The Other Instant Powerhouse in Energy Trading

It's not easy being No. 4. Despite a $35 billion merger completed in October, ChevronTexaco Corp. (CVX ) is still not one of the oil superpowers. Nor, at more than $90 billion a year in revenues, is it a scrappy little guy. So Chairman David J. O'Reilly has been searching for a strategy beyond just drilling for more oil and gas.

Now, he may have something: a big stake in the No. 1 energy-trading company. Chevron Corp. has owned 26% of Dynegy Inc. (DYN ) since 1996, and with Dynegy's planned acquisition of Enron Corp. (ENE ), the top energy trader, ChevronTexaco is making the oil industry's most aggressive push yet into this fast-growing business. It plans to eventually pump $2.5 billion into the combined Dynegy and Enron to maintain its 26% stake, and it might raise that share. So, while ChevronTexaco's much bigger rivals run small in-house trading operations, energy trading may soon account for more than 10% of ChevronTexaco's earnings. "Chevron is now positioned to be a leader in the business," says analyst Arjun Murti at Goldman, Sachs & Co.

The deal would certainly dovetail with ChevronTexaco's strategy of becoming a more integrated energy company, with a hand in everything from pumping oil at the wellhead to trading natural-gas futures. By acquiring Texaco, Chevron picked up, for instance, a big refining-and-marketing business --which should balance out the bad times in oil and gas production, says Eugene Nowak, an analyst at ABN Amro. "When crude-oil prices are down, they'll have margin improvements on refining and marketing," he says. O'Reilly and other ChevronTexaco executives declined to comment.

Until now, Dynegy wasn't a big deal for Chevron. Chevron purchased the stake for $700 million when Dynegy was still called NGC Corp., and it filled three of the 14 board seats--positions it will keep. Since then, Chevron has sold nearly all its domestic natural-gas production to Dynegy. The stake has been a good investment: it is now worth $3 billion, ChevronTexaco says.

Sitting on $2.9 billion in cash as of the end of the second quarter, ChevronTexaco can well afford the Dynegy deal, analysts say. And they expect O'Reilly to use some of that to make more buys; the most likely target is a natural-gas company. Maybe it's not so bad being No. 4.

By Louise Lee in San Mateo, Calif.

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