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Texaco Out Shopping for Merger Partner

Texaco Out Shopping for Merger Partner

Texaco Chairman Peter I. Bijur said industry observers shouldn't be surprised to see Texaco marching to a different drummer in the industry's high-stepping merger parade

"The industry we once knew is gone," Bijur told attendees at the Howard Weil Energy Conference Monday in New Orleans. He noted the commodity price collapse over the past year has led to near unprecedented turbulence within the top tier of major oil and gas companies. 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, BP Amoco-Arco, Seagull-Ocean and others, and join with another major or a large independent.

Although there have been few combinations between major electric utilities and major producers, other than the Dominion Resources-CNG deal now in the works, it has not quelled speculation of a possible Southern-Texaco combination or the joining of Texaco with another large electric company. More frequently, however, reserve-heavy independents, such as Burlington Resources, have topped the list of potential candidates.

J.P. Morgan analyst Jay Wilson does not follow Texaco but said a combination with a large E&P 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 & Gas." Enron Corp. has been rumored to be close to a deal to sell its majority interest in Enron Oil & Gas.

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

Unlike most of its peers, Texaco appears to be looking outside the upstream industry. Despite a 78% drop in net income and a 32% decline in revenues in 1998, the company had its best year in decades in exploration, said Bijur, 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."

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

"The prospect of going outside the conventional M&A 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&P companies re-engineering themselves for new times (see Daily GPI Jan. 29, 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.

Nevertheless, Bijur indicated Texaco will not be left out of the merger frenzy. The question is when and with whom.

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