Unocal Corp. offers Chevron Corp. a quick fix.
That's one reason Chevron is stepping up its effort to acquire the Southern California oil company.
Chevron's oil and natural gas production has fallen steadily since 1998, and its oil and gas reserves have declined since 2003, raising concerns on Wall Street. Chevron said longer-term projects will improve its performance beginning in 2006, but in the meantime, the company expects to benefit from increased production and reserves and synergies resulting from its purchase of Unocal -- if it happens.
This week, Chevron upped its bid for Unocal with an offer worth more than $17 billion -- hoping to fend off rival bidder Cnooc Ltd., a Chinese oil firm. The Chinese company, 70 percent owned by the government, has offered roughly $18.5 billion for Unocal, and its board has authorized the company to increase its bid.
Unocal's board has recommended that its shareholders accept the Chevron offer in a vote scheduled for Aug. 10.
For Chevron, acquiring Unocal would immediately spike production and reserves. Chevron is also interested in Unocal because a number of the smaller company's operations -- particularly in Thailand, Indonesia, the Gulf of Mexico and the Caspian Sea region -- dovetail with Chevron's, creating management and production efficiencies, analysts said.
Unocal would be Chevron's largest acquisition since it merged with Texaco Inc. in 2001. That deal also was overseen by David J. O'Reilly, who took over as chairman and chief executive of Chevron in 2000.
The battle over Unocal comes at a time of heightened worldwide demand for oil, particularly in fast-growing economies such as India and China. Oil production has been pushed to its limits, resulting in prices of more than $50 a barrel in recent weeks.
Higher prices have been a boon for oil companies, including Chevron, whose profits and stock values have soared. But Chevron's stock has lagged compared with some of its competitors' shares, which analysts attributed to concerns about production and reserves. The San Ramon, Calif., company has been hurt by aging oil fields with declining production, including some in the United States and Canada that it has sold recently to smaller energy firms.
In the global quest for reserves, state-owned oil companies such as Cnooc are not Chevron's only challengers. It also faces stiff competition from Exxon Mobil Corp., BP PLC and other international companies. At the same time, a growing portion of the world's remaining oil reserves is concentrated in Middle Eastern countries that significantly restrict access to foreign firms.
"The reach of firms like BP and Exxon is more extensive" than Chevron's, said Lysle Brinker, an analyst for the research and consulting firm John S. Herold Inc., based in Norwalk, Conn. "They're perhaps feeling more of the crunch from the more competitive global landscape."
If Chevron succeeds in acquiring Unocal, the company's proved oil and natural gas reserves would jump by about 15 percent, to the equivalent of 13 billion barrels of oil. Daily production would go from the 2.4 million barrels a day forecast for 2005 to about 2.8 million barrels a day with Unocal, Brinker said.
Unocal, which is responsible for less than 1 percent of world oil production, was traditionally known to American consumers for its "76" brand gas stations. The company shed those stations, and its refining operations, in 1996 and 1997 to focus on oil and natural gas exploration and production.
Unocal is especially appealing, analysts said, because of oil and gas fields it has discovered but not yet listed as proved reserves.
"A critical attribute of Unocal, and one of the main reasons we believe so strongly in this deal, is the long-term resource potential it presents," O'Reilly said in an April conference call with analysts.
He also said there are "numerous opportunities to capture synergies" between Unocal and Chevron operations.
Unocal is unusual for an operation of its size. It has fewer projects -- and at bigger scales -- than other small oil companies. Unocal also lacks a lot of low-producing fields that smaller firms typically own but that are of little interest to the larger companies.
As of yesterday, Unocal's market capitalization was about $17.64 billion, compared with about $119.54 billion for Chevron.
Analysts said timing plays an important role in Chevron's reserves and production challenges. Chevron has several big projects in the works -- including natural gas fields off the shores of Nigeria and western Australia -- that the company says will boost production between 2006 and 2009, when they ultimately come online.
"We expect solid growth from that queue of projects," said Chevron spokesman Don Campbell.
Chevron and Texaco produced nearly 2.9 million barrels a day of oil and gas equivalent in 1998 -- a number that declined to about 2.4 million barrels a day last year, according to data compiled by A.G. Edwards & Sons Inc. After years of increases, the company's proved oil and gas reserves fell from nearly 12 billion barrels equivalent at the end of 2003 to about 11.3 billion barrels a year later, according to the data.
Excluding sales and purchases of oil and gas fields, Chevron has not had a long-term problem replacing the reserves it has pumped from the ground, said Bruce Lanni, a San Francisco-based analyst with A.G. Edwards. While the company struggled to replace its reserves last year, the longer-term outlook has been strong, he said.
Lanni said the acquisition would "fill a near-term void" and provide long-lasting benefits. However, he said that despite concerns among some investors about the company's difficulties, "Chevron is fine without Unocal."