It only takes a quick walk though
El Segundo, Calif., headquarters to figure out where the oil and natural gas producer sees its future. A collection of Asian art is decorously displayed throughout.
Well over half of Unocal's 6 billion cubic feet of natural gas reserves and 35% of its 532 million barrels of crude oil reserves are located in the Far East. And the company plans to increase its daily production of oil and gas by 75% in the next four years, to 845,000 barrels of oil equivalent per day from today's 487,000, the vast majority of the increase coming from the Far East. This narrow exploration focus, which also includes West Africa and the Gulf of Mexico, marks a drastic change from just few years ago, when Unocal's operations were spread across 45 countries.
The change also is part of an overall transformation the company is making from a small integrated player with refining and marketing, or downstream, operations to a major niche player in the upstream, or exploratory, sector. The idea behind this change is to create a more nimble player with enough size to still take advantage of big exploration opportunities.
Yet at the same time, Unocal's strategy leaves it vulnerable, especially in today's environment, in which oil companies see definite advantages in size. Unocal's attractive portfolio of assets, especially in Indonesia and Thailand, could make it a target, just like
strong Alaskan operations made it an appetizing mark for
For now, Unocal says it's only interested in completing its transformation, boosting earnings and increasing its return on capital. Unocal's net profit margins have lagged both the industry's as well as those of the
Standard & Poor's 500
. Net income for 1998 fell to $130 million, or 54 cents per share including special items, on revenues of $5.5 billion, down from $581 million, or $2.31 per share, on revenues of $6 billion in 1997.
Investors so far like the company's restructuring moves. Its shares are up 27% from early March, in part because of the recent jump in oil prices.
"I think they're making all the right moves," says Terry Gerlich, portfolio manager at Boston's
Freedom Capital Management
, a Unocal shareholder. If it succeeds in Indonesia, its production profile will look even stronger and costs will fall, Gerlich adds.
Three initial discoveries in Indonesia's deep-water Kutei basin could add more than 1 million barrels of oil equivalent to Unocal's reserve base. There's potential for more discoveries in the basin, and Unocal has developed a low-cost structure there.
Unocal also plans to utilize its Indonesia drilling experience and technology in the Gulf of Mexico, which it believes will enable it to drill wells there for half as much as its competitors.
In just a few years, Unocal has amassed a Gulf of Mexico exploratory portfolio of nearly 300 blocks, over 200 of which are located in deep water. The company's
unit, which runs the gulf operations, participated in a recent discovery on a block operated by
, which could prove significant. The problem, however, is that no one has proven that deep-water Gulf of Mexico drilling can actually produce the gigantic reserves many expect without equally huge spending.
"Investors will likely remain cautious until Unocal demonstrates that it can deliver on its promises on the gulf," writes analyst Thomas Driscoll of
Salomon Smith Barney
. Driscoll has a neutral rating on Unocal. His firm has performed underwriting for the company.
Also in question is Unocal's ability to replace its reserves in the gulf. Spirit 76 wants to add 400 million barrels of deep-water reserves by 2002, a target equal to all of Spirit's current reserves; Driscoll at Salomon calls the target "ambitious."
Meanwhile, Spirit 76 also shows how difficult it is for a large company to try to become a deft entrepreneur. Formed in 1997, the unit was to be autonomous, with even its own unit for identifying and evaluating acquisitions and joint ventures. In 1998's third quarter, however, Unocal disbanded the M&A unit, taking back the responsibility. Then in March, it replaced Spirit President Jack Schanck with John Donahue from Unocal's Alaskan operations. The division was placed under the guidance of Tim Ling, Unocal's chief financial officer and newly appointed executive vice president of North American energy operations.
A former Spirit employee who declined to be identified says shutting the M&A unit shows Unocal's lack of commitment to actually becoming entrepreneurial.
Ling says Spirit needed more "of an application of commercial and business skills. From a performance standpoint, nothing is going to change," he says. "Philosophically we have a real strong feeling that acquisitions have to be championed at the operational level rather than at the staff level."
Spirit needed more "of an application of commercial and business skills. From a performance standpoint, nothing is going to change." -- Tim Ling, chief financial officer and executive vice president of North American energy operations.
Ling declines to comment on Schanck, who couldn't be reached for comment.
But despite some missteps within its new agile structure, Unocal has the look of a changed company. Now, it just has to prove that agility beats mass in today's environment.