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FINANCIAL TIMES: Market fails to see value in Unocal deal: “…Chevron will now be in a more competitive position with BP, ExxonMobil and Royal Dutch/Shell in both scope and scale.” ( 14 April 05


By Sheila McNulty

Published: April 14 2005


Despite all the froth over Chinese rivalry for Unocal, the market took a dim view of ChevronTexaco's $18bn trump last week. The 5 per cent fall in shares reflected more than the usual technical trade exacted on an acquirer.


Investors saw the impact of the deal as initially neutral to earnings and diluting return on capital employed (roce). In addition, it fails to expand Chevron's portfolio into new growth areas, such as liquefied natural gas or oil sands. As a result, they questioned the price being paid.


Yet Bruce Lanni, analyst at AG Edwards, says the deal could signal a strategic shift by Chevron and the broader industry: although they have long been driven by returns, now they are also focusing on securing longer-term growth.


State-owned oil groups own 77 per cent of the world's proved oil and gas resources and are reluctant to negotiate with western oil companies. Fields open to exploitation by western oil companies are, for the most part, in hard-to-reach or politically sensitive regions. Therefore, the world's independent oil and gas companies are finding it increasingly difficult to gain control over these fields to replace their own reserves.


By buying Unocal, and its string of valuable assets, Chevron has eased immediate fears about its own growth prospects.


"We are positive on the long-term outlook of the Unocal acquisition," says Mr Lanni. "We believe it represented a unique opportunity to acquire resources in regions where ChevronTexaco was focusing. It also enables the company to establish a large basket of projects for future growth; to strengthen its position in several of the world's few remaining growth regions, including Asia Pacific, the Caspian and the Gulf of Mexico; and to rebalance modestly its reserve/production mix."


The result, he says, is that Chevron will now be in a more competitive position with BP, ExxonMobil and Royal Dutch/Shell in both scope and scale.


He considers Unocal's assets in the fast-growing Asian region the "crown jewel". Chevron will have more reserves in the region than its peers, and will be the second largest holder overall, behind PetroChina. It will be the top producer in Thailand and one of the largest in Indonesia, Bangladesh and Myanmar.


Other analysts agreed that the market was missing the significance of the deal. Criticism based on dilution of return on capital employed and earnings is "applying the wrong metrics to evaluate the deal", say Wood Mackenzie, the oil consultants.


"ChevronTexaco has acquired a great portfolio of assets that addresses both its need to boost short-term production, but also adds significant long-term legacy assets and an enhanced exploration opportunity set to its existing portfolio. Clearly, it has achieved this at a reasonable price."


Michael Mayer, analyst at Prudential Securities, says the equity group had in early March estimated Unocal's net asset value at about $15.8bn, based on oil and gas price assumptions of $30 per barrel of oil and $5.25 per thousand cu ft of gas. Chevron is paying $2.6bn more, Mr Mayer says, adding, however, that each $1 per barrel (or 15 cents per thousand cu ft) increase in the price assumptions would raise Unocal's value by about $700m.


Given that oil and gas prices are both substantially above the normalised levels in that report, he considers the price Chevron is paying to be reasonable.


Mr Lanni says the return on capital employed is only expected to decline 3 per cent in the first two years and, even then, only if Chevron does not divest under-performing properties, such as Unocal's onshore US assets. And he considers the synergy target of $325m conservative.


"Similar to the Chevron/ Texaco merger, returns were initially sacrificed, but once the divestments and cost-cutting initiatives were in place, it resulted in a much stronger combined entity," Mr Lanni says.


Nevertheless, investors are wary after Chevron's difficulties with its last acquisition, involving Dynegy, the US energy company caught in the post-Enron fall-out.


"The reality is that Chevron should, in our view, highlight the asset shape and asset value of the deal, and explain that it has been undertaken at an aggressive oil price assumption because of the quality of the fit," says Paul Sankey, analyst at Deutsche Bank.


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