O'Reilly: Chevron + Texaco Equals 'Very Powerful' Union
Chevron Corp.'s proposal to acquire Texaco Inc. for $35.7 billion in stock, if given the green light by federal regulators, would put the merged company into the "Super Major League" of producers worldwide and domestically. In the United States alone, it would become the third largest natural gas and oil producer.
ChevronTexaco --- as the combined company would be known --- would have total domestic production of 1.1 million barrels of oil equivalent (BOE) per day, lagging behind BP Amoco Plc and ExxonMobil, the companies said in formally announcing their merger plans last Monday. 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.
In the U.S., Chevron and Texaco had 6.1% of the total 18.9 Tcf of gas produced in 1999, with both accounting for about 1.15 Tcf last year, the Energy Information Administration estimated last week. The companies owned a combined 4.8% (7.99 Tcf) of total U.S. natural gas reserves of 167.4 Tcf as of Dec. 31, 1999, the agency said.
ChevronTexaco 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 will be chairman of ChevronTexaco.
In the Canadian gas market, 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 told energy reporters during a teleconference last 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, worldwide refining and marketing business; a global chemicals business; and 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 have approved the transaction.
While the average energy consumer may see the proposed merger as further evidence of 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 projected would be completed six to nine months 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 execution advantage."
Worldwide (including U.S.), Chevron and Texaco reported they produced a total of about 4.5 Bcf/d of natural gas in 1999, and about two million barrels of natural gas liquids. Last year, the two companies had combined global natural gas sales of 8.88 Bcf/d. The worldwide oil production of the two companies (including U.S.) was estimated at about 550 million barrels last year.
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 Chevron would consolidate its 26% interest in Dynegy Inc., a Houston-based gas and power marketer, with Texaco Natural Gas, also a top gas and power marketer.
"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. Texaco operates more than 1,500 miles of pipeline, 50 interconnects and 8 Bcf of storage. It currently has equity interests in 47 power projects operating or under development throughout the world, with a total generating capacity of more than 5,400 MW.
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 on Oct. 13, which represented 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%.
Enterprise Value: $100B
The enterprise value of a combined ChevronTexaco would be more than $100 billion. It would have an operating net income of $3.4 billion, cash flow from operations of $6.2 billion, total assets of $77.2 billion and a debt load of $35.5 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 how many of the cuts would come from the merged company's U.S. operations.
On Capitol Hill last week, the chairman and ranking Democrat on the Senate Judiciary's antitrust subcommittee said they planned to carefully review the proposed $35 billion merger of Chevron Corp. and Texaco Inc. because of the industry consolidation issues it raised.
"We are seriously concerned by the news of the planned merger between Chevron and Texaco," said Subcommittee Chairman Mike DeWine (R-OH) and Herb Kohl (D-WI), ranking minority member of the panel.
"Consumers all across the country are suffering from very high [energy] prices," the senators noted, and "vigorous competition is essential to constrain these prices." But the proposed Chevron-Texas union will take the industry "further down the road of consolidation [that] we have been concerned about for the last couple of years."
In addition to close review by the Senate antitrust panel, "we expect this deal to face careful scrutiny [by federal] antitrust authorities, both to explore the industry-wide effects of such a deal and to examine the local market implications," DeWine and Kohl said.
In contrast, Energy Secretary Bill Richardson had a positive reaction to the news of the Chevron-Texaco proposed merger. "These are two solid companies. This is one of the inevitable outgrowths of the global economy."
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