The final shareholder vote won't be revealed until this week, but Chevron Corp. CEO Dave O'Reilly on Wednesday announced that the long-sought merger between his company and Unocal Corp. is completed, and will translate into a 1-2 cent earnings per share increase in 2006.
The combined companies produced 2.9 MMboe/d in 2004, with 2.5 MMboe/d from Chevron. Considered a pure exploration and production company, Unocal is much smaller than Chevron, with operations in nine countries, including a large stake in the growing Asian region. By comparison, Chevron operates gas stations, drilling rigs, chemical plants and refineries in 180 countries. Combined, the companies generated $14.5 billion in income in 2004.
"This merger provides current and longterm investment value, and Unocal is an excellent strategic fit with Chevron's assets and corporate culture," said O'Reilly. "Chevron has proven technical and financial capabilities to maximize the full value of Unocal's world-class assets, and Unocal's talented employees worldwide will enhance our organizational capability."
Despite its smaller size, Unocal has several strategic assets and several projects -- including Gulf of Mexico production platforms and a Caspian Sea venture -- that are nearly ready to ramp up production. Along with increasing its daily output, the deal will give Chevron some coveted proven reserves -- another 15%, based on year-end 2004 reporting. Factoring in discoveries, acquisitions and revisions to previous estimates, Chevron's reserve replacement rate last year was only 18%, which was one of the lowest by any of the major producers.
In the Asia-Pacific region, which is anticipated to be one of the world's strongest economic growth areas, the combined company will generate more than 20% of its equivalent daily crude oil and natural gas production. The company also will be a leading resource holder in this region.
Chevron is paying about $10.30/boe of proven reserves for Unocal, and some of Unocal's reserves will require more investment. According to A.G. Edwards, the cost of finding and development in 2004 was about $9.16/boe for the majors, which was up from $7.40 in 2003. Although the cost Chevron is paying for Unocal is considered high, the company is counting on oil prices to remain above $30/bbl.
"If prices turn out to be where they are today for a long time, we'll have a great win," said Chevron Vice Chairman Peter Robertson.
Unocal employs 6,400 people, compared with Chevron's staff of 47,000. To date, Chevron confirmed the continued employment of more than 5,000 Unocal employees, and said it intends to make employment offers to many of the remaining 1,400 by the end of September.
Unocal Chairman and CEO Charles Williamson will join Chevron in a transition role until later this year, according to Chevron. He will be an executive vice president of the corporation, assisting with the integration of the two companies.
According to Chevron, 77% of Unocal shares outstanding, and 97% of those Unocal shares present and entitled to vote, were in favor of Chevron's $17.5 billion offer. Under terms of the agreement, Unocal stockholders had the option to receive either $69 in cash, 1.03 shares of Chevron stock or a combination of $27.60 in cash and 0.618 of a share of Chevron stock, for every Unocal share, with the all-cash and all-stock elections subject to proration.
Following the shareholder approval, Standard & Poor's Ratings Services (S&P) affirmed its "AA/A-1+" corporate credit rating on Chevron and equalized Unocal's ratings.
"Operationally, Chevron benefits from the Unocal acquisition by stemming its chronic production declines," said S&P credit analyst John Thieroff. "Chevron has several major developments expected to begin production in 2006 and beyond; production from Unocal fills the gap until these fields come on stream." He noted that over the longer term, Unocal's Asian and deepwater Gulf of Mexico assets "provide an excellent fit with Chevron's considerable activities in those areas."
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