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Vol. 10, No. 15 Week of April 10, 2005
Providing coverage of Alaska and northern Canada's oil and gas industry

Chevron nabs Unocal

$18.4B deal said perfect fit; company mum on sale of non-core Unocal assets

Ray Tyson

Petroleum News Houston Correspondent

ChevronTexaco, which is acquiring big exploration and production independent Unocal in an $18.4 billion cash and stock deal, plans to sell roughly after-tax $2 billion in unwanted Unocal assets after the transaction closes later this year, leading to ramped speculation as to which Unocal properties might get the ax.

ChevronTexaco’s chairman and chief executive officer, Dave O’Reilly, said just enough during an April 4 conference call announcing the deal to whet the appetite of investors and industry analysts, but he refused to specify which Unocal assets would go.

Rather, O’Reilly reverted to a riddle that went something like this: study the property divestiture record of ChevronTexaco after Chevron and Texaco merged a few years ago and you should be able to solve the Unocal side of the equation.

In that case, he said it was ChevronTexaco’s strategy “to take short-lived, end-of-life or near end-of-life non-core assets and shift them out of the portfolio and focus on the higher quality assets. And that’s the kind of criteria that we’ll apply going forward.”

Certainly one asset that fits the bill is Unocal’s Alaska Cook Inlet oil and gas properties, most of which have long been in production decline. The company operates 10 platforms in the Cook Inlet and six of 14 producing fields. Its Alaska assets also include minority stakes in two other fields producing about 20,000 barrels of oil per day net to Unocal. (See related story on page 16 of this issue.)

North American onshore fields may be on block

One source said to be close to the actual divestiture plan told Reuters that ChevronTexaco was planning to sell Unocal’s North American onshore fields and Asian power plants for a total of around $2 billion. Unocal previously sold its mature fields in the relatively shallow waters of the Gulf of Mexico’s continental shelf, opting instead to focus on bigger prey in deepwater Gulf.

In fact, O’Reilly said that in part ChevronTexaco was attracted to Unocal because of the company’s discoveries and numerous prospects in the U.S. Gulf, along with Unocal’s holdings in the Caspian Sea and Asia Pacific. “It’s a great strategic fit with ChevronTexaco’s core areas,” he added.

Moreover, Unocal would provide ChevronTexaco with badly needed oil and gas reserve additions. In its annual report, the major said its net proved reserves at its consolidated companies dropped 11 percent in 2004, while net production was down 12 percent from 2003 and 19 percent from 2002.

Unocal would bring an additional 1.7 billion barrels of oil equivalent reserves, increasing ChevronTexaco’s total proved reserve base by about 15 percent to a total of about 13 billion barrels.

“We think the Unocal assets have a very strong potential in resources that have been discovered but not yet moved to proved” reserves, O’Reilly said, adding that with Unocal ChevronTexaco’s proved gas reserves would increase from 29 percent to 34 percent of the company’s total oil-gas mix.

Deal 75 percent stock, 25 percent cash

Under terms of the $18.4 billion deal, ChevronTexaco would pay 75 percent of the sale price in stock and 25 percent in cash, providing an overall value of about $62 per share based on the closing price of ChevronTexaco stock on April 1. Unocal shareholders may elect to receive either 1.03 shares of ChevronTexaco stock or $65 in cash for each share of Unocal stock. ChevronTexaco said it would issue about 210 million shares of ChevronTexaco stock and pay about $4.4 billion in cash and assume an estimated $1.6 billion in Unocal debt.

The acquisition, which is subject to approvals by Unocal shareholders and regulatory agencies, would significantly enhance ChevronTexaco’s position as a leading global energy provider, O’Reilly said. ChevronTexaco is currently the world’s fifth largest oil company.

“Unocal is a unique independent with super-major assets that are an excellent fit with our existing portfolio and our long-term strategies — to grow profitably in core upstream areas, build new legacy positions and commercialize our large undeveloped natural gas resource base,” he added.

“Unocal has enjoyed a good deal of success with the drill bit, particularly in Asia and deepwater Gulf of Mexico,” added Charles Williamson, Unocal’s chairman and chief executive officer. “And we welcome this chance to work with ChevronTexaco to develop those super-major type opportunities.”

According to several media accounts, Unocal also had offers from several other companies, including Italian oil group Eni and China offshore producer CNOOC Ltd.

Position in Gulf enhanced

In the U.S. Gulf, the acquisition would enhance ChevronTexaco’s position where it is already a leading participant on the continental shelf and in deepwater discoveries such as Tahiti, Jack, Blind Faith and Great White. This, when combined with Unocal’s remaining position on the continental shelf, its interests in Mad Dog, St. Malo, K2 and Puma in the deep water, and its portfolio of exploration acreage, “will further strengthen ChevronTexaco’s Gulf of Mexico profile,” ChevronTexaco said.

Moreover, the combination of the two companies in Asia Pacific would place ChevronTexaco in the top tier of natural gas producers and marketers “in this expanding and strategically important region,” the company said.

ChevronTexaco would become the top oil and gas producer in Thailand. In Indonesia, extensive oil and gas producing operations offshore in both the shelf and deepwater areas would augment ChevronTexaco’s oil production, primarily onshore. Unocal also markets through the Bontang LNG plant in Indonesia, complementing ChevronTexaco’s current LNG production in Australia, as well as ChevronTexaco’s planned development of natural gas fields in the greater Gorgon area of Australia and the shipment of LNG to markets in Asia and North America.

In the Caspian region, the acquisition would give ChevronTexaco the second-largest interest in the Azerbaijan International Operating Co. oil producing operations, broadening its status as a leading oil company in the Caspian region. With AIOC comes a share in the Baku-Tbilsi-Ceyhan export pipeline, further expanding ChevronTexaco’s position in Caspian oil export infrastructure.

“Our size and scope, as well as the capabilities we developed in managing large complex projects, prove us with the ability to capitalize on Unocal’s undeveloped assets,” ChevronTexaco’s O’Reilly said.

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