Excerpts from Morgan Stanley Valuation of
UNOCAL
Unocal DEF 14A,
The following
is a summary of the material financial analyses performed by Morgan Stanley in connection
with its opinion dated
Pursuant
to an engagement letter dated February 17, 2005, Unocal has agreed to pay Morgan
Stanley a customary transaction fee of approximately $29 million (based on closing
stock prices as of July 21, 2005), a significant portion of which is contingent
upon the consummation of the merger. Unocal has also agreed to reimburse Morgan
Stanley for its fees and expenses incurred in performing its services.
Historical Share Price Analysis
Morgan Stanley performed an historical share price analysis
to obtain background information and perspective with respect to the relative historical
share prices of Unocal and Chevron common stock. Consequently, Morgan Stanley reviewed
the historical price performance of Unocal and Chevron common stock from
“Unaffected” Price and “Unaffected” Exchange Ratio Analysis
Morgan Stanley noted that Unocal’s common stock price had been
affected by rumors appearing in the financial press and the publicly announced acquisition
proposals and performed an analysis to estimate the “unaffected” price of Unocal
common stock. Morgan Stanley calculated the market value weighted average return
between January 5, 2005, the day prior to the first news article regarding a possible transaction in the Financial Times, and
In addition, Morgan Stanley also analyzed the “unaffected” exchange
ratio using the closing price of Unocal common stock of $41.19 and closing price
of Chevron common stock of $50.88 on
Morgan Stanley noted that the implied blended merger consideration
for Unocal common stock was $63.01 per share and that the implied blended merger
exchange ratio was 1.0997x, both as of
Analyst Price Targets
Morgan Stanley reviewed the range of publicly available equity
research analyst “price targets” for Unocal. As of
Comparable Company Analysis
Morgan Stanley performed a comparable company analysis, which
attempts to provide an implied value for Unocal by comparing it to similar companies.
For purposes of its analysis, Morgan Stanley reviewed certain public market trading
multiples for the following eight public companies which, based on its experience
with companies in the energy industry, Morgan Stanley considered similar to Unocal
in size and business mix:
• Amerada Hess Corp.
• Anadarko Petroleum Corp.
• Apache Corp.
• Burlington Resources Inc.
• Devon Energy Corp.
• EOG Resources
Inc.
• Marathon Oil Corp.
• Occidental Petroleum Corp.
Selected
multiples, which are commonly used by participants and investors in the energy industry,
for Unocal and each of the comparable companies were reviewed
in this analysis. The selected multiples analyzed for these companies included the
following:
• the per share price divided by 2005 and
2006 estimated cash flow per share
• the per share price divided by 2005 and
2006 estimated earnings per share
• the aggregate trading value divided by
2005 and 2006 estimated EBITDAX
EBITDAX is net earnings before interest, taxes, depreciation, depletion and
amortization, impairments, exploration expenses, dry hole costs, special items and
the cumulative effect of accounting changes. Morgan Stanley calculated these financial
multiples and ratios based on publicly available financial data as of
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Comparable Companies |
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Metric |
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Average |
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Unocal |
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Price/ 2005E Cash Flow |
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4.8x - 7.1 |
x |
5.6 |
x |
5.5x |
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Price/ 2006E Cash Flow |
|
4.2x - 7.1 |
x |
5.4 |
x |
5.6x |
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Price/ 2005E Earnings |
|
9.1x - 16.2 |
x |
10.8 |
x |
10.9x |
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Price/ 2006E Earnings |
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8.1x - 16.5 |
x |
10.4 |
x |
11.9x |
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Aggregate Value/ 2005E EBITDAX |
|
4.2x - 7.0 |
x |
5 |
x |
4.5x |
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Aggregate Value/ 2006E EBITDAX |
|
4.1x - 7.0 |
x |
5 |
x |
4.6x |
|
Morgan Stanley, based on its experience with mergers and acquisitions
and companies in the energy industry and taking into account the ranges expressed
above, selected for its comparable company analysis of Unocal, a representative multiple range of
per share price divided by 2006 estimated cash flow of 4.9x to 5.9x and a range
of aggregate value divided by 2006 estimated EBITDAX of
4.3x to 5.3x.
Based upon and subject to the foregoing, Morgan Stanley calculated
an implied valuation range for Unocal common stock of $56.75 to $68.50 per share
based on a price divided by the selected 2006 estimated cash flow multiple range
and $60.25 to $75.00 based on the selected aggregate value divided by the 2006 estimated
EBITDAX multiple range. Morgan Stanley noted that the per share implied blended merger consideration was $63.01
per share as of
Morgan Stanley also reviewed and analyzed certain public market
trading multiples for public companies considered to be similar to Chevron from
a size and business mix perspective. For purposes of this analysis, Morgan Stanley
identified the following six publicly traded companies which, based on its experience
with companies in the energy industry, Morgan Stanley considered similar to Chevron
in size and business mix:
• BP plc
• ConocoPhillips
• Eni SpA
• ExxonMobil Corp.
• Royal Dutch/ Shell Group
• Total S.A.
The selected multiples analyzed for these companies included
the following:
• the per share price divided by 2005 and
2006 estimated earnings per share
• the per share price divided by 2005 and
2006 estimated cash flow per share
• The aggregate market value divided by 2005
and 2006 estimated EBITDAX
|
Aggregate Value/ 2005E EBITDAX |
|
4.3x - 6.8 |
x |
5.3 |
x |
3.9x |
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Aggregate Value/ 2006E EBITDAX |
|
4.6x - 7.1 |
x |
5.5 |
x |
4.1x |
Although
the foregoing companies were compared to Unocal and Chevron for purposes of this
analysis, Morgan Stanley noted that no company utilized in this analysis is identical
to Unocal or Chevron because of differences between the business mix, regulatory
environment, operations and other characteristics of Unocal, Chevron and the comparable
companies. In evaluating the comparable companies, Morgan Stanley made judgments
and assumptions with regard to industry performance, general business, economic,
regulatory, market and financial conditions and other matters, many of which are
beyond the control of Unocal and Chevron, such as the impact of competition on the
business of Unocal and Chevron and on the industry generally, industry growth and
the absence of any adverse material change in the financial condition and prospects
of Unocal and Chevron or the industry or in the markets generally. Mathematical
analysis (such as determining the average or median) is not in itself a meaningful
method of using comparable company data.
Sum-of-the-Parts Analysis
Morgan Stanley analyzed Unocal as the sum of its constituent business units, or as the “sum of its parts,” to determine an implied valuation range for Unocal common stock. Morgan Stanley valued Unocal’s businesses in a Sum-of-the-Parts analysis by combining two methods:
• Discounted Cash Flow Method.
Morgan Stanley analyzed each individual Unocal business using a discounted cash
flow analysis. This discounted after-tax unlevered free
cash flow analysis, calculated as of
• Multiple Method. For selected business units, Morgan Stanley also reviewed and compared various actual and forecasted financial and operating information of these businesses with that of various precedent transactions which shared certain characteristics with these businesses. Based upon the aggregate transaction value divided by proved reserves in these precedent transactions and Morgan Stanley’s experience in mergers and acquisitions in the energy industry, Morgan Stanley estimated appropriate reference valuation metric ranges for these business units. Morgan Stanley then calculated the potential implied after-tax valuation range for these business units.
Morgan Stanley calculated
the Sum-of-the-Parts valuation range by adding the ranges of implied value per Unocal
common stock for each business unit utilizing results of both methods and Unocal’s
assessment of the risks associated with achieving such results. Based upon and subject
to the foregoing, Morgan Stanley calculated an implied Sum-of-the-Parts valuation
range for Unocal common stock of $50.75 to $71.25 per share. Morgan Stanley noted
that the per share implied blended merger consideration
for Unocal common stock was $63.01 per share as of
Contribution Analysis
Morgan Stanley compared
the contribution, based on research analyst estimates and I/B/E/S estimates, of
each of Unocal and Chevron to pro forma combined company statistics. The implied
contribution by Unocal, based on a variety of operating and market statistics, ranged
from 3.0% to 15.7%. Based on an exchange ratio of 1.03x
and assuming 100% stock ownership, the pro forma ownership of the combined company
by Unocal’s stockholders was approximately 11.8%, and assuming 100% stock ownership
based on the implied blended exchange ratio of 1.0997x, the pro forma ownership
of the combined company by Unocal stockholders was approximately 12.5%.
Pro Forma Analysis
Morgan Stanley
analyzed the pro forma impact of the acquisition on Chevron’s pro forma earnings
per share and pro forma cash flow per share. Such analysis was based on 2005 and
2006 earnings and cash
flow projections based on I/B/E/S estimates. The analysis
assumed a purchase price of $63.01 per share of Unocal common stock, which represents
an exchange ratio of 1.03x for 60% stock consideration plus 40% cash consideration
at $69.00 per share, based on the per share closing price of Chevron’s common stock
on July 19, 2005. In addition, the analysis assumed annual pretax synergies of $325
million. Based upon and subject to the foregoing, Morgan Stanley observed that the
earnings per share impact of the merger for Chevron stockholders was approximately
1.5% accretion in 2005 and approximately 1.0% accretion in 2006. Morgan Stanley
also observed that the cash flow per share impact of the acquisition for Chevron
stockholders was approximately 9.3% accretion in 2005 and 9.6% accretion in 2006.
The analysis did not take into account any one-time charges.
Furthermore, Morgan Stanley analyzed the pro forma impact of
the merger on Chevron’s return on capital employed in 2006. Such analysis was based
on 2006 earnings projections based on I/B/E/S estimates. The analysis assumed a
purchase price of $63.01 per share of Unocal common stock, which represented exchange
ratios of 1.03x for 60% stock consideration plus 40% cash consideration at $69.00
per share, based on the per share closing price of Chevron’s common stock on July
19, 2005. Based on these assumptions, Morgan Stanley calculated the pro forma return
on capital employed as approximately 22.1% in 2006.
Morgan Stanley performed a variety of financial and comparable
analyses for purposes of rendering its opinion. The preparation of a fairness opinion
is a complex process and is not susceptible to partial analysis or summary description.
In arriving at its opinion, Morgan Stanley considered the results of all of its
analyses as a whole and did not attribute any particular weight to any analysis
or factor considered. Furthermore, Morgan Stanley believes that the summary provided
and the analyses described above must be considered as a whole and that selecting
any portion of the analyses, without considering all of them, would create an incomplete
view of the process underlying Morgan Stanley’s analysis and opinion. As a result,
the ranges of valuations resulting from any particular analysis or combination of
analyses described above should not be taken to be the view of Morgan Stanley with
respect to the actual value of Unocal or Chevron or their common stock.
In performing its analyses, Morgan Stanley made numerous assumptions
with respect to the industry performance, general business, regulatory and economic
conditions and other matters, many of which are beyond the control of Morgan Stanley,
Unocal or Chevron. Any estimates contained in the analysis of Morgan Stanley are
not necessarily indicative of future results or actual values, which may be significantly
more or less favorable than those suggested by such estimates. The analyses performed
were prepared solely as part of the analyses of Morgan Stanley of the fairness of
the consideration to be received by holders of shares of Unocal common stock pursuant
to the amended merger agreement from a financial point of view, and were prepared
in connection with the delivery by Morgan Stanley of its opinion on July 21, 2005
to Unocal’s board of directors.
Selected Precedent Transaction Analysis
Morgan Stanley reviewed and compared the proposed financial
terms and the premia implied in the Chevron/ Unocal merger
to corresponding publicly available financial terms and premia
of selected transactions. In selecting these transactions Morgan Stanley reviewed
corporate transactions since
• 1/26/2005 — Cimarex/
Magnum Hunter
• 12/16/2004 — Noble/ Patina
• 6/9/2004 — Petro-Canada/
Prima Energy
• 5/24/2004 —
• 5/4/2004 — Pioneer/ Evergreen
• 4/15/2004 — EnCana/
Tom Brown
• 4/7/2004 — Kerr-McGee/ Westport Resources
• 2/12/2004 — Plains/ Nuevo
• 2/24/2003 —
• 9/4/2001 —
• 8/14/2001 —
• 7/10/2001 — Amerada Hess/ Triton Energy
• 5/29/2001 — Conoco/
Gulf Canada Resources
• 5/14/2001 — Kerr-McGee/ HS Resources
• 5/7/2001 — Williams/ Barrett
• 12/22/2000 — Marathon/ Pennaco
• 12/21/2000 — ENI SpA; Agip/ LASMO
• 5/26/2000 — Devon Energy/ Santa Fe Snyder
• 4/3/2000 — Anadarko/ Union Pacific Resources
No transaction utilized in the selected precedent transactions
analysis is identical to the merger. In evaluating the transactions, Morgan Stanley
made judgments and assumptions with regard to industry performance, general business,
economic, market and financial conditions and other matters, many of which are beyond
the control of Unocal or Chevron, such as the impact of competition on Unocal or
Chevron and the industry generally, industry growth and the absence of any adverse
material change in the financial condition and prospects of Unocal or Chevron or
in the financial markets in general. Mathematical analysis, such as determining
the mean or median, or the high or the low, is not in itself a meaningful method
of using comparable transaction data.
Morgan Stanley derived from these selected transactions a reference
range of premia paid relative to the trading share prices
four weeks prior to and trading share prices one day prior to the deal announcement
for transactions announced in two different periods of time. For transactions announced
before January 1, 2003, the premium paid relative to the share price four weeks
prior to deal announcement ranged from 17.6% to 75.0% with a mean of 45.0%, while
the premium paid relative to the share price one day prior to deal announcement
ranged from 5.8% to 51.0% with a mean of 30.9%. For transactions announced after
January 1, 2003, the premium paid relative to the share price four weeks prior to
deal announcement ranged from 2.7% to 33.7% with a mean of 17.8%, while the premium
paid relative to the share price one day prior to deal announcement ranged from
- 3.2% to 32.2% with a mean of 12.0%. Morgan Stanley then selected a premia range of 10% to 30% based on the precedent transactions
as listed above and applied that range to the unaffected Unocal common stock price
ranging from $56.00 to $61.00, which resulted in a valuation range of $61.50 to
$79.25 per share of Unocal stock. Morgan Stanley also applied the 10-30% premia range to the unaffected exchange ratio of 0.8096x, which resulted in a valuation ranging from $51.00 to
$60.25 per share of Unocal stock based on Chevron’s common stock price as of July
19, 2005.
In addition, Morgan Stanley derived from these selected transactions
a reference range of aggregate value divided by year 1 EBITDAX
multiple range for transactions announced in two different periods of time. The
aggregate value divided by year 1 EBITDAX multiple range for transactions announced before
Morgan Stanley noted that the per share
implied blended merger consideration was $63.01 as of
The merger consideration was determined through arm’s-length
negotiations between Unocal and Chevron and was approved by Unocal’s board of directors.
Morgan Stanley provided advice to Unocal during these negotiations. Morgan Stanley
did not, however, recommend any specific merger consideration to Unocal or that
any specific merger consideration constituted the only appropriate merger consideration
for the merger. Consequently, the analyses as described above should not be viewed
as determinative of the opinion of Unocal’s board of directors with respect to the
merger consideration or of whether Unocal’s board of directors would have been willing
to agree to a different merger consideration. Moreover, these analyses do not purport
to be appraisals or to reflect the prices at which shares of common shares of Unocal
might actually trade. The foregoing summary does not purport to be a complete description
of the analyses performed by Morgan Stanley.
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