What Makes a Small Player Attractive to Industry Giants? It's Where the Oil and Gas Are By THADDEUS HERRICK Staff Reporter of THE WALL STREET JOURNAL June 27, 2005; Page A6
Unocal Corp. accounts for less than 1% of the world's oil production, but its potential for growth -- in a climate in which oil is near $60 a barrel -- has made it one of the industry's hottest companies.
With the company a target of a bidding war between Chevron Corp. and China's state-owned Cnooc Ltd., Unocal's value is widely seen in its discovered but undeveloped oil and natural-gas fields. Those fields are estimated to hold about 1.5 billion barrels of oil and gas equivalent.
The U.S. oil company's booked reserves -- totaling 1.7 billion barrels equivalent, of which natural gas comprises roughly 60% -- are coveted as well, especially as the industry's bigger companies lament a dearth of new exploration and production plays.
More than half of Unocal's proved reserves are concentrated in Southeast Asia, making the company even more attractive to Cnooc and Chevron, long a major player in the region. In addition to reserves in Thailand, Indonesia and Myanmar, Unocal owns reserves in the U.S. and Canada totaling 556 million barrels of oil equivalent, most of it in the Gulf of Mexico.
"Unocal happens to have an interesting portfolio," says Fadel Gheit, an analyst with Fahnestock and Co. "These are the sweet spots where people want to be."
It wasn't until Cnooc made an unsolicited $18.5 billion cash bid last week for Unocal in an effort to break up its pending $16.5 billion acquisition by Chevron that Unocal took the spotlight.
Unocal, El Segundo, California, hasn't always been so coveted. Earlier this year, some of its largest institutional shareholders were selling. Mutual-fund investment manager Capital Research & Management Co., whose holding of 21.4 million Unocal shares as of March 31 was the second largest, dumped 4.4 million shares in the first quarter. The company declined to comment. In all, six of the top 10 Unocal shareholders reduced their holdings during the first quarter.
Now Unocal, which has about 6,800 employees world-wide, may end up the biggest oil acquisition since a spate of big mergers a few years ago created the likes of Exxon Mobil Corp. and the present-day Chevron Corp. Last year, Unocal had earnings of $1.2 billion on revenue of $8.2 billion.
Unocal's oil in the ground isn't its only appeal. The company is unencumbered by refining and marketing, making an acquisition easier: The process is less likely to run afoul of antitrust concerns regarding control of local gasoline markets. Refining and marketing, though lucrative this year, for many years offered low returns on investment. Long known for its "76" brand gasoline, Unocal has since 1997 focused exclusively on finding oil; the 76 brand now belongs to ConocoPhillips.
The fact that Unocal is a pure asset play makes it easier to digest than an integrated company with complex refineries and chemical plants to operate. This factor is an important consideration for the Chinese, who have never acquired a company remotely this large. Cnooc already has tried to assuage potential anti-China sentiment in the U.S. by pledging that any oil or gas produced in the U.S. by Unocal will be sold there.
The sudden popularity of a company that has largely flown below the radar screen underscores the scarcity of options for the industry's major players. Most of the world's biggest oil fields are already believed to have been discovered, and many of those are in oil-producing countries such as Saudi Arabia that are off limits to public companies.
"If you want to increase your reserves, you have to buy a company," says Adam Sieminksi, an analyst for Deutsche Bank.
Still, a series of acquisitions isn't likely to follow the fight for Unocal. Analysts and industry experts say only a handful of companies can be considered takeover candidates, most of them smaller exploration and production concerns much like Unocal, though with less potential for growth. Among those mentioned: Apache Corp., Anadarko Petroleum Corp. and Marathon Oil Corp.
Unocal's gas and oil fields in Southeast Asia complement the offshore Chinese, Indonesian and Australian holdings of Cnooc. Unocal also owns a 10% stake in a large Azerbaijan field and pipeline operated by British oil company BP PLC, which is to move oil to the Mediterranean. A successful Cnooc bid would give the company oil to sell in the Atlantic market.
Unocal is led by a geologist, somewhat unusual for an industry that tends to tap executives from finance or engineering. A Unocal employee since 1977, Chief Executive Charles R. Williamson was appointed in 2001, after serving as vice president for international operations.
Until recently, the company may have been best known for its ties to Myanmar. Several years ago, a U.S. federal judge found that Unocal among other companies that joined in a partnership with Myanmar knew a pipeline project was benefiting from forced Burmese labor and "numerous acts of violence" by Myanmar's military. Charges brought by Burmese plaintiffs against Unocal were dismissed on the grounds that the company didn't conspire to commit the abuses.