O'Reilly Touts Benefits of Chevron, Texaco Union

Chevron Corp's proposed agreement to acquire Texaco Inc. for $35.7 billion in stock would, if given the go-ahead by federal regulators, put the merged company into the "Super Major" League of producers worldwide and domestically. It would create the third largest natural gas and oil producer in the United States.

A combined ChevronTexaco would have total domestic production of 1.1 million barrels of oil equivalent (BOE) per day, lagging behind BP Amoco Plc and ExxonMobil. It also would hold the third largest reserve position in the nation at 4.2 billion BOE. Globally, the merged company would produce 2.7 million BOE daily, and would own reserves of 11.2 billion BOE.

The combined company would have the "No. 1 position in the deep-water Gulf of Mexico." and an "excellent position" in the Permian Basin, San Joacquin Valley and Canada in the "near term as well as long term," said Chevron Chairman David O'Reilly, who would be chairman of ChevronTexaco.

In Canada specifically, the merger partners have "great exploration positions" in the Northwest Territories and in the MacKenzie Delta, and have existing and future prospects for exploration and production of natural gas in offshore eastern Canada, he noted during a teleconference with energy reporters Monday. "So all in all, this is a very powerful combination in North America."

In addition to the U.S. and Canada, the proposed combination would create "complementary growth opportunities" in the upstream throughout the world; an integrated and worldwide refining and marketing business; a global chemicals business; significant growth platforms in natural gas and power, according to San Francisco-based Chevron and Texaco of White Plains, NY. The boards of directors of both companies approved the transaction Sunday.

While the average energy consumer may view the proposed merger as further shrinkage of the oil and gas industry, O'Reilly believes the deal will be good for them. The "combination is going to improve energy supply to the U.S. consumers because we'll have stronger positions, we'll be better able to invest in growth."

He vowed the two producers would continue to grow their oil and gas production while they are trying to integrate their two operations, which he estimates will take six to nine months to complete after the transaction is closed. "I don't anticipate things [upstream growth] coming to a stop. In fact, we're confident [that] because of our historical relationship we have an [merger] execution advantage."

Worldwide, Chevron and Texaco produce a total of about 4.5 Tcf/d of natural gas, and about two million barrels of gas liquids. Last year, the two companies had combined natural gas sales of 8.88 Tcf/d. The global oil production of the two companies was not broken out separately.

The announcement of the Chevron and Texaco deal comes more than a year after merger talks between the two companies fell apart over price. "We didn't have a deal a year ago. The circumstances, the timing, the situation then simply was not right to make a deal," said Texaco Chairman Peter Bijur, who will be vice chairman of the new company.

Turning to the companies' marketing operations, O'Reilly was somewhat evasive when asked how Dynegy Inc., a Houston-based gas and power marketer in which Chevron has a 26% interest, and Texaco Natural Gas, an international gas and power operation, would be consolidated.

"We're very satisfied with Dynegy's performance; Texaco has had excellent position. It gives us some options for the future. We have to look at what those potential growth opportunities will be. That's something we'll evaluate during the merger integration process," he said.

When asked which operations might be divested, O'Reilly pointed to the companies' refining and marketing operations. "We are certainly aware that there is a concentration issue in the United States downstream, and we anticipate the FTC will require us to do something about it," O'Reilly said. The companies plan to submit a filing to the Federal Trade Commission "right away," he noted, adding that he was "confident that this issue [would] be resolved."

Under the merger agreement, Texaco shareholders will receive approximately $64.87 for each Texaco share they own based on Chevron's closing stock price of $84.25 last Friday (Oct. 13), which is an 18% premium over Texaco's closing stock price on that same day. Chevron shareholders would hold approximately 61% of the combined equity of the new company, while Texaco stockholders would own about 39%. The enterprise value of a combined ChevronTexaco would be more than $100 billion.

As part of the merger, O'Reilly estimated that about 4,000 jobs would be cut. But he said it was too early to determine what portion of the job cuts would be in the merged company's U.S. operations.

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