Chevron Corp.’s proposal to acquire Texaco Inc. for $35.7billion in stock, if given the green light by federal regulators,would put the merged company into the “Super Major League” ofproducers 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 oilequivalent (BOE) per day, lagging behind BP Amoco Plc andExxonMobil, the companies said in formally announcing their mergerplans last Monday. It also would hold the third largest reserveposition in the nation at 4.2 billion BOE. Globally, the mergedcompany would produce 2.7 million BOE daily, and would own reservesof 11.2 billion BOE.
In the U.S., Chevron and Texaco had 6.1% of the total 18.9 Tcfof gas produced in 1999, with both accounting for about 1.15 Tcflast year, the Energy Information Administration estimated lastweek. 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 agencysaid.
ChevronTexaco would have the “No. 1 position in the deep-waterGulf of Mexico” and an “excellent position” in the Permian Basin,San Joacquin Valley and Canada in the “near term as well as longterm,” said Chevron Chairman David O’Reilly, who will be chairmanof ChevronTexaco.
In the Canadian gas market, the merger partners have “greatexploration positions” in the Northwest Territories and in theMacKenzie Delta, and have existing and future prospects forexploration and production of natural gas in offshore easternCanada, he told energy reporters during a teleconference lastMonday. “So all in all, this is a very powerful combination inNorth America.”
In addition to the U.S. and Canada, the proposed combinationwould create “complementary growth opportunities” in the upstreamthroughout the world; an integrated, worldwide refining andmarketing business; a global chemicals business; and significantgrowth platforms in natural gas and power, according to SanFrancisco-based Chevron and Texaco of White Plains, NY. The boardsof directors of both companies have approved the transaction.
While the average energy consumer may see the proposed merger asfurther evidence of shrinkage of the oil and gas industry, O’Reillybelieves the deal will be good for them. The “combination is goingto improve energy supply to the U.S. consumers because we’ll havestronger positions, we’ll be better able to invest in growth.”
He vowed the two producers would continue to grow their oil andgas production while they are trying to integrate their twooperations, which he projected would be completed six to ninemonths 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 executionadvantage.”
Worldwide (including U.S.), Chevron and Texaco reported theyproduced a total of about 4.5 Bcf/d of natural gas in 1999, andabout two million barrels of natural gas liquids. Last year, thetwo 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 thana year after merger talks between the two companies fell apart overprice. “We didn’t have a deal a year ago. The circumstances, thetiming, the situation then simply was not right to make a deal,”said Texaco Chairman Peter Bijur, who will be vice chairman of thenew company.
Turning to the companies’ marketing operations, O’Reilly wassomewhat 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 hadexcellent position. It gives us some options for the future. Wehave to look at what those potential growth opportunities will be.That’s something we’ll evaluate during the merger integrationprocess,” he said. Texaco operates more than 1,500 miles ofpipeline, 50 interconnects and 8 Bcf of storage. It currently hasequity interests in 47 power projects operating or underdevelopment throughout the world, with a total generating capacityof more than 5,400 MW.
When asked which operations might be divested, O’Reilly pointedto the companies’ refining and marketing operations. “We arecertainly aware that there is a concentration issue in the UnitedStates downstream, and we anticipate the FTC will require us to dosomething about it,” O’Reilly said. The companies plan to submit afiling 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 receiveapproximately $64.87 for each Texaco share they own based onChevron’s closing stock price of $84.25 on Oct. 13, whichrepresented an 18% premium over Texaco’s closing stock price onthat same day. Chevron shareholders would hold approximately 61% ofthe combined equity of the new company, while Texaco stockholderswould own about 39%.
Enterprise Value: $100B
The enterprise value of a combined ChevronTexaco would be morethan $100 billion. It would have an operating net income of $3.4billion, 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 themerger, O’Reilly estimated that about 4,000 jobs would be cut. Buthe said it was too early to determine how many of the cuts wouldcome from the merged company’s U.S. operations.
On Capitol Hill last week, the chairman and ranking Democrat onthe Senate Judiciary’s antitrust subcommittee said they planned tocarefully review the proposed $35 billion merger of Chevron Corp.and Texaco Inc. because of the industry consolidation issues itraised.
“We are seriously concerned by the news of the planned mergerbetween 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 isessential to constrain these prices.” But the proposedChevron-Texas union will take the industry “further down the roadof consolidation [that] we have been concerned about for the lastcouple of years.”
In addition to close review by the Senate antitrust panel, “weexpect this deal to face careful scrutiny [by federal] antitrustauthorities, both to explore the industry-wide effects of such adeal and to examine the local market implications,” DeWine and Kohlsaid.
In contrast, Energy Secretary Bill Richardson had a positivereaction to the news of the Chevron-Texaco proposed merger. “Theseare two solid companies. This is one of the inevitable outgrowthsof the global economy.”
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