Chinese bid stirs Unocal stock, but analysts remain dubious.

THOUGH takeover talk has injected some excitement into Unocal Corp.'s stock, analysts were unimpressed last week by the rumored $13 billion bid by Chinese oil and gas company CNOOC Ltd.

The El Segundo-based oil and gas exploration company has been whispered as a takeover target so often that Wail Street seems bored by the idea.

"When I came into this business 20 years ago, the first thing I learned was that Unocal was rumored to be a takeover target or a target for acquisition," said Corporate Fadel Gheit, oil analyst with Oppenheimer & Co. "What can I tell you--it hasn't happened yet." Gheit maintains a "neutral" rating on the stock.

Unocal shares gained more than $4 after the potential bid circulated. Shares had been trading at $41.19 on Jan. 5; by Jan. 7, the stock closed at $45.46.

Despite investor excitement, 14 of the 20 analysts that follow the company maintain neutral or hold ratings.

Bruce Lanni, an analyst with A.G. Edwards & Sons, called Unocal "the perennial takeout candidate" that's always been the subject of speculation. Lanni has had a "hold" rating on the stock for three years.

Nevertheless, the smoke signals coming from Unocal last week weren't enough to dampen speculation.

The company released a statement saying that it does not comment on acquisition rumors as a matter of company policy. Unocal Chairman Charles Williamson was unavailable because he was traveling in Asia, said company spokesman Paul Silva.

Silva emphasized that the trip did not involve a stop in China, although the company's Thailand and Indonesian units were on the schedule. Williamson's full Asian itinerary was not disclosed.

"Do I believe Unocal put up a 'For Sale' sign? The answer is no," Lanni said. He added that he's not surprised by the rumored bid, but CNOOC is probably looking at a range of companies, not just Unocal. "Companies are always looking for potential opportunities," he said.

Lagging its peers

Unocal shares have lagged its peers in oil and gas exploration and production. For 2004, the stock gained 17.4 percent, while the S&P 500 Oil and Gas Exploration and Production Index gained about double that amount.

Over the past three years, with oil prices rising and a world thirsting for oil sources outside the Middle East, Unocal managed just a 34 percent gain while competitors gained an average of 95.9 percent, according to Gheit's research.

Part of the explanation is that investors have lost confidence in a company that consistently let them down. "Unocal historically has put out fairly robust growth targets and was never able to meet those targets," Lanni said. With a new management team since 2002, the company has lowered expectations and become more realistic in its assessments, he said.

Founded in 1890 as Union Oil Co. of California, Unocal is one of the country's oldest oil and gas companies. It used to refine and market gasoline under the 76 brand, until it sold its refinery operations in 1997 to focus strictly on drilling and exploration.

With a market capitalization of about $12 billion, Unocal is smaller than some of its main competitors. Independent oil and gas producer Devon Energy Corp. has a market cap of $18 billion, while Anadarko Petroleum Inc., Apache Corp. and Burlington Resources Inc. all hover around $16 billion.

Much of Unocal's exploration and reserves are in Asia, with offshore drilling taking place in Thailand, Indonesia, Myanmar, Bangladesh and Azerbaijan. These holdings fed into speculation that the China National Offshore Oil Corp. was considering a takeover, looking to boost its regional energy operations. Unocal also has activities in the Gulf of Mexico, Brazil and the Congo.

International operations contribute 51 percent of its natural gas production and about 49 percent of its oil production. About two-thirds of Unocal's estimated 1.2 billion barrels of reserves are in natural gas.

While Unocal reports proven reserves of 1.2 billion barrels of oil and equivalents, it has consistently delivered disappointing production levels.

The company estimates that it produced 405,000 barrels per day of oil equivalent in 2004, down from 448,000 barrels in 2003. (Barrels-of-oil equivalents is a way of comparably measuring both oil and gas production.)

Some of Unocal's offshore operations in Asia are still in the exploratory phase and not yet in production.

"One of the big problems Unocal has is that many projects are way down the line," Gheit said. "You're talking a minimum of five years before they're producing anything, and investors get sick and tired of waiting."

Unocal Corp

Stock Prices

YEAR (Dec. 31)                 2003    2002

Revenue (billions)            $6.54    $5.3
Total Expenses (billions)      5.49    4.84
Operating Income (millions)   1,049     462
Net Income (millions)           643     331
Earnings Per Share            $2.46   $1.34

Quarterly Net Income (millions)

SUMMARY

Business: Oil and gas exploration and production
Headquarters: El Segundo
CEO: Charles Williamson
Market Cap: $12 billion Dividend Yield: 1.8%
Total Liabilities: $7.69 billion P/E Ratio: 11.7
Long-Term Debt: $2.84 billion