ChevronTexaco Corp. and Unocal Corp. have reached an agreement whereby ChevronTexaco will acquire Unocal in a transaction valued at $18 billion in stock and cash, including net debt.
The acquisition would represent the largest union of US oil and gas companies since the Conoco Corp. and Phillips Petroleum Co. $15 billion merger in late 2002 (OGJ Online, Aug. 30, 2002).
With $93 billion in total assets at yearend 2004 and $11 billion in debt, ChevronTexaco, San Ramon, Calif., is the second largest US oil and gas company behind ExxonMobil Corp. Its subsidiaries conduct business in 180 countries worldwide, and in 2004 it posted a $13.3 billion profit.
Unocal, the ninth largest oil and gas company in the US, has total assets of $13.1 billion and current market capitalization of $17.4 billion.
Although Unocal never officially acknowledged that it was for sale, the Apr. 4 announcement ended months of speculation and rumors about suitors for the El Secundo, Calif.-based independent. These included offers from other supermajors such as Italy’s Eni SPA and China National Offshore Oil Corp., Beijing, which are seeking to increase proved reserves and acquire important assets in Southeast Asia, where Unocal has a substantial presence.
ChevronTexaco, which replaced only 18% of its production last year after more than a decade of successful reserves replacement, shares those long-term goals. Acquiring Unocal will add 15% more production and proved reserves to ChevronTexaco’s yearend 2004 assets.
“Unocal is a unique independent with supermajor assets that are an excellent fit with our existing portfolio and our long-term strategies,” which include growing profitably in upstream areas and commercializing a large undeveloped natural gas resource base, said ChevronTexaco Chairman and CEO Dave O’Reilly.
Unocal has 1.8 billion boe proved reserves, most of which is in the Asia-Pacific region (56%), North America (32%), and in the Caspian region. The acquisition will place ChevronTexaco in the top tier of natural gas producers and marketers in the Australia-Asia-Pacific region and, in the Caspian Sea area, will give the company the second-largest interest in the Azerbaijan International Operating Co. (AIOC) oil producing operations, broadening its status as a leading oil company in that region. With AIOC comes a share in the Baku-Tbilsi-Ceyhan (BTC) export pipeline, further expanding ChevronTexaco’s position in Caspian oil export infrastructure.
“Over the past several years Unocal has been highly successful in building a portfolio of major international and deepwater assets and prospects,” said Unocal Chairman and CEO Charles R. Williamson. “The combination with ChevronTexaco will provide the financial and technical resources to maximize the potential of these assets and prospects,” he said.
ChevronTexaco expects oil-equivalent production from the combined portfolios during 2006 to average about 3 million b/d.
The resultant weighting of natural gas reserves would increase by about 5 percentage points to roughly one third of the oil-equivalent total. ChevronTexaco expects the transaction to be accretive to ChevronTexaco’s prospective production growth rate.
Financial effects
Standard & Poor’s Rating Services affirmed its “AA/A-1+” corporate credit rating on ChevronTexaco following the announcement. “The outlook is stable,” S&P said. “An extended period of extremely high oil and natural gas prices have allowed the company to build a considerable surplus of cash; pro forma for the transaction, ChevronTexaco’s yearend 2004 cash balance would have been a still robust $6.5 billion.”
At the same time, it placed its “BBB+/A-2” corporate credit rating of Unocal on CreditWatch with positive implications.
ChevronTexaco’s payment for Unocal consists of about $12 billion in equity issued to Unocal shareholders, $4.4 billion in cash, and $1.6 billion of net debt.
The acquisition will provide an overall value of about $62/share based on the closing price of ChevronTexaco stock on Apr. 1.
Over the past year, ChevronTexaco repurchased $2.8 billion of its common shares, as part of a $5 billion repurchase program.
“ChevronTexaco is expected to continue to actively pursue share repurchases with cash flow in excess of capital spending and dividends; however, by issuing a large equity component in the proposed transaction, it retains substantial flexibility as to the timing and scale of activity,” said S&P’s credit analyst John Thieroff.
“We view this approach as prudent and essential to maintaining the current ratings given the company’s considerable capital spending through the intermediate term,” said Thieroff.
“Although at about $10.30/proved boe, the transaction is priced well above ChevronTexaco’s 3-year finding and development cost of $6.77/boe, the company sees considerable additional value in Unocal’s nonproved assets and expects the ultimate acquisition price to approach $7/boe, given typical success rates on Unocal’s considerable probable and possible reserves,” S&P said.
Lehman Bros. Inc. is serving as financial advisor to ChevronTexaco, and Pillsbury Winthrop Shaw Pittman LLP is acting as legal advisor.
Morgan Stanley & Co. Inc. is acting as financial advisor to Unocal, and Wachtell, Lipton, Rosen & Katz is serving as legal advisor to Unocal.
Corporate integration
O’Reilly expects full integration of the two companies to be completed within 6 months following the acquisition, which is subject to approvals by Unocal shareholders and regulatory agencies. Integration will involve about 53,000 employees.
“We have very strong integration capabilities following the merger of Chevron and Texaco [in October 2001] and intend to combine operations and achieve synergies quickly and efficiently,” he said (OGJ, Dec. 10, 2001, p. 74).
Williamson added, “In our discussions with ChevronTexaco it is clear that we share similar values and have comparable corporate cultures. This merger will be a good fit.”
ChevronTexaco said the company would target synergies in operations and corporate functions “by rationalizing duplicate activities and high-grading investment programs.” Integration will combine each company’s strengths such as ChevronTexaco’s expertise in project execution, particularly in deep water, to help leverage the full value of Unocal’s major developments, and adopting Unocal’s operating best practices.
ChevronTexaco anticipates annual savings from operational synergies and reduced corporate expenses to be more than $325 million before tax and expects disposition of assets following the close of the transaction to result in proceeds of more than $2 billion. ✦