Chevron plans to buy Unocal for $18.4 billion;

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Deal would bolster East Bay oil giant’s strategically located sources of gas, crude

The San Francisco Chronicle

ChevronTexaco’s planned $18.4 billion purchase of Unocal Corp. is designed to give the San Ramon oil giant what it needs most — new sources of natural gas and crude in precisely the right places.

The deal announced Monday would boost ChevronTexaco’s petroleum and natural gas reserves by about 15 percent at a time when most oil firms, including ChevronTexaco, have been watching theirs shrink.

Those new sources sit in strategic locales. Some are in Southeast Asia, easy shipping distance from the surging economies of China and India. Others lie beneath the Caspian Sea region, where a pipeline can move them to Europe. Still more underlie the Gulf of Mexico, ready to fuel America.

“With its (Unocal’s) operations in the Asia Pacific (region), the Caspian and the Gulf of Mexico, it’s a great strategic fit with ChevronTexaco’s key strategies,” said Dave O’Reilly, ChevronTexaco’s chief executive officer. “This is a large resource base that is going to add opportunities for development over many, many years.”

The sale, which still must win the approval of shareholders and federal regulators, also would unite two of the last survivors from California’s original oil boom in the late 1800s. A group of San Francisco financiers in 1879 founded the firm that became Chevron. Eleven years later, Unocal’s predecessor was born in the small Ventura County town of Santa Paula.

Unocal, based in El Segundo, had remained stubbornly independent for more than a century, even fending off a hostile takeover attempt from famed corporate raider T. Boone Pickens Jr. But the company lacked the financial resources to develop many of its properties on its own. Other firms, reportedly including the China National Offshore Oil Corp. and Italy’s Eni, began wooing the company, driving up its stock price 38 percent this year.

ChevronTexaco and Unocal executives wouldn’t discuss Monday why the Southern California company picked this deal over others. But Unocal CEO Charles R. Williamson said the strengths of the two companies would complement each other as they sought more oil and gas.

“We welcome this chance to work with ChevronTexaco to develop those, as Dave says, ‘supermajor’ opportunities,” he said.

The sale didn’t excite investors, who heard rumors of it early last month. ChevronTexaco’s stock price drooped 3.93 percent Monday to close at $56.98; Unocal fell 7.38 percent to $59.60. Some Wall Street analysts argued that ChevronTexaco was paying more than it should; others said not enough.

Several said, however, that ChevronTexaco needed some way to reverse the slide in its proven reserves of oil and natural gas. Last year, those reserves dropped by 6 percent as production from aging, developed oil fields fell.

“Considering the fact that ChevronTexaco has got to do something about reserves, if that means going out and buying another company, so be it,” said Louis Gagliardi, vice president at the John S. Herold energy market research company.

The proposed sale includes both stock and cash.

Unocal’s stockholders would be offered either 1.03 shares of ChevronTexaco stock or $65 in cash for every share they own. ChevronTexaco would issue about 210 million shares of its own stock for the deal and spend about $4.4 billion in cash. The San Ramon firm also will take on $1.6 billion in debt.

O’Reilly said the company would accelerate an existing program to repurchase some of its stock, in an effort to prevent dilution. The company has spent $2.8 billion in the last year buying back its own stock.

Although large, that number pales in comparison to the amount of money ChevronTexaco currently makes. The company’s profit last year hit an all-time high of $13.3 billion, driven by the relentless rise in oil prices.

Another, earlier merger also helped the firm’s recent fortunes. In 2001 under O’Reilly’s guidance, Chevron purchased and merged with Texaco, then based in White Plains, N.Y. Both companies needed the merger to thrive in a business dominated by such huge international firms as America’s Exxon Mobil, England’s BP and the Dutch-British conglomerate of Royal Dutch/Shell Group.

Even after the planned Unocal purchase, ChevronTexaco would remain America’s second-largest oil firm, behind Exxon Mobil.

Unocal’s operations would become blended with ChevronTexaco’s own. Williamson would stay on to help the merger. O’Reilly said Monday it was too soon to know what Williamson’s future role might be.

The company expects to save $325 million by getting rid of overlapping operations. O’Reilly declined to say Monday how many employees could lose their jobs but said the acquisition wasn’t an effort to cut costs.

“This is not about shedding people,” he said. “We’re going to need the vast majority of the Unocal people to make this a success.”

Unocal employs roughly 6,000 people worldwide, about 125 in its El Segundo headquarters. ChevronTexaco has about 47,000 employees, stationed in 180 countries.

Although the deal drew a mixed reaction from Wall Street, a California consumers’ group slammed it as a way for ChevronTexaco to corner the state’s market for liquefied natural gas.

The Foundation for Taxpayer and Consumer Rights said ChevronTexaco had forged close ties with the governor and contributed to his campaign committees. The group argued that since some of Unocal’s Asian and Pacific Ocean properties could supply the U.S. West Coast, the company could dominate the market if liquefied natural gas terminals were built in California or nearby. Several companies, including ChevronTexaco, are pursuing such projects in California and in northern Mexico.

“Today’s announced merger indicates ChevronTexaco’s desire to corner the market on LNG, of which Unocal controls significant supplies in the Far East,” the foundation argued in a press release. It called it an $18 billion bet “that California will open the door to coastal LNG terminals and make the long-term commitment to gas-produced electricity.”

The group also called for an investigation of contacts between Gov. Arnold Schwarzenegger‘s administration and ChevronTexaco about future LNG projects. A spokeswoman for the governor rejected any notion of improper contact. “It’s completely ridiculous,” said Margita Thompson. “The more outlandish their claims, the more ink they hope to receive.”

ChevronTexaco spokesman Donald Campbell said: “We’re not going to get into the political accusations surrounding the bigger-picture LNG issues. This is a commercial transaction to increase U.S. and global energy production to the benefit of shareholders and other stakeholders.”
Blending oil

ChevronTexaco plans to acquire Unocal Corp. in a $18.4 billion deal announced Monday.

Top oil producers

Billions of barrels of oil equivalent per year, based on 2003 data:


Royal Dutch/Shell




Occidental Petroleum


Marathon Oil

Amerada Hess
Source: A.G. Edwards & Sons Inc.
E-mail David R. Baker at [email protected]

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