Ending weeks of speculation, ChevronTexaco
Oil-watchers had been expecting a deal for Unocal for some time and the stock had been on a bit of a tear since the beginning of the year (up about 50%). Interestingly, speculation about the deal pushed Unocal's share price above the actual price offered by ChevronTexaco -- making the deal look like a "take under" to those who don't realize how much Unocal traded up in anticipation of the deal.
For ChevronTexaco, the deal makes a considerable amount of sense, as Unocal is pretty much a pure production and exploration company (it doesn't own much in the way of refinery or chemical businesses). Given that ChevronTexaco's production has been a bit anemic of late, the addition of Unocal's production and reserves should help produce growth for the combined company.
What's more, Unocal has considerable resources in two popular areas -- the Gulf of Mexico and Asia. If and when this deal is completed, the combined company will be the second-largest resource holder in Asia (after China's PetroChina
As I mentioned, with the run-up in Unocal stock, the idea that this company was for sale was basically an open secret. Italian energy company Eni SpA
The price for the deal seems pretty reasonable for ChevronTexaco -- it values Unocal at about 15 times trailing earnings (a discount to large oil companies as a group) and less than $11/barrel for Unocal's 1.75 billion barrels of oil equivalent in proven reserves. What's more, ChevronTexaco expects about $2 billion in asset sales, and management believes that the deal will be basically neutral to EPS and slightly dilutive to return on capital employed.
This deal might mark the beginning of a broader movement among large oil companies to buy up smaller producers in an effort to fortify their production and reserves. After all, buying a company with proven reserves at the right price can be much more cost-effective than spending money on exploration in the hopes of finding your very own new "elephant" oil field.
Accordingly, Fools with an interest in the oil patch might want to keep their eyes on other high-quality, but smaller producers. Buying a stock just for the possibility of a take-out is almost always a bad move, but with energy prices as high as they are and production constrained, smaller energy producers might have room to run whether they're bought out or left alone.
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Fool contributor Stephen Simpson owns shares of PetroChina.