By acquiring Union Texas Petroleum in a deal worth about $3.3billion, ARCO would grow production, reserves and its presenceinternationally. The two companies agreed to merge yesterday, withARCO acquiring all Union Texas common stock for $29 cash per share,including debt and preferred stock of Union Texas. The deal willimmediately add 140,000 barrels/d of oil equivalent to ARCO’sproduction. Union Texas production last year was 44 million BOE,51% of it natural gas.

ARCO CEO Mike R. Bowlin called the agreement “an importantbuilding block” for the company. “This acquisition is consistentwith our strategy of building scale and presence in five to sixcore producing areas as a means of creating shareholder value. Over90% of Union Texas’ assets are located in ARCO’s core producingareas, specifically Venezuela, Indonesia, the North Sea and Alaska.The combination of the two companies solidifies ARCO’s position asa significant player in those regions and is another step towardaccomplishing our goal of becoming a great global player.

“We are becoming increasingly global in our actions and ourmindset. For example, we no longer view our business as eitherdomestic or international. Instead, we view it on a basin-by-basinbasis, part of a seamless, global portfolio.” ARCO is stabilizingproduction in Alaska, modestly growing production and reserves inthe Lower 48, and substantially growing production and reservesoutside the United States.

Bowlin said the transaction is especially attractive to ARCObecause of asset overlap of the two companies and opportunities forcost cutting. He predicted the combination will eventually yieldafter-tax savings of at least $85 million per year. Bowlin said heexpects the acquisition to be accretive to operating cash flow inthe first year and only modestly dilutive to earnings through nextyear. He said there is little risk as Union Texas’ production fromknown resources is rising and cost reductions anticipated aretotally within ARCO’s control.

The transaction will also give ARCO 573 million barrels ofproved reserves for a gross cost of $5.76 per BOE. ARCO estimatesit is paying about $5 per proved BOE based on costs attributable toproducing oil and gas assets.

ARCO expects the tender offer will be completed by the end ofthe company’s second quarter and plans to finance the transactionusing commercial paper and other short-term borrowings backed byexisting and additional bank facilities.

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