UCL Speak of the Devil, I got some too at 29 15/16...
Thursday April 6, 11:00 am Eastern Time
Individual Investor
Oil & Gas: Unocal: Next Oilfield Takeover Target?
Analyst: Bob Hirschfeld (4/6/00)
The consolidation bug is hitting the oil patch.
Earlier this week Anadarko Petroleum (NYSE: APC - news)agreed to purchase rival oil and
gas explorer Union Pacific Resources (NYSE: UPR - news).
This deal comes on the heels of Phillip Petroleum's (NYSE: P - news) recent purchase of
Arco's (NYSE: ARC - news) Alaska assets and Occidental Petroleum's (NYSE: OXY -
news) purchase of assets from both Shell (NYSE: RD - news) and BP Amoco (NYSE: BPA
- news).
Now, analysts feel the next likely takeover target is Unocal (NYSE: UCL - news).
This merger activity comes amid a worldwide spike in energy prices. And last week's OPEC agreement to slightly increase
production is increasing investor confidence that there will be no repeat of late 1998, when oil prices dropped 50%.
``The recent agreement by OPEC is the best gift the sector has received in the 25 years I've been following it,' says Fadel
Gheit, an analyst at Fahnestock. ``Until now, the industry has been plagued by volatility. Now, with the price band in place,
OPEC members will increase production when prices reach the high end of the band and slow production when prices touch
the lower end. That means, for the first time, the industry has a safety net.'
No surprise, investors have already warmed up to the group. But there is still a lot of money to be made, say analysts. Although
E&P (exploration and production) valuations are still cheap, they are no longer rock bottom. Says Mark Fischer of Bank of
America Securities: ``The entire E&P group is no longer trading at 10-year lows relative to cash flow the way it was in
February. Right now, the group trades closer to its five-year average levels.'
Fisher is keeping a \221strong buy' rating on shares of a number of E&P companies, including Unocal, which he describes as a
``stock that has lagged more than it should have.' After closing Wednesday at $29.75 per share, Unocal is well off its 52-week
high of $46.63.
Why is Unocal deemed the next takeover target? David Wheeler at Deutsche Banc Alex. Brown says Unocal shares are trading
below the average multiple on a key measurement called DARN, or debt-adjusted reserve normalized estimated year 2000
cash flow. To compare, Unocal's multiple is 5.1 times, versus an average industry-wide multiple of 5.5 times. And Unocal's
price-to-net-asset-value ratio, at 67%, compared to an average ratio of 90%, is the lowest of 14 companies surveyed.
Hence, Unocal seems an attractive takeout candidate simply on the basis of valuation.
Why is Unocal's stock so cheap? ``The company was hyped as a takeover target by either Texaco (NYSE: TX - news) or
Chevron (NYSE: CHV - news),' notes Gheit. Meanwhile, ``management tuned down production growth forecasts from the
double digits they had promised, and the stock came down. As of now, management is aware that the stock is not going to
move on operations alone. They need a catalyst.'
The most likely scenario, according to Gheit, is that ``when BP Amoco at last completes its acquisition of Arco (NYSE: ARC -
news), it will seek further acquisitions. BP Amoco hopes to unseat Exxon Mobil (NYSE: XOM - news) and Royal Dutch
(NYSE: RD - news) as the number one and number two petroleum companies in the world.'
Unocal, Gheit claims, ``is the right size, it's selling at the right price, and it provides the right fit for BP Amoco. BP wants to gain
global gas exposure and Unocal has a lot of exposure in Asia, and is in fact the largest gas provider in Thailand.'
In fact, the Thai field is half-owned by Arco (NYSE: ARC - news), which means BP will have 50% of the field when it
completes the Arco acquisition. ``It wants the other half,' Gheit insists. ``BP doesn't want to sit on the passenger side.'
Meanwhile, Paine Webber analyst Frank Knuettel, in a recent survey of the E&P industry, wrote that Unocal was his ``best
call' and set a target price of $40, based on seven times 2001 cash flow of $5.80 per share.
Another likely takeover target for BP, Gheit says, is Triton (NYSE: OIL - news), which offers two major gas fields in Colombia
and the single largest discovery in West Africa, in Equatorial Guinea. Nonetheless, Gheit adds, ``Unocal is bigger and more of
an acquisition with which BP can hit the ground running.'
Could this takeover, or takeovers, take place this year? ``Certainly, it might happen this year,' says Gheit. ``BP Amoco wants
to become the premiere oil company, a company that is like the British Empire, where the sun never sets.'
Bottom Line:
The escalating merger scene among the oil patch's E&P set is showcasing under-valued names, such as Unocal, which can be
snapped up at bargain prices before being taken out at a premium.
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