San Ramone, California-based ChevronTexaco Corp. won the bidding yesterday for its California-based rival Unocal Corp. yesterday in a cash-and-stock package valued at $16.8 billion. The deal is the largest oil-sector deal since 2001 when the acquirer was created under Chevron’s merger with Texaco.
ChevronTexaco is paying a premium price for Unocal as U.S. oil companies face heightened competition for scarce oil-and-gas reserves, many of which are locked up in regions where the companies are not welcome. The theory behind the deal is that it turns the merged company into the second-largest holder of oil-and-gas reserves in Southeast Asia behind Petrochina Co. and also strengthens ChevronTexaco’s presence in the Caspian Sea region.
However, today’s high oil prices can turn such deals upside down in a hurry. Although the price allows companies such as ChevronTexaco to have the strong balance sheet necessary for such acquisitions, should oil prices retreat from current levels in the next two to three years, the risk of write-downs in goodwill is high. ChevronTexaco hedged that risk somewhat by financing the deal mostly with its own stock — ChevronTexaco will pay $4.4 billion in cash and the balance in stock, and will assume $1.6 billion in Unocal debt.
Moreover, the deal reflects the increasing price that oil companies will pay for reserves. ChevronTexaco was able to replace only about 20% of the oil and gas that it produced in 2004, even though it generated in excess of $13 billion in profits and ended the year with over $9 billion in cash. The merged company will have daily production of over 3 million barrels of oil equivalents and increases ChevronTexaco’s reserves by about 15%.
The deal values Unocal at $62.07 a share, which is a 3.6% discount based on Unocal’s closing price of $64.35 on Friday. Widespread market anticipation that Unocal would be acquired has increased its share price nearly 50% since the beginning of the year. News of the deal actually sent both Unocal and ChevronTexaco stock down yesterday on the New York Stock Exchange, Unocal to $59.60 and ChevronTexaco to $56.98.