'Historic partners' Chevron and Texaco plan quick consolidation

With a 65-year "historic partnership" through their Caltex international refining and marketing joint venture, Chevron Corp. and Texaco Inc. should move faster in fusing their similar cultures, without the disruption of upstream activity experienced in other megamergers, company officials claimed Monday.

But reality will likely prove very different from that promise, said James K. Wicklund at Dain Rauscher Wessels Inc.

He expects another significant drop in upstream spending as a result of the proposed merger, which will put more emphasis on independent operators picking up the slack in US exploration and production, and more pressure on oil field service companies to research and develop new technology for the future,

"The majors aren't spending their E&P budgets this year, primarily as a result of the megamergers of 2 years ago," Wicklund told OGJ Online.

"Like those other mergers, this one will go through a period of who's in charge, whose projects have priority, who makes the decisions," he said Monday. "It will be at least 12 months from the close of the merger�not its announcement�before spending starts to return to normal."

In separate telephone conferences with financial analysts and journalists Monday, company officials insisted that the unique closeness shared by Chevron and Texaco will give them a leg-up in completing their megamerger faster and more smoothly than their predecessors, however.

"We're historic partners with a lot in common," Chevron CEO Dave O'Reilly told industry analysts during a telephone conference Monday morning. Members of the two companies "are already talking as one team" in their efforts to improve the financial strength and flexibility of the new ChevronTexaco Corp.

Bijur: Merger makes good sense
"If ever there was a deal to be done, a consolidation to take place, this is it," said Peter Bijur, Texaco chairman and CEO, in that same session. "We know each other better than any other two companies." The proposed merger "makes good sense for the upstream, good sense for the downstream, and terrific sense for the midstream."

The two major integrated US companies share a common goal to "create a juggernaut" that will shoulder aside Shell Oil Co. to become the third largest US producer of oil and gas, behind top producer BP and ExxonMobil in second place.

Analysts say it has taken nearly a year on average to get regulatory approvals for other recent megamergers.

O'Reilly claims the two companies "won't stand still" on upstream operations while awaiting regulatory approval for the merger and then combining operations. But of the $1.2 billion of synergy savings that ChevronTexaco expects to realize within 9 months of completing that merger, $700 million will come out of the combined upstream operations.

That includes $300 million from exploration, with a potential 25% reduction of the combined exploration budgets; $350 million from production; and $50 million from research and development, officials said.

Texaco's production has been declining as that company disposes of non-core operations, as Chevron did previously. Meanwhile, Chevron is pursuing strategies aimed at growing its production by 4% annually.

Once the merger is consummated, O'Reilly claims, the top talents gleamed from the top personnel of the two companies will be able to high-grade a bigger sample of the best exploration and production opportunities to get more production from less spending.

Even the cutback in R&D spending doesn't signal "a reduced commitment" to that important aspect of future growth. "This is truly a case where 1 plus 1 equals 3," O'Reilly said.

But even as the two executives praised the talents of their current workforce, they announced plans to eliminate 4,000 jobs�a 7% reduction of their combined 57,000 employees worldwide.

The new company plans to become "No. 1 in shareholder value" with higher returns on capital investments in all aspects of the current oil and gas industry and with strong branches in industries of the future, including electric power generation and e-commerce, officials said.

ChevronTexaco set to be production leader
The merger, once approved, would provide ChevronTexaco with combined global reserves totaling 11.2 billion boe, with global daily production totaling 2.7 million boe.

The combined company would be the biggest producer in the gas-prone Gulf of Mexico, the largest holder of deepwater acreage in the gulf and the low-cost producer in the San Joaquin Valley, with growth positions in Canadian gas plays, said O'Reilly.

The combination also increases the scale and scope of the new company's West African holdings. ChevronTexaco will be the No. 1 producer off Angola, with an expanded deepwater position and No. 2 off Nigeria, where it will hold the biggest amount of deepwater acreage. The merger also will provide the company with strong positions in 6 other countries in that region, O'Reilly said.

ChevronTexaco also will be top producer in the Caspian region, the No. 1 foreign producer in Venezuela, and will hold the top exploration position with 9 deepwater blocks off Brazil, he said.

The merger also will enhance the scale and efficiency of the companies' operations in Indonesia and China and provide expanded gas platforms for the Asia-Pacific market in Australia, Thailand, and the Philippines, said O'Reilly.

Company officials recognize that the US Federal Trade Commission will probably insist on divestitures of some downstream refining and marketing facilities.

Chevron already has about 40% of the California refinery market, said Ronald B. Gold, a consulting senior adviser to PIRA Energy Group. "If you throw in Equilon's operations in Washington state, that gives them about 36% of the West Coast market. That�s too big for the FTC to ignore," he said.

Equilon Enterprises LLC and Motiva Enterprises LLC were created in 1998 by the combination of the US refining and marketing businesses of Shell, Texaco, and Star Enterprises�a joint venture between Texaco and Saudi Refining Inc. (SRI). Shell and Texaco own 56% and 44%, respectively, of Equilon. Shell, Texaco, and SRI own about a third each of Motiva.

Officials of Shell Oil Co. and SRI confirmed Monday they are in discussions with Texaco concerning possible restructuring of the ownership of those two Alliance companies.

Shell and SRI officials said they are committed to US refining and marketing. However, they said a number of significant issues must be ironed out among the parties.