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Texaco Looking for Surprise Merger Candidate

Texaco Looking for Surprise Merger Candidate

Industry observers shouldn't be surprised to see Texaco marching to a different drummer in the industry's high-stepping merger parade, Texaco Chairman Peter I. Bijur said last week. Unlike many of its peers, Texaco appears to be looking outside the upstream industry for a merger partner.

"The industry we once knew is gone," Bijur told attendees at the Howard Weil Energy Conference last week in New Orleans. The commodity price collapse over the past year has led to near unprecedented turbulence within the top tier of major oil and gas companies, and many smaller companies will be lucky to get out of this downturn alive. Texaco has not been immune to effects of the tumultuous change. Net income fell 78% last year. Revenues declined 32%.

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

"This does not mean Texaco is not considering a merger or acquisition. We are," he said. "We don't think you can save yourself into prosperity."

Lately, analysts have kept a close eye on Texaco for signs it might follow the thinking of most of its peers, including Exxon-Mobil, BP Amoco-Arco, Seagull-Ocean and others, and join with another major or a large independent. But Bijur's comments confirmed earlier reports that Texaco wouldn't be playing that game. (See NGI, March 29)

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

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

J.P. Morgan analyst Jay Wilson said a combination between Texaco and a large E&ampP company would not surprise him. "They're looking for a company that would allow them to increase their exposure to natural gas. Maybe Unocal would make sense. Maybe Enron Oil &amp Gas." Enron Corp. has been rumored to be close to a deal to sell its majority interest in Enron Oil &amp Gas.

Analyst John Olson of Sanders Morris Mundy noted Texaco's assets are about $28.5 billion. "That's not big anymore."

Bijur, however, said the industry "needs a break from the legacy assets of the past. The role of upstream is in decline." The Texaco of the future will be heavily into high-tech services, a "high-solutions provider...[that has] virtually integrated the value chain." The technology and knowledge base is becoming more important than the resource base, he said.

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

Bijur focused on the tremendous value Wall Street has placed on ideas and technical knowledge over revenues and resources. He cited the soaring stock value of Internet companies, such as America Online, computer companies, such as Microsoft, and other high-tech computer firms and technology solutions companies.

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

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

Rocco Canonica, New Orleans

(Other NGI staff members contributed to this report)

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