The Delaware Chancery Court has issued a preliminary injunction that may prevent Unocal Corp. from completing an offer to exchange the common stock shares of Pure Resources Inc. Unocal subsidiary Union Oil Company of California already owns 65% of Pure, and it launched its exchange offer last month to acquire the remaining 35% (see Daily GPI, Sept. 6).

According to Unocal, based in El Segundo, CA, the injunction concerns the “structure of the minimum condition in the exchange offer and to certain disclosure matters in Unocal’s offering materials and in the Schedule 14D-9,” which Pure Resources’ board of directors special committee filed with the Securities and Exchange Commission. Unocal said it will seek to address the concerns raised in the court’s opinion.

Union Oil is offering 0.6527 of a share of Unocal common stock to Pure Resources’ shareholders for every share it does not already own. The offer began Sept. 5, and is scheduled to expire at midnight EDT on Wednesday.

In related news, Standard & Poor’s Ratings Service (S&P) on Tuesday affirmed Unocal and Union Oil’s credit ratings at “BBB+” and said its outlook is stable. The ratings on Unocal “reflect its participation in the highly competitive, cyclical, and capital-intensive exploration and production industry; a large, geographically diverse reserve base (10.6 Tcfe at year-end 2001; 61% natural gas; 51% proved developed); a competitive cost structure; and a large exposure to emerging markets,” said S&P analyst Paul. B. Harvey.

He noted that the company’s reserves “are geographically divided among the U.S. (32% of 2001 reserves, concentrated in Alaska and the rapidly producing U.S. Gulf of Mexico; 48% of production), higher-risk Asia (48% of reserves; 39% of production; over 50% of normalized cash flow), and other international locations. While the company has a better-than-average total reserve life of 9.4 years, which indicates a high degree of future production visibility, a large percentage of undeveloped reserves leads to a below-average reserve life of 4.8 years on a proved developed basis, and implies meaningful future development expenses to bring these reserves to production.”

With the development of new fields in the Gulf of Mexico and Asia, Harvey said that the company’s proved reserves should increase. “Production replacement is supported by an active exploration program, a good acreage position, and enormous unbooked reserves in Asia. Depending on local infrastructure and market development, production on these unbooked reserves could commence over the next decade with minimal additional capital investment.”

Regarding liquidity, the analyst said that “unless prices remain at unusually high levels, Unocal is unlikely to generate sufficient internal funds to meet fixed charges, dividends, and about $1 billion of planned capital spending for the second half of 2002…In the medium term, Unocal plans to maintain capital expenditures within cash flows; however, annual cash dividends of almost $230 million on its common and preferred shares will prevent significant debt reduction and likely will lead to further indebtedness in 2002 and in future years, should hydrocarbon prices descend below midcycle levels.”

Harvey also noted that the company plans to fund “a high percentage of its future capital spending and dividend payments with internal funds. Acquisitions should continue to be financed conservatively,” ensuring a stable status.

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