Industry observers shouldn’t be surprised to see Texaco marchingto a different drummer in the industry’s high-stepping mergerparade, Texaco Chairman Peter I. Bijur said last week. Unlike manyof its peers, Texaco appears to be looking outside the upstreamindustry for a merger partner.

“The industry we once knew is gone,” Bijur told attendees at theHoward Weil Energy Conference last week in New Orleans. Thecommodity price collapse over the past year has led to nearunprecedented turbulence within the top tier of major oil and gascompanies, and many smaller companies will be lucky to get out ofthis downturn alive. Texaco has not been immune to effects of thetumultuous change. Net income fell 78% last year. Revenues declined32%.

But Bijur said the company had its best year in decades inexploration and is targeting about $650 million in annual pre-taxcost savings through 2000, increasing production by 5% in the U.S.and raising production by 14% overseas. The savings the companyachieved were comparable to those resulting from the major mergersthat have taken place recently, according to Bijur.

“This does not mean Texaco is not considering a merger oracquisition. We are,” he said. “We don’t think you can saveyourself into prosperity.”

Lately, analysts have kept a close eye on Texaco for signs itmight follow the thinking of most of its peers, includingExxon-Mobil, BP Amoco-Arco, Seagull-Ocean and others, and join withanother major or a large independent. But Bijur’s commentsconfirmed earlier reports that Texaco wouldn’t be playing thatgame. (See NGI, March 29)

Although there have been few outright combinations between majorelectric utilities and large producers, other than the DominionResources-CNG deal now in the works, it has not quelled speculationof a possible Texaco combination with the likes of Entergy Corp.which operates in Louisiana where Texaco has a lot of itsoperations, or with Columbia Gas with its Mid-Atlantic outlets forLouisiana gas.

It has been noted that other major producers, while not actuallymarrying downstream entities, have formed alliances such asDuke/Mobil in Duke Energy and Trading and Vastar/Southern Co. inSouthern Company Energy Marketing, and Chevron, which is part ownerof Dynegy, which markets Chevron’s gas. Some analysts, however,still favored a combination with a reserve-heavy independent, suchas Burlington Resources.

J.P. Morgan analyst Jay Wilson said a combination between Texacoand a large E&ampP company would not surprise him. “They’re lookingfor a company that would allow them to increase their exposure tonatural gas. Maybe Unocal would make sense. Maybe Enron Oil &ampGas.” Enron Corp. has been rumored to be close to a deal to sellits majority interest in Enron Oil &amp Gas.

Analyst John Olson of Sanders Morris Mundy noted Texaco’s assetsare about $28.5 billion. “That’s not big anymore.”

Bijur, however, said the industry “needs a break from the legacyassets of the past. The role of upstream is in decline.” The Texacoof the future will be heavily into high-tech services, a”high-solutions provider…[that has] virtually integrated thevalue chain.” The technology and knowledge base is becoming moreimportant than the resource base, he said.

“The prospect of going outside the conventional M&ampA arena isinteresting because that would show some very original thinking andperhaps move them more toward the mainstream of the North Americaenergy arena,” said Olson, who has been a big proponent of E&ampPcompanies re-engineering themselves for new times (see NGI, Feb. 1,1999). “I mean the old formulas have not worked. Spot prices incommodity markets have generated marginal returns to oil companies,and it’s time to follow other leads, whether they be in theelectric arena or in the pipeline arenas.”

Bijur focused on the tremendous value Wall Street has placed onideas and technical knowledge over revenues and resources. He citedthe soaring stock value of Internet companies, such as AmericaOnline, computer companies, such as Microsoft, and other high-techcomputer firms and technology solutions companies.

It seemed less than coincidental that Halliburton, the largestdrilling technology and upstream energy services company in theworld, was the next in line to speak at Howard Weil. However, therewas no stated design in the line-up.

Texaco probably will not be left out of the merger frenzy, butBijur has successfully clouded the picture of who might be thecandidate for a combination.

Rocco Canonica, New Orleans

(Other NGI staff members contributed to this report)

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