Monday, March 07, 2005

Spending the Windfall
Ever since oil prices popped up into the stratosphere last year, the market has wondered how the major oil companies would spend the resulting cash windfall. The answer so far has been fairly restrained: stock buybacks, balance sheet polishing, and little to no increases in exploration. Now ChevronTexaco has apparently thrown its hat in the ring in the chase for Unocal, in competition with one of China's state oil companies. It will be interesting to see if the resulting offer for Unocal is in cash, stock, or a blend.

Unocal looks like a good fit with ChevronTexaco's existing portfolio, and the California reformulated gasoline patent I highlighted in my posting of 1/7/05 should be much less of a concern in a domestic transaction such as this, though it could still draw regulatory attention. One of the more interesting angles concerns Unocal's controversial position in Burma. Would ChevronTexaco retain this, or divest it as Texaco did a few years ago?

Although a Chevron/Unocal transaction would make sense from a company perspective, it does not address the fundamental issue facing the industry today. The consolidations of the last decade have enhanced the size and profitability of the global energy companies, but they have not noticeably increased aggregate production. With reserve replacement slipping and the national oil companies preoccupied funding domestic social programs, the global oil industry will continue to struggle to meet the growing demand for petroleum products generated by the development of China and India.

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