The China National Offshore Oil Corp Ltd. announced yesterday that it is abandoning its effort to acquire second-tier U.S. exploration and production company Unocal Corp, paving the way for Unocal shareholders to accept Chevron’s competing bid. Here are the previous posts on the battle over Unocal.
Chevron clearly overwhelmed CNOOC in the political arena of this takeover battle, which ended up discounting the value of CNOOC’s superior all-cash bid because of concerns over whether CNOOC could close it anytime soon. Although there will likely be much hand-wringing over the impact to Sino-American economic relations as a result of CNOOC’s failed bid, the reality is that CNOOC screwed the pooch on this one.

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Houston-based Dynegy, Inc. announced yesterday that it had agreed to sell its natural-gas-processing business for $2.48 billion to Houston-based Targa Resources Inc., the energy company that private-equity firm Warburg Pincus LLC founded. As a part of the deal, Targa Resources will also acquire Dynegy’s storage, transportation, distribution, fractionation and marketing assets.
With this sale, Dynegy becomes solely a power generator that would be a prime acquisition target of other energy companies. The sale is the latest move in a restructuring plan that Dynegy undertook after the company was nearly drawn into its own reorganization case in the the bankruptcy wake of its acquisition target Enron Corp. in late 2001. Last year, Dynegy sold its Illinois Power utility to St. Louis-based Ameren Corp. for $500 million in cash and $1.8 billion in assumed debt and preferred stock.

In a move that almost certainly means that its bankruptcy case filed in December, 2002 will extend well into 2006, United Airlines parent UAL Corp. announced Tuesday that it was delaying the filing its plan of reorganization with the U.S. Bankruptcy Court in Chicago after various interest groups in the case opposed the plan because of its overly aggressive timetable. It is symptomatic of the disheveled financial condition of the airline indurstry that a debtor-company’s creditors — as opposed to its management — are afraid to push the company out of bankruptcy too quickly. Here are previous posts that comment on the United Airlines saga.
Interestingly, United’s labor unions — one of interest groups that bears a substantial amount of responsibility for United’s bankruptcy in the first place — is largely responsible for the delay in United filing is plan and might just tip the reorganization process in such a way to strap United when it emerges from bankruptcy. Over the past few months, a number of private-equity firms and hedge funds have expressed interest in participating in the airline’s refinancing. However, the unions — which are among United’s largest unsecured creditors — prefer not to give up the equity in a reorganized United necessary to attract such private capital. Rather, the unions support a plan that would leverage the reorganized company with debt that would be used to pay a portion of unsecured creditors’ claims. Not surprisingly, United must overcome more than a little skepticism among institutional lenders that it is a prudent investment to risk loaning money to a highly-leveraged carrier coming out of bankruptcy and attempting to compete in the fiercely competitive airline industry.

Houston-based pipeline operator Kinder Morgan Inc. announced a big bet Monday on the development of the Western Canadian oilfields — the purchase of Vancouver-based Terasen Inc. for $3.1 billion in stock and cash and the assumption of $2.5 billion in debt.
Terasen is the largest natural-gas operator in British Columbia and operates pipelines that connect Alberta, Canada with the Midwestern part of the U.S. and the Canadian West Coast. Kinder Morgan is paying a premium price for the company, almost 24 times Terasen’s estimated 2005 earnings.

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Most readers of this blog already have a healthy skepticism of the opinions of stock analysts. But for those who don’t, please read this NY Times article on several bullish analyst opinions on that black hole of financial loss, the airline industry.
It takes a fairly fertile imagination to reconcile the following excerpt from the Times article with these recent items (here and here) on the airline industry:

[D]eep losses at Delta Air Lines do not deter Jamie Baker, an airline analyst at J. P. Morgan. He maintained an overweight rating even after Delta’s shares were pummeled last week on a fresh warning from its chief executive, Gerald Grinstein, that the airline’s cost-cutting plan was not enough to offset the impact of brutal competition. Delta lost $388 million during the second quarter, and has lost nearly $10 billion this decade.
Without building cash, and without the passage of pension reform legislation now in Congress, Delta was virtually assured of a bankruptcy filing, Mr. Baker conceded in a research note.
Nevertheless, he wrote, “Our call remains that Delta will manage to pull some liquidity strings, make one last and perhaps final run at avoiding Chapter 11, and successfully limp into 2006 while hoping for lower oil prices and improved revenue trends.”

Despite such speculation, stick with Warren Buffet’s analysis of the airline industry. After a particularly unfulfilling investment experience in airline stocks several years ago, Mr. Buffett undertook a study of the airline industry. Taking into consideration the airline industry’s cumulative finances since the day the Wright Brothers took off at Kitty Hawk in 1903, Mr. Buffet concluded that the industry has been, on the whole, utterly unprofitable. In hindsight, Mr. Buffett wryly observed that shooting down the Wright Brothers on that beach would have been a reasonable financial, if not moral, move.
Key tip on airline stocks — wait for Professor Ribstein’s proposed solution to occur before taking a flyer on any airline stock other than Southwest.