Unocal/Chevron Deal a Go

Oil giant counts on continued high prices

SAN RAMON, Calif. -- With itsplanned purchase of Unocal Corp. approved by stockholders yesterday for $18.1 billion, Chevron Corp. has landed the biggest oil acquisition in years and snatched a prize away from a government-controlled Chinese company.

But behind this victory lies a giant bet on the future of energy prices, according to a report in The Wall Street Journal. If they stay high, Chevron CEO David O'Reilly could be remembered for a stroke of genius. If they tumble, Chevron's results could suffer for many years to come because of the high [image-nocss] price it paid for Unocal, El Segundo, Calif.

Unocal Corp. announced yesterday thatits stockholdersapproved the merger agreement between Unocal and Chevronat Unocal's special meeting of stockholders, paving the way to create a combined company that will be the fourth-largest publicly traded energy company in the world in terms of oil and gas production.

Unocal said77.2% of the company's outstanding stock, or 210.26 million shares, voted to approve the merger. Unocal had approximately 272.3 million shares outstanding as of the June 29, 2005, record date.

The Unocal deal gives San Ramon, Calif.-based Chevron access to oil and gas fields across Asia and North America. O'Reilly needs the new supplies: Chevron's production has fallen 14% since he took the reins in 2000, according to the energy research firm John S. Herold Inc.

Chevron's decision to swallow Unocal comes amid an increasingly tense debate over whether the world's oil supplies have hit a peak and are about to start running out. If so, that will mean sky-high oil prices and a race for control of companies such as Unocal that own proven reserves.

Some leading oil companies, including No. 1 Exxon Mobil Corp., flatly reject the so-called peak-oil theory. They say there's still plenty of oil out there. They think oil prices, which hit $64 a barrel this week, will retreat over the long run and it doesn't make sense to pay a premium price for companies like Unocal.

ExxonMobil's outgoing CEO, Lee Raymond, has dismissed his competitor's deal as ill-timed. "I can never remember an industry consolidating at high prices," he said in an interview earlier this year.

While O'Reilly hasn't said that oil production is peaking, he believes that oil output won't be able to keep pace with galloping demand as China and India emerge as huge oil consumers. With governments scrambling to secure energy supplies, he foresees oil becoming an increasingly scarce and expensive commodity. O'Reilly, 58 years old, declined to be interviewed before Chevron completes its Unocal acquisition.

When Unocal became available, O'Reilly went flat out to snap it up. After Chinese company CNOOC Ltd. lobbed in a higher bid, Chevron helped fan protectionist fears in Congress and sweetened its own bid. Last week, CNOOC withdrew, citing the intensity of the political opposition in the United States.

Chevron posted net income of $13.3 billion in 2004, up 85% from a year earlier, thanks to soaring oil prices. This made it the fifth-most-profitable U.S. corporation, trailing only ExxonMobil, General Electric Co., Bank of America Corp. and Citigroup Inc. Since O'Reilly took over, Chevron's total shareholder returns have been neck-and-neck with Exxon and outpaced big competitors Royal Dutch Shell PLC and BP PLC.

But the strong results mask weakness in Chevron's core business: finding oil and gas. Last year, it pumped the equivalent of 2.5 million barrels of oil out of the ground every day. After factoring in asset sales, new discoveries and revisions to previous estimates, it didn't come close to adding that much in proven reserves. Its "replacement rate" was just 18%one of the worst showings by a large oil company in recent years. If that continues, Chevron could eventually pump itself out of existence. That is why many in the oil patch see Chevron's acquisition of Unocal as a sign of weakness, not strength.

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