Texaco to Buy Monterey Resources for $1.4 Billion in Stock and Debt

Texaco Inc. on Monday agreed to buy Monterey Resources Inc. of Bakersfield for $1.4 billion in stock and assumed debt, a move that would boost the petroleum giant’s presence in the state and beef up its reserves of heavy oil as better technology makes it cheaper to produce.

Texaco Chairman Peter I. Bijur said the acquisition “will further enhance Texaco’s leadership position in the area of enhanced oil recovery and give us a clear competitive advantage in a region in which we already have significant production and reserves.”

The deal has Texaco exchanging its common stock for all outstanding shares of Monterey, which will be valued at $21 per share. Texaco will also assume Monterey’s existing debt of about $285 million.

Monterey shares surged on the news, gaining $5.31 to close at $20.38 on the New York Stock Exchange. Texaco shares advanced $1.50 to close at $111.50, also on the NYSE.

The deal needs approval from Monterey shareholders and is expected to be completed in 90 days.

“We look forward to melding our petroleum assets and our capable people into Texaco,” Monterey Chairman R. Graham Whaling said.

The $21-a-share purchase price is 39% more than Monterey’s closing price Friday of $15.06. Under the agreement, Texaco will also take on $285 million of Monterey’s debt.

The proposed acquisition builds on Texaco’s efforts to boost oil reserves that generally are harder to extract and more expensive to refine.

“With the scale of operations that they have already, it can really make sense for them to have done this deal,” said Alvin Silber, an analyst at Herzog Geduld in New York.

Texaco is focusing on so-called heavy crude because new technology is allowing it to produce more of the oil at a lower cost and refine it more profitably, said Claire Farley, president for North American production.

Buying Monterey would boost Texaco’s reserves in California by a third and its total heavy-oil reserves by about a fifth.

White Plains, N.Y.-based Texaco plans to increase the amount of oil it can produce from the Monterey properties by investing in technology that uses chemicals, heat or gas to increase the amount of crude recovered from a reservoir.

It plans to sell the crude on the open market or for use in its Los Angeles and Bakersfield refineries, depending on which option is more profitable.

Monterey’s oil holdings are primarily in the San Joaquin Valley, and the transaction would increase Texaco’s oil production in the state by 54,000 barrels a day to 180,000. Texaco’s heavy-crude reserves of almost 1 billion barrels make up 35% of its total oil reserves. The company’s California oil reserves, which are primarily heavy crude, total 480 million barrels.

Monterey estimated its reserves at the equivalent of 218 million barrels of oil at the end of 1996; Texaco said it will be able to boost that figure to 385 million barrels.

“Monterey’s existing production and asset base are very complementary to Texaco’s already sizable production of heavy oil in California,” said Michael Young, a Deutsche Morgan Grenfell analyst.

Texaco’s competitors in California’s heavy-crude fields include Atlantic Richfield Co., Chevron Corp. and Aera Energy LLC, a joint venture of Shell Oil Co. and Mobil Corp. that is the largest oil producer in the state.