Aug. 2 (Bloomberg) -- Chevron Corp.'s $17.3 billion bid for Unocal Corp. is likely to win approval from a majority of shareholders next week amid doubt that a higher, all-cash offer from China's Cnooc Ltd. can overcome opposition by U.S. lawmakers.

Chevron's cash-and-stock plan to buy El Segundo, California- based Unocal was backed yesterday by Institutional Shareholder Services, the biggest adviser to fund managers on merger votes. The group said Cnooc's offer isn't enough to offset the risk that U.S. politicians could scuttle a deal.

``That recommendation is probably a pretty good sign of which way the vote will go,'' said Christopher Edmonds, managing director at Pritchard Capital Partners, a New Orleans-based investment banking firm that specializes in energy. ``For some people this involves more than just price.''

Investors are scheduled to vote Aug. 10 on Chevron's offer, which valued Unocal at $63.71 a share as of yesterday. Cnooc's bid of $67 a share, or $18.5 billion, ``is highly uncertain'' and may no longer be ``on the table,'' Chris Young, director of mergers and acquisition research at the ISS advisory firm in Rockville, Maryland, said in yesterday's report.

Unocal shares yesterday fell for a second day, to 64.37, having risen to a record $66.79 on July 13.

Cnooc may drop its bid today because of political opposition from members of the U.S. Congress, the Wall Street Journal said on its Web site, citing an unidentified person. There was little chance the company, which was unwilling to raise it to ``top $70 a share,'' would decide to continue with the offer, the report said, without giving details.

Cnooc's Shares Gain

Institutional Shareholder Services said it may change its recommendation if Cnooc increases its bid. The report did not say how much of an increase would be needed to win its support.

Cnooc's Beijing-based spokesman Xiao Zongwei declined to comment. ``If there's any announcement to be made, we will make it,'' Xiao said. The company's shares today gained for the fourth day in five, by 3.7 percent, to HK$5.55 at 3:50 p.m. in Hong Kong.

Cnooc should scrap its bid for Unocal and instead focus on increasing oil production at its existing fields, said seven out of nine fund managers contacted by Bloomberg last week. Cnooc is offering too much for Unocal in an attempt to outbid Chevron, the investors said. The managers oversee a combined $52 billion of stock, including Cnooc shares.

Uncertainty surrounding the plan has limited gains in Cnooc's shares, said Agnes Deng, who helps manage $1.2 billion at Standard Life Investments in Hong Kong.

`Positive Reaction'

``There would be positive reaction in the market if Cnooc drops the bid,'' said Deng. ``If they were to enter into another round and bid higher, I would be very disappointed.''

The company's Hong Kong-traded stock has risen 33 percent since the beginning of the year, lagging the 78 percent advance by rival PetroChina Co. as oil prices surged to records.

Chevron, which ushered in the Middle East oil boom when it struck oil in Saudi Arabia in 1938, is competing with Cnooc, a 1982 creation of the Chinese government, for reserves equivalent to 1.75 billion barrels.

Chevron pumped 1.71 million barrels of oil a day last year, or 2.1 percent of the world's supply. That was more than five times Cnooc's 2004 crude-oil output, which averaged 319,000 barrels a day.

Chevron, the second-largest U.S. oil company, has benefited as lawmakers in Washington threatened to delay or block any Chinese takeover of U.S. oil assets. Irving, Texas-based Exxon Mobil Corp. is the largest U.S. oil company.

Energy Bill

An amendment to President George W. Bush's energy bill delays government approval of any Chinese takeover of a U.S. oil company for at least 120 days. In that time, the Energy Department would study the effect Chinese energy needs are having on U.S. national security and the economy. The energy bill got final congressional approval last week.

Cnooc, China's third-largest oil company, made its cash offer for Unocal on June 23, topping Chevron by about $2 billion.

Chevron Chief Executive David O'Reilly sweetened his offer July 19 by increasing the cash component to 40 percent from 25 percent, effectively raising the price. The Chevron bid was endorsed the same day by Unocal's board.

The gap between the rival bids had narrowed to $3.29 a share yesterday from $6.46 on June 23, the day Cnooc made its proposal.

Capital Costs

The advisory group said the gap continues to shrink when the capital costs involved in waiting for Cnooc to gain regulatory approvals are included. A six-month wait for Cnooc to win over regulators would reduce the value of the bid to about $65.38 a share, assuming a 5 percent annual cost of capital, ISS said.

Chevron's cash-and-stock offer ``will allow Unocal shareholders to both capture some degree of certain value today and, in addition, to participate in the value created by the combined company going forward,'' the advisory group said in yesterday's report.

The group's recommendation mirrors the sentiment of money managers such as Phillip Davidson, who oversees $7.7 billion at American Century Investment Management in Kansas City, Missouri. Davidson supports Chevron's bid because there's no regulatory hurdles. He also said that owning Chevron stock will enable him to benefit from rising oil prices.

Debt, Profit

Davidson increased his Unocal stake to 2.279 million shares during the first three months of this year from 17,000 at the end of 2004. The stock appeared undervalued, given the pace at which Unocal has cut debt and increased profit, he said.

``We got in front of a takeover,'' Davidson said. ``We always knew they had these assets in Asia that were attractive.''

Douglas Harrell, who helps manage $325 million, including $7.1 million in Unocal shares, at Chicago-based Kenwood Group, will vote for the Chevron agreement because the stock portion of the deal allows investors to continue benefiting from the rally in oil prices.

He also likes Chevron's bid because Unocal investors will receive shares with twice the dividend yield of Unocal stock. Chevron stock has an annual dividend yield of 3.1 percent, compared with 1.2 percent for Unocal shares.

``I think for those who have a bullish view of commodity prices, it allows them to continue to play,'' Harrell said.

U.S. Fields

Some investors expect Cnooc to increase its bid in the eight days remaining before Unocal shareholders vote. Cnooc may arrange to sell Unocal's U.S. fields to assuage concerns among lawmakers, said Doug Hohertz, who helps manage $395 million, including Unocal shares, for Mitchell Group in Houston.

``It's not over,'' Hohertz said. ``If they come up with a deal to dispose of the U.S. assets that changes the game. You have to come in above $69 a share.'' Anything at $70 a share or higher would ``get people's attention.''

To contact the reporter responsible for this story: Joe Carroll in Chicago at Jcarroll8@bloomberg.net

Last Updated: August 2, 2005 03:52 EDT