Tuesday, April 05, 2005

A few weeks ago it looked possible that a Chinese oil company would buy Unocal, one of the largest independent oil companies in the US. Now it seems they will become part of ChevronTexaco (my old firm). This partially answers the question of how the Super-Majors will spend the heaps of cash they are amassing as a result of high oil prices, and in the absence of the kind of access they really need to top-tier opportunities in the Middle East.

It's always interesting to see the media parroting estimates of "synergies". The traditional view of merger synergies focuses too much on cutting headcount and selling underperforming assets, and too little on genuine upside. This transaction offers a lot of the latter, in my view, and barely enough of the former to affect the bottom line of a company this size.

Consider the overlaps and the voids. Unocal lacks a US downstream, so anti-trust concerns and forced divestments are unlikely, with the possible exception of some pipeline interests. But that also means no downstream synergies. Unocal is heavily focused on natural gas and on Asia, both areas where ChevronTexaco's portfolio could use some beefing up. The biggest overlaps will probably be in deep water Gulf of Mexico exploration and production--a key play for the entire industry--and in Thailand, where CVX's downstream presence via Caltex should be a nice fit with Unocal's big upstream operation. At $10 per oil-equivalent barrel in the ground, it might seem a bit pricey, but not if you think oil has moved into a new trading range.

This deal won't put CVX into the Exxon/BP/Shell league, though it should move them solidly into fourth place globally among publicly-traded oil companies, ahead of Total.

N.B. If I were an equity analyst, I would have to disclose that I own CVX stock.

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