ChevronTexaco Inc. said yesterday that it will buy Unocal Corp. for $16.4 billion, in a deal that industry analysts said is proof that buying oil is cheaper than discovering it.
ChevronTexaco, the nation's second-largest oil company after Exxon Mobil Corp., has had limited success in finding new oil reserves in recent years. Analysts said the company's reserves - the petroleum it can count on producing in the future - were weak in comparison with those of other major players.
"In one fell swoop, they reversed that trend," said Lysle Brinker, senior vice president of the oil research firm John S. Herold Inc. "What Unocal brings to the table is a lot of U.S. reserves and areas in Asia where the outlook for growth is quite favorable."
The deal comes as petroleum is trading near record prices. Yesterday, the price of a barrel of crude hit a record $58.28 before closing at $57.01, down 26 cents, on the New York Mercantile Exchange.
San Ramon, Calif.-based ChevronTexaco is offering stock and cash worth $62 for each share of Unocal, though the value of the deal will move with the price of ChevronTexaco's stock. ChevronTexaco will also assume $1.6 billion of Unocal's debt.
The stock market was not terribly impressed. Unocal's shares slid $4.75, or more than 7 percent, to $59.60, and ChevronTexaco's shares closed at $56.98, off $2.33, in trading on the New York Stock Exchange.
"We just put out a report downgrading the stock," said Jacques Rousseau, an analyst with Friedman Billings Ramsey, who said he thinks ChevronTexaco overpaid and he doubts the acquisition will do much for earnings.
ChevronTexaco Chairman and Chief Executive Officer David J. O'Reilly, who was in charge when Chevron Corp. bought Texaco Inc. in 2001 for almost $46 billion, said yesterday that "Unocal is a unique independent with supermajor assets that are an excellent fit with our existing portfolio."
O'Reilly said ChevronTexaco will sell assets and lay off workers, though he gave no details.
Unocal, the nation's ninth-largest oil company, has been rumored to be for sale for weeks. Several companies had looked into the El Segundo, Calif., company, whose stock price, even after yesterday's drop, has risen 38 percent this year on the speculation.
The Italian oil company Eni SpA and the state-owned China National Offshore Oil Corp. reportedly had been interested in Unocal.
Unocal sold off its refineries and gas stations over the years to focus on exploration and development of oil and gas fields around the world.
The company has proven reserves of 675 million barrels of crude oil at properties in the Gulf of Mexico, Asia, Africa and Latin America. Unocal also has large natural gas fields in Asia, well located for serving growing markets in China and Japan.
Much larger ChevronTexaco has proven reserves of 8.5 billion barrels of oil. It also owns or has interests in more than 21,000 gas stations.
Michael Stavy, a Chicago energy consultant, noted that the merger does nothing to increase world oil supplies or reduce prices at the pump.
"It's not increasing the amount of reserves. It's increasing the amount of reserves ChevronTexaco will have," he said.
But the merger definitely does extend ChevronTexaco's already prodigious reach. For example, it takes on a major interest in Azerbaijan oil-producing operations, broadening its status as a leading oil company in that area. It also will become the top oil and gas producer in Thailand and a larger producer in the Gulf of Mexico.
Although it is a major acquisition, the merger of ChevronTexaco and Unocal is small by recent standards. In 1999, Exxon Corp. bought Mobil Corp. for $85 billion. A year earlier, BP PLC bought Chicago-based Amoco Corp. for nearly $62 billion.
Unocal and ChevronTexaco both trace their roots to Southern California.
Unocal started in 1890 as Union Oil Co. of California. In 1965, it acquired Chicago-based Pure Oil.
ChevronTexaco began as Pacific Coast Oil in 1879. It fell to John D. Rockefeller's Standard Oil in 1900, and remained a part of that company until it was freed in 1911 by trustbusters.
After that, it operated under the name Standard Oil Co. (California) and sold products under the Chevron brand, which it eventually took as its official name.