by Christopher Helman

04-04-05 For years, oil analysts have kicked ChevronTexaco and its peers like ExxonMobil and Shell for their inability to grow output while maintaining high levels of return on capital.
There's plenty of oil and gas out there, it's just getting harder to get to. With its $ 16.4 bn purchase of Unocal, ChevronTexaco is finally able to deflate those concerns, at least for the time being -- Unocal's key assets in the Middle East and Asia have the potential for explosive growth by the end of the decade.

For all the talk of synergies in fast-growing Asia, the plum morsel that ChevronTexaco will get from this Unocal deal is in Azerbaijan. The small country, north of Iran on the Caspian Sea, is home to the Azerbaijan International Oil Consortium.
Ten oil companies -- led by BP with a 34 % stake and Unocal with 10.3 % -- are jointly developing major fields there. Early production is 150,000 bpd, with output slated to soar to 1.1 mm bpd by 2009. The consortium will move much of that oil through the nearly complete BTC pipeline from Baku, Azerbaijan to Ceyhan, Turkey. Unocal owns nearly 9 % of that $ 2.9 bn project.

ChevronTexaco is buying Unocal at a prime time, considering that the riskiest stage of development in Azerbaijan -- exploration -- is over. In recent years, Unocal's average return on capital employed has been higher than ChevronTexaco's, 9.4 % vs. 8.7 %. But as Unocal's Azerbaijan investments come on line and generate profit, those returns will be even juicier, upgrading ChevronTexaco's overall earnings quality.
The second most interesting assets appear to be in Thailand, where the combined Unocal and ChevronTexaco operations will make it that nation's premier energy company. Unocal produces some 20,000 bpd of oil and 1 bn cfpd of natural gas and supplies the gas to generate 75 % of the nation's power demand.

ChevronTexaco pumps 24,000 bpd and 100 mm cf of gas and owns Ma Tap Phut, one of Southeast Asia's most efficient refineries. Seeking to grow its energy base, Thailand has recently ordered the steel to build a third major gas pipeline, which in time would trigger development of 2 tcf of undeveloped Unocal reserves.
Solidifying dominance of the Thai energy industry will likely lead ChevronTexaco to its next acquisition. Duane Grubert, analyst at Fulcrum Global Partners, notes that Pogo Producing, a 43 % stakeholder on a ChevronTexaco gas project in Thailand, has indicated its willingness to sell. Grubert thinks ChevronTexaco could get Pogo's Thai assets for $ 500 mm, and recommends Pogo stock.

Other major asset matches exist in Indonesia, as well as the Gulf of Mexico, where both ChevronTexaco and Unocal have been exploring deepwater prospects to total depths of 35,000 feet. By consolidating GOM operations, ChevronTexaco will be able to reduce operating costs while leveraging Unocal's proprietary geologic data.
Most of the rest of Unocal's North American assets will likely be part of the $ 2 bn in asset sales planned by ChevronTexaco CEO David O'Reilly.

The biggest piece on the block is Unocal's wholly owned subsidiary Pure Resources, which develops oil and gas in southwest US basins like the San Juan and Permian. Last year ChevronTexaco sold $ 1 bn of its own mature US fields, reasoning that it could get better returns investing capital in Asia and the Middle East than stateside.
Likely bidders for Pure, as well as Unocal's small Alaskan operations would be independents like Forest Oil, Devon Energy and XTO Energy.