As the bidding war heats up for Unocal Corp., shareholders on all sides of the courtship have to wonder whether the oil and gas company’s assets are really worth all those extra dollars.

Value, it appears, is in the eye of the beholder and the ever-escalating price of oil.

Based on Chevron Corp.’s slightly sweetened offer last week that added more cash to the deal, the value of Unocal’s assets continues to rise, despite analysts’ concerns that the bids are justified only if oil prices remain at historically high levels.

Chevron is now offering $17.4 billion, or $63 a share, which is still lower than CNOOC Ltd.’s higher bid of $18.5 billion, or $67 a share. Unocal’s board has already endorsed Chevron’s lower price and CNOOC officials said late last week that they have no plans to raise their offer.

As the numbers continue to rise, questions linger about the true value of Unocal’s large-scale oil and gas interests in the Gulf of Mexico, Azerbaijan, Myanmar and Thailand. A handful of analysts are quick to point out that just a year ago, neither company would have been willing to bid nearly $20 billion for the assets in a company long considered an industry laggard.

“This is the best job Unocal’s board has ever done for this company, which is extracting the highest price for shareholders,” said Fadel Gheit, an oil analyst with Oppenheimer & Co. “Had either of these companies come up with a lower bid last year, we wouldn’t be talking.”

Many analysts now see the deal tilting toward Chevron because of the $500 million break-up fee that Unocal would have to pay Chevron in the event the deal falls through. That’s the equivalent of roughly $2 per share, putting the bids within a stone’s throw of each other.

As of late last week, both companies insisted they would not be raising their offer, a nod towards trying to keep the purchase price in sync with the value of Unocal. But before upping their offer, Chevron officials had indicated they wouldn’t budge. With Unocal’s shareholders meeting on Aug. 10 to vote on the Chevron deal, it’s not inconceivable that the numbers could be upped again.

Coveted assets


Chevron, the world’s fourth-largest publicly traded oil company, already has the tacit approval of the U.S. government and the ability to use its own stock as part of its bid. CNOOC, which is 70 percent owned by the Chinese-government and has no stock to trade as part of the deal, would have to come up with a significantly higher cash bid within the next two weeks.

So what would either Chevron or CNOOC get for their money? At the heart of Unocal’s holdings are coveted assets in Myanmar, Indonesia and Thailand that have been collectively valued by Deutsche Bank at more than $6 billion.

But therein lies the rub. Well before the bidding war heated up, there was considerable debate on Wall Street and elsewhere about just how much oil and natural gas could be extracted from these remote areas. Nearly 60 percent of Unocal’s 981 million proven barrels-of-oil are in undeveloped projects, and there’s no way of measuring how much can actually be extracted from the ground.

The lofty valuations for Unocal have far more to do with skyrocketing oil prices than the proven value of the reserves. “It’s because oil and gas prices have soared, and there’s a general view that they will continue going up a complication that you really don’t have in other industries,” said Steve Enger, an oil analyst at Petrie Parkman & Co.

Another reason Unocal’s assets have risen is progress being made by large oil companies in transporting both oil and natural gas out of remote areas.

Chevron is part of a 9-member consortium controlled by BP Plc that is planning a $3 billion pipeline capable of carrying 1 million barrels of oil a day from the Caspian Sea to international markets in the Mediterranean. Unocal has undeveloped projects in the Caspian Sea, and the pipeline means any production in the area could be transported to world markets.

Charles Williamson, Unocal’s chairman and chief executive, told analysts in a conference call that “the combination (with Chevron) makes sense strategically in terms of assets, but also in terms of the resources that we would need to develop these large fields.”

Chevron Chief Executive David O’Reilly told investors that Unocal’s assets “fit like a glove,” noting that the merger would produce cost savings of $325 million in the first year, with two-thirds of that coming from shedding overlapping corporate operations and employees as well as selling off poor-performing assets.

More critical, O’Reilly is seeking to reverse a decline in reserves and production at Chevron, mostly from exhausted wells and the sale of oil and gas fields to fund projects in Australia and the Gulf of Mexico. The company’s natural gas output has fallen 7 percent since its $45.8 billion takeover of Texaco Inc. in 2001.

Hard to value


But there’s no way to accurately value Unocal’s assets. Geologists and engineers often differ in their estimates of proven, probable and possible reserves in a given area, particularly in remote locations like the Caspian Sea. Both RoyalDutch/Shell Group and Chevron have had to restate estimates in the past two years.

In addition, the Securities and Exchange Commission has no staff to determine the accuracy of reserve estimates, so proven reserves are much like relying on a company to properly record its inventory.

All of which makes it difficult to match the offering prices with the company’s real value. Gheit, who believes that the price would have been far lower last year, said CNOOC dragged its feet early in February, allowing Chevron to lock in a bid.

At this point, Unocal is seen by many to be stretching the process for as long as possible in the hope that either or both bidders might raise their offering prices. Reuters reported last week that CNOOC was still trying to persuade Unocal to take its all-cash bid instead of Chevron’s cash-and-stock offer.

“Basically Chevron has lobbed the ball back into Cnooc’s court,” Enger said. “Unocal’s board is tightly constrained in determining what they think is the best combination the price, the certainty and timing for shareholders.”