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Monday, May 10, 1999 Published at 17:59 GMT 18:59 UK

Business: The Company File

Oil merger in pipeline

Partners for 63 years: Chevron and Texaco jointly own Caltex

Two of the oil industry's largest companies, Texaco and Chevron, are reported to be in talks about a merger.

The deal in which Chevron would effectively engineer a takeover would value Texaco at around $42bn, according to the Wall Street Journal.

If this is the case it is just the latest corporate move as the oil industry consolidates in the race to cut costs.

BP's $55bn takeover of Amoco started the rush last August.

And the largest company, Exxon, got even bigger when it acquired Mobil for $81bn in December.

Oil prices have recovered from the 25 year lows hit last year, but the pressure is still on, from exploration through refining to chemicals.

Smaller oil companies are unwilling to be dwarfed by the new giants such as Exxon Mobil, BP Amoco and Royal Dutch Shell.

Fourth spot

[ image:  ]
If Chevron were to buy Texaco, it would consolidate its fourth placed position behind Exxon, BP and Shell and create a group worth just over $100bn.

It would still be about half the size of Shell in terms of market value.

"They should be able to extract about $1bn of cost savings but really the overlap is not as compelling as some of the other deals", said sector analyst John Toalster, of SG Securities.

The two companies have been close partners for more than 60 years, jointly owning Caltex Corporation, which operates 13 petroleum refineries and 8,500 service stations in the Asia Pacific region, Africa and the Middle East.

There has also been speculation that Shell could step in as a suitor for Texaco because of their US refining and marketing joint venture.

Chevron Co-Chairman David O'Reilly said about two weeks ago that Chevron would "certainly consider a merger that would improve shareholder value".

Price pressure

[ image: A sharp fall in oil prices last year forced oil companies to streamline]
A sharp fall in oil prices last year forced oil companies to streamline
The wave of oil industry mergers was triggered by last year's slump in oil prices, which sank to a 25 year-low, dropping below $10 per barrel.

The drop in prices had two causes: demand was weak, because of the economic crisis in Asia, and a mild winter in Europe and North America.

At the same time supply was plentiful as cash-strapped oil-producing countries tried to increase revenue by boosting output.

This squeezed the margins and profits of oil companies. To drive down costs, improve market share and gain benefits from economies of scale, firms were forced to either merge or buy up one another.

The price pressure has receded somewhat during recent weeks. A barrel of Brent crude oil now costs just over $16.

The figures

Texaco's 24,628 employees last year generated revenues of $31.7bn and a net income of $578m.

The company is exploring new oil fields in the deepwater Gulf of Mexico, Latin America and West Africa. Its main production areas include the United States, the North Sea, the Middle East, and the Pacific Rim.

Chevron is the larger of the two, with 34,000 employees, revenues of $40bn and a record net income last year of $3.25bn.

The company pumps oil in the United States, Angola, Nigeria, Canada, the North Sea, Australia, Indonesia, Kazakhstan, Venezuela, China and Papua New Guinea. Major exploration areas include the above, as well as Alaska and Azerbaijan.

If the deal goes ahead, then six of the 'Seven Sisters' who dominated the world oil industry for decades will have formed partnerships.

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