares of ChevronTexaco stock or $65 in cash for each share of Unocal stock, it said. But both of these selections will be subject to proration.

In trading Monday morning, shares of Unocal, which had been bid higher in recent months, sank $4.39, or 6.8%, to $59.96 in New York Stock Exchange composite trading. Shares of ChevronTexaco dropped $1.61, or 2.7%, to $57.70, also on the Big Board.

ChevronTexaco said it will issue 210 million shares and pay $4.4 billion in cash under the deal; it also will assume net debt of $1.6 billion. The company expects asset sales following the close of the transaction to result in proceeds of more than $2 billion. It also estimates annual savings from operational synergies and reduced corporate expenses of $325 million before taxes.

Mr. O'Reilly said job cuts were likely. "Clearly there will be some redundancy because, for example, we don't need two corporate headquarters, and there are areas where we have overlapping operations," he said, though he declined to estimate what the extent of such layoffs might be.

ChevronTexaco had about 47,000 employees world-wide as of Nov. 30, excluding service-station employees, according to the company's Web site. Unocal has 6,600 employees world-wide.

Attractive Reserves

Unocal offers an attractive collection of oil and natural-gas reserves in the ground, at a time when energy companies are struggling to find enough new oil and natural gas to replace what they pump every year. Moreover, most of Unocal's best assets are in Southeast Asia, near the fast-growing Chinese and Indian economies that are both consuming rapidly increasing amounts of energy.

Other mergers could follow a purchase of Unocal, as companies scramble to gobble up smaller but still sizable companies. Soaring energy prices have allowed oil companies to build up piles of cash and ramp up share-buyback programs, giving them plenty of resources for acquisitions.

While any deal is risky, especially because crude-oil prices have surged in recent weeks, it is increasingly difficult for any Western company to build a comparable portfolio through painstaking exploration. Meanwhile, Chinese and Indian national oil companies are scouring the globe for new oil and gas reserves, driving up prices and intensifying competition.

Other Possible Targets

In addition to Unocal, Occidental Petroleum Corp., Anadarko Petroleum Corp. and Devon Energy Corp. are considered possible takeover targets.

ChevronTexaco, the second-largest U.S. oil company, is under pressure to restock its cupboard of prospects for future growth. Last year, the San Ramon, Calif., company didn't sanction a single large-scale project and replaced a dismal 18% of the oil and natural-gas it pumped out of the ground -- ending an 11-year streak of finding more than it produced.

Thanks to sky-high oil and natural-gas prices, it posted a $13.3 billion profit in 2004, a record for the company, and ended the year with $10.7 billion in cash.

The acquisition is subject to approvals by Unocal shareholders and certain regulatory agencies. Full integration of the two companies is expected to be completed in six months.

Mr. O'Reilly said he doesn't "anticipate any significant roadblocks to completing the deal from a regulatory standpoint."

ChevronTexaco expects oil-equivalent production from the combined portfolios of about three million barrels a day during 2006. Unocal's 1.75 billion barrels of oil-equivalent proved reserves are expected to increase ChevronTexaco's reserve base as of the end of 2004 by about 15%. ChevronTexaco said the acquisition will place it in the top tier of natural gas producers and marketers in the Asia Pacific region and enhance its position in the Gulf of Mexico.

Lehman Brothers is acting as financial adviser to ChevronTexaco, while Morgan Stanley & Co. Inc. is acting as financial adviser to Unocal.


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