Shareholders of Chevron Corp. and Texaco Inc. should be pleased. Chevron's agreement to buy Texaco for $34 billion in stock, announced Oct. 16, will create the world's fourth-largest oil and gas company in an era when size matters. The merger is expected to shave $1.2 billion--perhaps more--from the combined companies' annual expenses. And if history is any guide, the merged company could enjoy a higher price-earnings multiple than its predecessors because of forecasts of faster earnings growth. ExxonMobil Corp., for example, trades at 25 times the past year's earnings, up from 18 for Exxon alone before its big merger. Chevron, in contrast, trades at 15 times earnings. Over the past five years, big acquirers in the oil biz have performed far better than their unacquisitive sisters (chart).
But will the marriage be good for consumers? That's harder to say. Chevron Chairman and CEO David J. O'Reilly, who'll keep the same titles at ChevronTexaco Corp., answers yes. "We'll have expanded scale, be better able to manage and absorb risks, and we'll have more choices of places to make investments," he said in announcing his deal. He vowed that production will be higher than what the companies could have done on their own.
A look at other big mergers, however, suggests that consumers shouldn't expect this latest deal to add to production anytime soon. "These mergers are about cost-cutting, not volume growth," says Michael Lewis, an analyst at Petroleum Finance Co., a Washington consulting firm. Capital spending at ExxonMobil, formed last year, was down 30% in the first half of this year despite high oil and natural gas prices. The company attributes this to the completion of some long-term projects. BP Amoco PLC's expenditures for oil exploration and production this year are likely to be 37% below what its three constituent companies--British Petroleum, Amoco, and Arco--spent separately in 1997. BP says it's because exploration and production spending is still recovering from the fall it took after the 1998 crash in oil prices.
Refinery capacity in the U.S. is extremely tight--refineries are running full blast to meet heating-oil demand. But don't count on mergers to solve that problem, either. ExxonMobil's refinery production is just what it was before its merger, after adjusting for asset sales required by regulators. And BP has actually been selling refineries.
The biggest trouble spot for consumers is at the pump. In places where Chevron and Texaco compete, a merger could raise prices. The combined companies might squeeze out independent dealers, says Eric DeGesero, executive vice-president of the Fuel Merchants Association of New Jersey, which represents independents. Prices tend to be lower in cities with more independents, says OPIS Energy Group, a Lakewood (N.J.) price-tracker. The Federal Trade Commission is likely to force divestitures where Chevron and Texaco overlap a lot, such as in California.
Chevron and Texaco say they expect the FTC to take six months to a year to clear their merger. Unfortunately for them, their already-merged peers aren't doing much to support the argument that big mergers will benefit consumers as much as shareholders.