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October 9, 2001 


Chevron and Texaco Complete Merger, 
Creating Second Largest U.S. Energy Company 



By Christopher Perdue
Director, Market Research 


[News item from PR Newswire] Chevron Corp. announced today that stockholders have voted to approve the proposed merger with Texaco. The votes were cast at a special stockholder meeting. More than 441 million shares, 99 percent of the shares voted, approved the common stock issuance, and more than 438 million shares, 68 percent of the shares entitled to vote, approved the name change to ChevronTexaco Corporation. The companies intend to close the merger later today. 

Analysis: While the energy market has seen many deals this year, nothing matches the colossus created by this merger. The combination of San Francisco-based Chevron (NYSE: CHV) and White Plains, N.Y.-based Texaco (NYSE:TX) creates a company with annual revenues of over $96 billion. In terms of market capitalization, the new company will rank second among U.S. energy companies with only Exxon Mobil Corp. (NYSE: XOM) being larger. 

Chevron agreed to buy Texaco last October in a stock deal valued at approximately $39.3 billion, plus the assumption of about $6 billion in debt. Under the terms of the deal, Texaco shareholders receive .77 shares of Chevron common stock for each share of Texaco common stock they own, and Chevron shareholders will retain their existing shares. Chevron will be renamed ChevronTexaco and will trade on the New York Stock Exchange under the new ticker symbol CVX. Next year, the new company will place its headquarters in suburban San Ramon, Calif. 

The new company will have reserves of 11.2 billion barrels of oil equivalent (BOE), daily production of 2.7 million BOE, assets of $77 billion, and operations throughout the world. In the United States, ChevronTexaco will be the nation's third largest producer of oil and gas, with production of 1.1 million BOE per day, and will hold the nation's third largest reserve position, with 4.2 billion BOE of proven reserves. 

The approval from shareholders represents the final hurdle to the merger. European regulators have already granted approval, and the Federal Trade Commission (FTC) voted 4-0 to approve the merger last month. Chevron and Texaco also recently negotiated a consent decree with the attorneys general of 12 states. 

To satisfy the FTC's apprehension that the merger, as initially proposed, would violate antitrust law, Texaco agreed to divest its U.S. refining and marketing affiliates. 

Texaco refines crude oil in the United States under two separate affiliates, Equilon Enterprises and Motiva Enterprises. The company owns a 44-percent interest in Equilon, with the remainder belonging to Shell. Texaco and Saudi Refining each own 35 percent of Motiva. The rest is owned by Shell. 

In addition, Texaco will sell its one-third interest in the Discovery natural-gas pipeline system in the Gulf of Mexico and its general aviation businesses in 14 states. 

Although Texaco and Chevron have been rivals, the two companies have a long business relationship. For the past 65 years, they have co-owned a prosperous joint venture called Caltex, which sells 1.8 million barrels of crude oil and petroleum products per day with operations in 60 countries. Caltex refines crude oil and marketing petroleum products, LNG and gas products with a workforce of more than 6,000. Revenues for the company and its affiliates were $20.2 billion in 2000. 

This merger appears to be a good fit for many reasons. One benefit is that the two companies have many complementary operations internationally, including West Africa and Brazil, home to some of the world's largest new oil fields. 

The new company will have a leadership position in power generation. Texaco's power and gasification business, with equity interests in 3,500 megawatts of power operating or under construction, and Chevron's 26-percent stake in Dynegy, Inc., will strengthen the company's position in the gasification and power generation markets. 

In addition, the sheer size of the new company should allow it to better cope with fluctuating crude prices and provide a greater ability to undertake global projects that are growing in complexity, size and cost. The stock market attests to these economies of scale. The stock prices for Chevron and Texaco, though up about 50 percent and 60 percent over the past five years, have under-performed those of the gargantuan players like ExxonMobil and BP. After gaining enormous size through mergers in recent years, these two companies have seen their shares return about 70 percent and 80 percent, respectively. 

ExxonMobil and BP have seen their price/earnings multiples command significant premiums as well. Chevron and Texaco currently have price/earnings multiples of about 9.2 and 12.3 respectively, while BP and ExxonMobil command price/earnings multiples of approximately 15.1 and 16.3 respectively. 

These significant stock price premiums that ExxonMobil and BP have obtained after their mergers bode nicely for ChevronTexaco. It now joins the ranks of these major players. As mentioned earlier, in terms of market capitalization, the new company will rank second among U.S. energy companies, and fourth among global energy companies, with a market capitalization approaching $100 billion. 

The new company expects to reduce costs by at least $1.2 billion per year within six to nine months of the merger's completion. The most significant savings (approximately $700 million) are projected to come from more efficient exploration and production activities. An additional $300 million is expected to come from the consolidation of corporate functions, and $200 million from other operations. The company anticipates that the combined workforce of about 57,000 will be reduced by approximately 7 percent worldwide. 

These projected expense reductions of $1.2 billion could be just an initial payoff. Looking at the recent mergers of BP and ExxonMobil, history suggests that the major oil companies underestimate their scope for slashing costs. For example, since the merger of Exxon and Mobil in 1999, savings estimates have been raised by about $1 billion in each of the years 2000 to 2002. In addition, BP has almost doubled initial savings expectations in its various mergers to $4 billion from $2.2 billion. So, it is not inconceivable that the merger could reduce costs perhaps up to twice as much as currently projected, and that would translate into earnings for next year and beyond being much higher than anticipated. 

The creation of ChevronTexaco adds a new player to the oil and gas elite. Rather than being acquired by ExxonMobil Corp., BP Amoco Plc, or Royal Dutch Shell Group, as was becoming more likely with each passing month, Chevron and Texaco became their equal. 


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