<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14D-9
SOLICITATION/RECOMMENDATION STATEMENT
(AMENDMENT NO. 20)
Pursuant to Section 14(d)(4) of the
Securities Exchange Act of 1934
PENNZOIL COMPANY
(Name of Subject Company)
PENNZOIL COMPANY
(Name of Person(s) Filing Statement)
COMMON STOCK, PAR VALUE $0.83 1/3 PER SHARE
(including the associated Preferred Stock Purchase Rights)
(Title of Class of Securities)
709903 10 8
(CUSIP Number of Class of Securities)
LINDA F. CONDIT
CORPORATE SECRETARY
PENNZOIL COMPANY
PENNZOIL PLACE, P.O. BOX 2967
HOUSTON, TEXAS 77252-2967
(713) 546-8910
(Name, address and telephone number of person authorized
to receive notice and communications on behalf of the person(s) filing
statement)
Copies To:
<TABLE>
<S> <C>
Moulton Goodrum, Jr. Charles F. Richards, Jr.
Baker & Botts, L.L.P. Richards, Layton & Finger
One Shell Plaza One Rodney Square
Houston, Texas 77002-4995 P.O. Box 551
(713) 229-1234 Wilmington, Delaware 19899-0551
(302) 658-6541
</TABLE>
<PAGE> 2
This Amendment No. 20 (this "Amendment") amends and supplements the
Solicitation/Recommendation Statement on Schedule 14D-9, as amended, originally
filed on July 1, 1997 by Pennzoil Company, a Delaware corporation (the
"Company"), relating to a tender offer commenced by Resources Newco, Inc., a
wholly owned subsidiary of Union Pacific Resources Group Inc., on June 23, 1997.
All capitalized terms used in this Amendment without definition have the
meanings attributed to them in the Schedule 14D-9.
The items of the Schedule 14D-9 set forth below are hereby amended by
adding the following:
ITEM 8. ADDITIONAL INFORMATION TO BE FURNISHED
On September 10, 1997, UPR, faced with the imminent threat of a
preliminary injunction being granted against it in a hearing before the United
States District Court for the Northern District of Texas, agreed to allow the
entire contents of six documents to be placed in the public domain.
The six documents are:
(a) Project Mercury Briefing Report dated May 3, 1997 (filed as Exhibit
62 hereto);
(b) Sixth Supplement to Request for Ruling dated June 3, 1996 submitted
to the Internal Revenue Service on behalf of UPR (filed as Exhibit
63 hereto);
(c) Board Presentation by V. R. Eales, Executive Vice President of UPR,
dated April 3, 1997 (filed as Exhibit 64 hereto);
(d) January 1997 presentation by Smith Barney Inc. ("Smith Barney"),
UPR's financial advisor (filed as Exhibit 65 hereto);
(e) March 18, 1997 presentation by Smith Barney (filed as Exhibit 66
hereto); and
(f) June 4, 1997 presentation by Smith Barney (filed as Exhibit 67
hereto).
ITEM 9. MATERIAL TO BE FILED AS EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<S> <C>
60 Cover letter for transmittal to financial analysts
61 Excerpts from Exhibit 62, Exhibit 63 and Exhibit 66
mailed to financial analysts
62 Project Mercury Briefing Report dated May 3, 1997
63 Sixth Supplement to Request for Ruling dated
June 3, 1996 submitted to the Internal Revenue Service
on behalf of UPR
64 Board Presentation by V. R. Eales, Executive Vice
President of UPR dated April 3, 1997
65 January 1997 presentation by Smith Barney Inc. ("Smith
Barney"), UPR's financial advisor
66 March 18, 1997 presentation by Smith Barney
67 June 4, 1997 presentation by Smith Barney
</TABLE>
2
<PAGE> 3
After reasonable inquiry and to the best of my knowledge and belief, I
certify that the information set forth in this statement is true, complete and
correct.
PENNZOIL COMPANY
Dated: September 15, 1997 By: /s/ James L. Pate
James L. Pate
Chairman of the Board, President
and Chief Executive Officer
3
<PAGE> 4
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<S> <C>
60 Cover letter for transmittal to financial analysts
61 Excerpts from Exhibit 62, Exhibit 63 and Exhibit 66 mailed to
financial analysts
62 Project Mercury Briefing Report dated May 3, 1997
63 Sixth Supplement to Request for Ruling dated June 3,
1996 submitted to the Internal Revenue Service on behalf of UPR
64 Board Presentation by V. R. Eales, Executive Vice President of
UPR dated April 3, 1997
65 January 1997 presentation by Smith Barney Inc. ("Smith
Barney"), UPR's financial advisor
66 March 18, 1997 presentation by Smith Barney
67 June 4, 1997 presentation by Smith Barney
</TABLE>
<PAGE> 1
EXHIBIT 60
[PENNZOIL LETTERHEAD]
September 12, 1997
TO: The Financial Community
In its public statements, UPR has anointed itself "the drilling
machine" with a unique and superior approach to exploiting domestic reserves
and generating shareholder value. At the same time, UPR has taken the position
that Pennzoil's management and strategic plan are not capable of delivering
sufficient value to shareholders. In contrast, UPR's key internal documents
paint a very different picture on both fronts.
In a sworn submission to the IRS as far back as June 1996 (which UPR
fought for three months in two different federal courts to keep out of the
public eye), UPR stated that it was faced with the dilemma of a declining
reserve base and a strategic objective to increase production by 10% per year.
In words startlingly clear, UPR laid out its fundamental problem as follows:
o The base Long Range Plan model ... reflects significant negative
trends for [UPR]
o There is significant uncertainty as to how much further the Austin
Chalk production can be economically extended, and the vast majority
of [UPR's] tight sand gas infill locations have been drilled.
o UPR's management refers to the trend of steep declines in production
from existing properties as the "valley of despair", and to the goal
of 10% growth per year, in spite of such declines, as "walking up the
down escalator." For [UPR] to maintain average production growth of
10% per year for 1997 - 2001, the Long Range Plan projects that [UPR]
will need to add, through acquisitions during this period,
approximately 750 million barrels of oil equivalent ("MMBOE") or 4.5
<PAGE> 2
trillion cubic feet equivalent ("TCFE") of gas reserves -- an amount
substantially greater than [UPR's] current proved reserves.
o Consequently, management has concluded that [UPR] cannot maintain its
current levels of production from existing properties, and that
acquisitions are necessary to do so.
o Quite simply, [UPR's] current drill site inventory is not sufficient
to keep [UPR's] overall production and reserves from declining
significantly in the near future.
In addition, UPR's public statements regarding Pennzoil and its
management team contradict key internal UPR documents relating their valuation
of Pennzoil. In fact, those documents acknowledge that Pennzoil's value has
appreciated considerably more than UPR's. The financial advisors for UPR
affirmed that Pennzoil's strong performance in 1996 represented a turnaround,
and that Pennzoil significantly outperformed the small integrated and large
independent oil and gas companies. In 1997, UPR boosted its evaluation of
Pennzoil, stating, "there is more likely good news than bad news for Pennzoil."
Moreover, valuations prepared by UPR's financial advisors set forth the belief
that Pennzoil has already delivered value in excess of UPR's offer to
Pennzoil's shareholders.
In short, in its public statements UPR has misled the investment
community regarding the quality of its assets, its ability to replace reserves
and production, and the contents of its own long-range plan. UPR has also
attempted to convince Pennzoil shareholders that its inadequate tender offer
exceeds Pennzoil's ability to create shareholder value. Again, UPR's own
internal documents contradict those public statements.
For your review, I have attached excerpts from the six key internal
documents which UPR made public at the September 10, 1997 hearing in the U.S.
District Court. You will receive the full contents of the six documents by
mail.
The full text of these key internal documents is being filed with the
Securities and Exchange Commission as exhibits to Pennzoil's Amendment No. 20
to Schedule 14D-9.
Sincerely,
/s/ GREGORY S. PANAGOS
---------------------------------
Gregory S. Panagos
Vice President
Corporate Communications
<PAGE> 1
EXHIBIT 61
JOE LASALA
CONFIDENTIAL
OLYMPUS
PROJECT MERCURY
BRIEFING REPORT
5/3/97
<PAGE> 2
[UPR LOGO]
INTER-OFFICE CORRESPONDENCE
TO: Jack Messman OFFICE: FW
FROM: Karl Nesselrode DATE: 5/3/97
SUBJECT: Project Mercury
In preparation for your anticipated phone call with the Mercury CEO on May 5,
the Mercury Project Team has developed this briefing package. An Executive
Summary is on the next page.
The Mercury Project Team consists of:
- UPR (Olympus, Law, Finance and Tax)
- Smith Barney
- Morgan, Lewis & Bocklus LLP
- Skadden, Arps, Slate, Meagher & Flom LLP
- Robinson, Lerer & Montgomery (communications consultant)
Sections Included:
- -----------------
1 Recommended Deal Terms for the Initial Conversation
2 Overall Approach Strategy (with draft "bear hug" letter seeking for
force negotiations without commencing a tender offer)
3 Strategic Rationale for a Merger
4 Biographical and Compensation Summary of Mercury CEO
5 Role Playing Scenarios: Initial discussions between CEOs
6 Key Questions That May Be Asked (with suggested answers)
7 Preliminary Credit Rating Analysis
8 Summary of Requirements for an Unfriendly Tender Offer
9 Summary of Media and Analyst Coverage - by Robinson Lerer & Montgomery
10 Mercury Project Team Contact List
There are a number of works in progress which will be completed by Friday May 9.
- -------------------------------------------------------------------------------
- - 5-Year Financial Projection for Combined Company
- - Detailed Credit Analysis
- - Impact of Announcement on UPR Stock Price
- - Detailed Timetable for Friendly and Unfriendly Deals
HIGHLY CONFIDENTIAL
<PAGE> 3
EXECUTIVE SUMMARY
- -----------------
The recommended approach is to persistently, and with progressive pressure
tactics, convince their CEO to negotiate a friendly merger. A degree of
patience is required, and although initiating a hostile tender offer may be
necessary, there are several preliminary steps which should [sic] taken. Tab 2
contains an overview of the themes UPR should follow during negotiations and
execution of this merger. Tab 3 summarizes the strategic rationale for the
merger, which is the basis of UPR's proposal to Mercury.
May 5 Phone Call
- ----------------
The goal is to set up a face-to-face meeting to communicate UPR's proposal.
Initial Face-to-Face Meeting
- ----------------------------
The goal is to verbally communicate our proposal outlined in Tab 1 and get
their CEO's reaction. There are a number of possible scenarios which could
occur in this meeting ranging from complete acceptance to outright rejection.
Four likely scenarios are outlined in Tab 5 and include the suggested
responses. Prior to the initial meeting, Linda Robinson strongly recommends
that some "role playing" exercises be considered as a way to prepare for the
unexpected. She would volunteer to role play the Mercury CEO. Tab 6 reviews
some questions which are likely to be asked either in the meeting or the phone
call to set up the meeting, with the suggested responses.
Initial Proposal (Tab 1)
- ------------------------
We recommend going in offering a price in the "mid-$70s" ($75). At this time,
we could justify a top-end price in the mid-$80s ($85). After reviewing a
number of alternative deal structures, we recommend, for a friendly merger, a
cash tender for 40% of the shares, with an option on an additional 11%,
followed by a back-end merger using a stock-for-stock exchange for the remaining
shares.
Credit Rating Summary
- ---------------------
A preliminary summary of the credit rating post-merger is shown in Tab 7. UPR
will be able to maintain a BBB- to a BBB+ rating, depending on the cash
component (40% to 51%) and the purchase price ($75 to $85). The debt/book cap
ranges from 55% to 61% in these scenarios. If the Chevron stock is excluded
from the credit analysis, then debt/book cap stays below 50% in all scenarios.
Pressure Tactics Before Initiating an Unfriendly Tender Offer
- -------------------------------------------------------------
The non-public approaches to apply pressure to the Mercury board of directors
and CEO include: (1) refusal to sign a standstill agreement, (2) informal
contact with a director, (3) teddy bear hug letter as attached in Tab 2, (4)
establishing a toe-hold position in stock which could lead to (5) an HSR
filing.
The public approaches to apply pressure short of a tender offer include: (1)
communication with major constituencies and (2) press release of teddy bear hug
letter.
HIGHLY CONFIDENTIAL
<PAGE> 4
Unfriendly Tender Offer
- -----------------------
If UPR cannot make any progress on a confidential basis, then an unfriendly
tender offer should be seriously considered. Because of the strong defenses
Mercury has in place, a successful tender requires specific action by the board
to (1) redeem or amend the shareholder rights plan, and (2) support the merger
plan which removes the applicability of Section 203 of the Delaware General
Corporation Law (requiring 85% control of outstanding shares). The board will
only take this action voluntarily if sufficient pressure exists for them to do
so in execution of their fiduciary obligations. Their ultimate weapon in
defending their decision will be the Just Say No tactic, which has been used
successfully in several recent cases.
The recommended approach for an unfriendly tender offer is a cash tender in the
mid-$70s for 51% of the shares, followed by a back-end merger using a stock-for-
stock exchange for the remaining shares. This approach will be the most
successful at stimulating the tender of shares and attracting arbitrage players
who can exert pressure. This approach also has the possibility of a tax-free
structure for the stock-for-stock exchange of 49% of the shares.
The tender offer would be accompanied by litigation to remove the shareholder
rights plan and to declare Delaware 203 unconstitutional. The likelihood of
winning is nil, but the litigation applies pressure to Mercury, and provides
defense against an unfriendly venue if UPR gets sued.
Timing Considerations for an Unfriendly Tender Offer
- ----------------------------------------------------
The consensus of the Mercury Project Team is that a decision to go hostile
should be made and executed before November 1997, in order to have time to get
the shares tendered prior to the April 1998 shareholder meeting. It is at that
meeting that the first vote of shareholder could occur on any issue critical to
the merger. A decision could be made earlier, subject to completion of the
initial requirements outlined in Tab 8. We are a couple of weeks away from the
earliest possible time for commencing an unfriendly tender offer.
The primary benefits of waiting until November are to (1) use the 4/98
shareholder meeting as an additional pressure tactic, (2) establish a solid
track record of diligently pursuing this merger, which helps build the "last
resort" image of the resulting tender offer, and (3) the possibility of spending
less time and expense in the litigation and media tasks. The risks of waiting
until November are (1) a positive movement in stock price which diminishes the
perceived premium paid, the pressure on the board to act and the reaction of the
market to the offer, and (2) the time that Mercury will have to prepare their
reactions.
The Olympus team feels that there is considerable risk to waiting until November
if a hostile tender is required to motivate Mercury's board. There is more
likely good news than bad news for Mercury, and a rising stock price is
ultimately their best defense. An early strike would somewhat preserve the
perception of our large current premium. The existence of our offer would blur
the market's perception of any subsequent increase in stock price, for which we
would naturally take credit.
Market Reaction to Unfriendly Tender Offer
- ------------------------------------------
A detailed analysis is in progress by Smith Barney, and should be completed by
May 7. Preliminary thinking is that the Mercury shareholders would react very
positively. UPR stock will probably weaken somewhat in the short term, due to
the magnitude of the deal and the market's uncertainty about the implications
for UPR. We will need to do a thorough job of communicating the rationale and
the specifics of the merger. Once the market understands and gets comfortable
with the merger, UPR stock price should recover and appreciate.
HIGHLY CONFIDENTIAL
<PAGE> 5
HIGHLY CONFIDENTIAL
COPIES TO:
Union Pacific Resources
- -----------------------
Dick Eales
Joe LaSala
Sam Smith
Karl Nesselrode
Mike Auflick
Kerry Brittain
Mark Jones
Smith Barney
- ------------
Chad Weiss
Ralph Watts
Fred Pevow
Morgan, Lewis & Bocklus
- -----------------------
Howard Shecter
Skadden, Arps, Slate, Meagher & Flom
- ------------------------------------
Paul Schnell
Robinson, Lerer & Montgomery
- ------------------------------
Linda Robinson
Don Nathan
<PAGE> 6
[IVINS, PHILLIPS & BARKER LETTERHEAD]
June 3, 1996
SIXTH SUPPLEMENT
TO REQUEST FOR RULING
DATED OCTOBER 17, 1995
BY MESSENGER DELIVERY
Ms. Susan Edlavitch
CC:DOM:CORP:1
Room 4408
Internal Revenue Service
1111 Constitution Avenue, NW
Washington DC 20224
Re: Union Pacific Corporation
Union Pacific Resources Group Inc.
Sections 332, 351, 355 and 368(a)(1)(D)
Dear Ms. Edlavitch:
This is the Sixth Supplement to the request for ruling (the "Request")
filed on behalf of the taxpayers named above. The Request is dated october 17,
1995. First, Second, Third, Fourth and Fifth Supplements to the Request were
filed on December 20, 1995, and April 30, May 6, May 9 and May 14, 1996,
respectively. Additional information was provided by letters dated March 26,
April 2, April 10, and April 11, 1996.
Unless otherwise indicated, the defined terms used in the Request and
in the earlier supplements are used herein. A revised Schedule of Defined
Terms, reflecting the defined terms used in the Request and in all the
supplements to date, is attached.
The alphabetical sequence of exhibits, begun in the Request and
continued in the earlier supplements, is continued herein. A Schedule of
Exhibits is attached to the Request, and revised Schedules of Exhibits are
attached to the First and Fourth
HIGHLY CONFIDENTIAL
<PAGE> 7
Ms. Susan Edlavitch
June 3, 1996
Page 6
discussing acquisitions as elements of their businesses. Attached as Exhibit AA
are several news articles (from Oil & Gas Interests Newsletter and Bloomberg's
Business News), describing major corporate acquisitions in the oil and gas
industry during January through April 1996. This information supplements the
list of acquisitions contained in the Smith Barney Letter (Exhibit F). Although
we have not attempted to tabulate the acquisitions described in Exhibit AA, it
is apparent that many, if not most, of these acquisitions involve stock of the
acquiring company.
2. Controlled's Need for Acquisitions
Like other oil and gas companies, Controlled must complete
large, strategic acquisitions, in order to maintain and increase its production
levels. To understand this point, it is important to understand Controlled's
recently completed long range planning process and the strategic conclusions
derived therefrom.
Controlled's Long Range Plan represents a detailed compilation
of its most current forecasts for existing production and drill site inventory,
combined with projections for the quantity and timing of acquisitions necessary
to meet Controlled's publicly-stated objective for Controlled's production to
grow by an average of 10% per year.(8) Controlled recently completed its Long
Range Plan for 1997 through 2001.
The foundation of the Long Range Plan consists of two essential
components.
The first component is Controlled's base forecast that
production from its currently-producing properties will decline, until the
properties reach their economic limit and are plugged and abandoned. This
forecast is reviewed and updated at least quarterly and provides the basis for
calculating the value of reserves, as reported in Controlled's public filings.
The second component is a projection of how Controlled will use
its discretionary cash flow and manpower resources to exploit its drill site
inventory. A projection of the drill site inventory and how it will be
exploited is maintained on an ongoing basis for each of Controlled's core areas.
This drill site inventory includes both proven, undeveloped locations on
Controlled's acreage position and a risk-weighted estimate of possible and
probable locations which may exist on Controlled's acreage.
- ----------------
(8) Controlled's senior management has made public statements to more than
100 audiences (composed principally of investment bankers and analysts) as "road
shows" leading to the IPO to the effect that Controlled intends substantial
growth, and that acquisitions are part of the plan. Attached as Exhibit BB are
(1) three slides used in these road shows, showing a goal of 12% volume growth
and (2) a presentation made to Distributing's Board of Directors in February
1994, regarding Amas, stating Controlled's goal of 10% growth per year. See
also Controlled's 1995 Annual Report (Exhibit T) at page 7.
CONFIDENTIAL
<PAGE> 8
Ms. Susan Edlavitch
June 3, 1996
Page 7
The base Long Range Plan model (composed of these two components but
before the consideration of acquisitions) reflects significant negative trends
for Controlled. Over the past five years, Controlled's increased activity in
the Austin Chalk and the successful infill drilling of its tight sand gas
reservoirs in East Texas and the Rockies were largely responsible for
Controlled's production growth.(9) Now, however, there is significant
uncertainty as to how much further the Austin Chalk production can be
economically extended, and the vast majority of Controlled's tight sand gas
infill locations have been drilled. Consequently, management has concluded
that Controlled cannot maintain its current levels of production from existing
properties, and that acquisitions are necessary to do so.
Specifically, the current Long Range Plan projects that, for 1997-2001,
Controlled's production in the Austin Chalk will decline by an average of 12%
per year, and its production from both East Texas and the Rockies will decline
by an average of 2% per year. Due to the steep decline of the production
curve, Austin Chalk reserves are projected to drop by an average of 34% per
year, and East Texas reserves by an average of 12% per year during the same
period. Controlled anticipates that drilling its remaining marginal prospects
in the Rockies will help to keep the declines in the Rockies reserves to a
minimum or zero level. Modest increases in reserves and production are
projected for Controlled's smaller and less-exploited Plains/Canada and Gulf
Coast core areas, but these increases will not come close to offsetting the
declines in the Austin Chalk and East Texas. Quite simply, Controlled's
current drill site inventory is not sufficient to keep Controlled's overall
production and reserves from declining significantly in the near future.
The strategic implication is quite obvious and compelling. Controlled
must complete acquisitions, in order to offset the decline in its current
reserve base and to provide additional drill sites for continued growth in
production. (Controlled's management refers to the trend of steep declines in
production from existing properties as the "valley of despair," and to the
goal of 10% growth per year, in spite of such declines, as "walking up the down
escalator.") For Controlled to maintain average production growth of 10% per
year for 1997-2001, the Long Range Plan projects that Controlled will need to
add, through acquisitions during this period, approximately 750 million barrels
of oil equivalent ("MMBOE") or 4.5 trillion cubic feet equivalent ("TCFE") of
gas reserves -- an amount substantially greater than Controlled's current
proved reserves. Acquisitions of such an amount of reserves can be expected to
cost a total of $3-4 billion.
Controlled cannot meet this goal with small, cash-flow-funded tactical,
acquisitions. Such acquisitions are already part of Controlled's ongoing
strategy. Even assuming an average of $25 million per tactical acquisition (an
amount far in excess
- -----------------------------
(9) A map showing Controlled's core production areas is located in the
inside front cover of the IPO prospectus (Exhibit A1).
<PAGE> 9
Ms. Susan Edlavitch
June 3, 1996
Page 8
of the historical average for these acquisitions). Controlled would need to
complete 120-160 such transactions in five years to meet its production goals.
Controlled's historical average for tactical acquisitions (excluding Amax. a
strategic acquisition) is fewer than 10 per year and less than $100 million per
year invested. Moreover, Controlled's recent experience shows that existing
drill sites cannot be acquired at reasonable prices. Recently, for example.
Controlled bid on two packages of properties owned by one seller in Wyoming.
Based on its analysis, Controlled bid a total of $34.9 million. The winning
bids, however, totaled $87 million, even though there appears to have been no
appreciable difference between Controlled's reserve estimates and those of the
winning bidders.
Thus, Controlled is faced with a difficult combination of fundamental
business conditions -- a declining reserve base, a strategic objective to
increase production by 10% per year and a recognition that it is impractical to
make enough tactical acquisitions at reasonable prices. If Controlled is to
increase its drill site inventory and meet its goals for growth, it must make
large, strategic acquisitions. Specifically management has concluded that
Controlled needs to complete at least one such acquisition by the end of 1997
and two or more by the end of 2001.
3. Controlled's Current Acquisition Plans
After the IPO in October 1995. Controlled intensified its
preparations for future acquisitions. In addition to setting a $100 million
goal for tactical acquisitions in 1996. Controlled formed two other
acquisition teams:
a. The New Opportunity Team focuses on properties outside
Controlled's existing core areas where Controlled can use its
petrotechnical strengths (such as in horizontal drilling,
hydraulic fracturing and 3D seismic techniques) to establish new
core areas. (These acquisitions are expected to be relatively
small and generally are not the type of acquisiton that would
involve stock as acquisition currency.)
b. Project Olympus (previously called "NEBO" or "NEXBO," for the
"next big one") focuses on large (more than $500 million)
strategic transactions.
Project Olympus has absorbed a great deal of management time and
energy and continues to be a high priority item. Attached as Exhibit CC are
memoranda, items of correspondence, meeting agendas, etc., documenting the work
of Project Olympus and its predecessor working groups. As this material shows.
Controlled management has devoted considerable resources to analyzing the
prospects for both domestic acquisitions and international acquisitions
(principally in Canada), but the primary concentration has been on the domestic
side. Also included in Exhibit CC is a spreadsheet showing a "long list" of
acquisition prospects for Project Olympus
<PAGE> 10
PROJECT MERCURY
- --------------------------------------------------------------------------------
PROJECT MERCURY
STRATEGY AND PRELIMINARY VALUATION DISCUSSION
MARCH 18, 1997
HIGHLY CONFIDENTIAL [SMITH BARNEY LOGO]
<PAGE> 11
PROJECT MERCURY
- --------------------------------------------------------------------------------
MERCURY [i.e. Pennzoil] PRICE PERFORMANCE
LTM COMPARATIVE PRICE PERFORMANCE: 3/15/96 THROUGH 3/5/97
[GRAPH]
MERCURY [i.e. Pennzoil] HAS SIGNIFICANTLY OUTPERFORMED BOTH THE SMALL
INTERGRATEDS AND THE LARGE CAP INDEPENDENT EXPLORATION AND PRODUCTION COMPANIES
DURING 1996.
3 YEAR MERCURY [i.e. Pennzoil] PRICE PERFORMANCE: 3/14/96 THROUGH 3/10/97
[GRAPH]
MERCURY'S [i.e. Pennzoil] STRONG PERFORMANCE IN 1996 MARKS A TURNAROUND FROM
THE COMPANY'S HISTORY OF LAGGING THE MARKET.
SINCE OUR LAST MEETING AT THE END OF JANUARY, THE E&P COMP INDEX HAS DECLINED
IN VALUE BY 13%.
[SMITH BARNEY LOGO]
<PAGE> 12
PROJECT MERCURY
- --------------------------------------------------------------------------------
LAST TWELVE MONTH'S EXCHANGE RATIO
[GRAPH]
OVER THE LAST TWELVE MONTHS MERCURY'S [i.e. Pennzoil] VALUE HAS APPRECIATED
CONSIDERABLY COMPARED TO UNICORN'S [i.e. UPR].
OVER THE LAST MONTH, UNICORN'S [i.e. UPR] COMPARATIVE VALUE HAS INCREASED OVER
20%.
HIGHLY CONFIDENTIAL [SMITH BARNEY LOGO]
<PAGE> 1
EXHIBIT 62
JOE LASALA
CONFIDENTIAL
------------
OLYMPUS
PROJECT MERCURY
BRIEFING REPORT
5/3/97
<PAGE> 2
[UPR LOGO]
INTER-OFFICE CORRESPONDENCE
TO: Jack Messman OFFICE: FW
FROM: Karl Nesselrode DATE: 5/3/97
SUBJECT: Project Mercury
In preparation for your anticipated phone call with the Mercury CEO on May 5,
the Mercury Project Team has developed this briefing package. An Executive
Summary is on the next page.
The Mercury Project Team consists of:
- UPR (Olympus, Law, Finance and Tax)
- Smith Barney
- Morgan, Lewis & Bockius LLP
- Skadden, Arps, Slate, Meagher & Flom LLP
- Robinson, Lerer & Montgomery (communications consultant)
Sections Included:
1 Recommended Deal Terms for the Initial Conversation
2 Overall Approach Strategy (with draft "bear hug" letter seeking for
force negotiations without commencing a tender offer)
3 Strategic Rationale for a Merger
4 Biographical and Compensation Summary of Mercury CEO
5 Role Playing Scenarios: Initial discussions between CEOs
6 Key Questions That May Be Asked (with suggested answers)
7 Preliminary Credit Rating Analysis
8 Summary of Requirements for an Unfriendly Tender Offer
9 Summary of Media and Analyst Coverage - by Robinson Lerer & Montgomery
10 Mercury Project Team Contact List
There are a number of works in progress which will be completed by Friday,
May 9.
- - 5-Year Financial Projection for Combined Company
- - Detailed Credit Analysis
- - Impact of Announcement on UPR Stock Price
- - Detailed Timetable for Friendly and Unfriendly Deals
HIGHLY CONFIDENTIAL
<PAGE> 3
HIGHLY
CONFIDENTIAL
EXECUTIVE SUMMARY
The recommended approach is to persistently, and with progressive pressure
tactics, convince their CEO to negotiate a friendly merger. A degree of
patience is required, and although initiating a hostile tender offer may be
necessary, there are several preliminary steps which should [sic] taken. Tab 2
contains an overview of the themes UPR should follow during negotiations and
execution of this merger. Tab 3 summarizes the strategic rationale for the
merger, which is the basis of UPR's proposal to Mercury.
May 5 Phone Call
The goal is to set up a face-to-face meeting to communicate UPR's proposal.
Initial Face-to-Face Meeting
The goal is to verbally communicate our proposal outlined in Tab 1, and get
their CEO's reaction. There are a number of possible scenarios which could
occur in this meeting ranging from complete acceptance to outright rejection.
Four likely scenarios are outlined in Tab 5, and include the suggested
responses. Prior to the initial meeting, Linda Robinson strongly recommends
that some "role playing" exercises be considered as a way to prepare for the
unexpected. She would volunteer to role play the Mercury CEO. Tab 6 reviews
some questions which are likely to be asked either in the meeting or the phone
call to set up the meeting, with the suggested responses.
Initial Proposal (Tab 1)
We recommend going in offering a price in the "mid-$70s" ($75). At this time,
we could justify a top-end price in the mid-$80s ($85). After reviewing a
number of alternative deal structures, we recommend, for a friendly merger, a
cash tender for 40% of the shares, with an option on an additional 11%,
followed by a back-end merger using a stock-for-stock exchange for the
remaining shares.
Credit Rating Summary
A preliminary summary of the credit rating post-merger is shown in Tab 7. UPR
will be able to maintain a BBB- to a BBB+ rating, depending on the cash
component (40% to 51%) and the purchase price ($75 to $85). The debt/book cap
ranges from 55% to 61% in these scenarios. If the Chevron stock is excluded
from the credit analysis, then debt/book cap stays below 50% in all scenarios.
Pressure Tactics Before Initiating an Unfriendly Tender Offer
The non-public approaches to apply pressure to the Mercury board of directors
and CEO include: (1) refusal to sign a standstill agreement, (2) informal
contact with a director, (3) teddy bear hug letter as attached in Tab 2, (4)
establishing a toe-hold position in stock which could lead to (5) an HSR
filing.
The public approaches to apply pressure short of a tender offer include: (1)
communication with major constituencies and (2) press release of teddy bear hug
letter.
Unfriendly Tender Offer
If UPR cannot make any progress on a confidential basis, then an unfriendly
tender offer should be seriously considered. Because of the strong defenses
Mercury has in place, a successful tender requires specific action by the board
to (1) redeem or amend the shareholder rights plan, and (2) support the merger
plan which removes the applicability of Section 203 of the Delaware General
Corporation Law (requiring 85% control of outstanding shares). The board will
only take this action
<PAGE> 4
HIGHLY
CONFIDENTIAL
voluntarily if sufficient pressure exists for them to do so in execution of
their fiduciary obligations. Their ultimate weapon in defending their decision
will be the Just Say No tactic, which has been used successfully in several
recent cases.
The recommended approach for an unfriendly tender offer is a cash tender in the
mid-$70s for 51% of the shares, followed by a back-end merger using a
stock-for-stock exchange for the remaining shares. This approach will be the
most successful at stimulating the tender of shares and attracting arbitrage
players who can exert pressure. This approach also has the possibility of a
tax-free structure for the stock-for-stock exchange of 49% of the shares.
The tender offer would be accompanied by litigation to remove the shareholder
rights plan and to declare Delaware 203 unconstitutional. The likelihood of
winning is nil, but the litigation applies pressure to Mercury, and provides
defense against an unfriendly venue if UPR gets sued.
Timing Considerations for an Unfriendly Tender Offer
The consensus of the Mercury Project Team is that a decision to go hostile
should be made and executed before November 1997, in order to have time to get
the shares tendered prior to the April 1998 shareholder meeting. It is at that
meeting that the first vote of shareholder could occur on any issue critical to
the merger. A decision could be made earlier, subject to completion of the
initial requirements outlined in Tab 8. We are a couple of weeks away from the
earliest possible time for commencing an unfriendly tender offer.
The primary benefits of waiting until November are to (1) use the 4/98
shareholder meeting as an additional pressure tactic, (2) establish a solid
track record of diligently pursuing this merger, which helps build the "last
resort" image of the resulting tender offer, and (3) the possibility of
spending less time and expense in the litigation and media tasks. The risks of
waiting until November are (1) a positive movement in stock price which
diminishes the perceived premium paid, the pressure on the board to act and the
reaction of the market to the offer, and (2) the time that Mercury will have to
prepare their reactions.
The Olympus team feels that there is considerable risk to waiting until
November if a hostile tender is required to motivate Mercury's board. There is
more likely good news than bad news for Mercury, and a rising stock price is
ultimately their best defense. An early strike would somewhat preserve the
perception of our large current premium. The existence of our offer would blur
the market's perception of any subsequent increase in stock price, for which we
would naturally take credit.
Market Reaction to Unfriendly Tender Offer
A detailed analysis is in progress by Smith Barney, and should be completed by
May 7. Preliminary thinking is that the Mercury shareholders would react very
positively. UPR stock will probably weaken somewhat in the short term, due to
the magnitude of the deal and the market's uncertainty about the implications
for UPR. We will need to do a thorough job of communicating the rationale and
the specifics of the merger. Once the market understands and gets comfortable
with the merger, UPR stock price should recover and appreciate.
<PAGE> 5
HIGHLY
CONFIDENTIAL
Copies to:
Union Pacific Resources
- -------------------------------------
Dick Eales
Joe LaSala
Sam Smith
Karl Nesselrode
Mike Auflick
Kerry Brittain
Mark Jones
Smith Barney
- -------------------------------------
Chad Weiss
Ralph Watts
Fred Pevow
Morgan, Lewis & Bockius
- -------------------------------------
Howard Shecter
Skadden, Arps, Slate, Meagher & Flom
- -------------------------------------
Paul Schnell
Robinson, Lerer & Montgomery
- -------------------------------------
Linda Robinson
Don Nathan
<PAGE> 6
HIGHLY
CONFIDENTIAL
RECOMMENDED DEAL TERMS - INITIAL CONVERSATION
Price:
Mid-70's opener. This is roughly a 50% premium to 5/1/97, and should
be high enough to get their attention (making it difficult to rely on
Just Say No defense), but still provide headroom to negoitate.
Consideration:
Optimum form of consideration for UPR is 40% cash and 60% stock, to
provide maximum cash flow accretion within investment grade debt
levels.
Transaction Structure:
The preferred structure is a two-step transaction with an up-front
cash tender for 40% of the shares (with appropriate conditions),
followed by a back-end merger for the remaining 60%. The deal should
include an option to purchase up to 11% of the shares (to a total of
51%). The advantages over a one-step cash/stock exchange for shares
are 1) a quicker lock-up of enough shares to discourage poachers, 2)
greater likelihood that arbs will quickly move in to apply pressure,
and 3) the potential for a tax-free exchange on the back-end.
Strategic Plan for Businesses:
Virtually all current initiatives in both companies will continue.
UPR would substantially increase domestic E&P capital spending, and be
prepared to fully fund international successes. UPR views the product
and franchise businesses very favorably, and are prepared to fund
future strategic expansions such as the recent joint venture in
Louisiana. Our intention is to accelerate, not redirect the strategic
initiatives of both companies.
Role of Senior Management:
The strongest team will be assembled from the best of both companies.
Significant incentives would be put in place. UPR feels strongly
about leading the domestic E&P business strategy, but would value your
input. We'd like your advice on international E&P leadership. Your
core management team for the product and franchise businesses should
stay in place.
Plan for Employees:
The two organizations are very complementary, with minimal overlap.
Dramatic action should not be necessary. Our joint management team
will select the best from both companies. Benefit programs will be
maintained or improved. The combined company will provide enhanced
opportunities for employees. If some reductions are justified,
severed employees will be treated very fairly, including attractive
severance packages and out-placement assistance.
Board Composition:
In addition to the seat given to the CEO, one to two additional
board seats could be added.
Timetable:
We are ready to begin work immediately, and can reach an agreement
within 2-3 weeks.
Role of Mercury CEO:
Naturally, I am open to your suggestions, but my thoughts are:
- Vice-Chairman, seat on the Board of Directors
- President and Chief Operating Officer of the Products and Franchise
Businesses
- Remain located in Houston
<PAGE> 7
JAMES L. PATE
BIOGRAPHICAL INFORMATION
&
COMPENSATION PROFILE
CONFIDENTIAL
<PAGE> 8
MERCURY CEO - BACKGROUND
1. Joined Mercury in 1976, age 40.
2. Joined as Chief Economist; later named Treasurer, in 1985 became Senior
Vice President, Finance. In March 1990, became President and CEO.
Chairman (replacing Hugh Liedtke) in May 1994.
3. Background:
Monmouth College - Undergraduate
Indiana University - Graduate Study
in business economics and public policy
Professor of Economics - Monmouth College
Federal Reserve Bank of Cleveland - Senior Economist
B. F. Goodrich - Director of Business Research
and Chief Economist
U. S. Assistant Secretary of Commerce
Appointed in 1974 by President Ford
Special Advisor to White House - 1975
CONFIDENTIAL
<PAGE> 9
JAMES L. PATE
VALUE OF CURRENT STOCK, SAR, & OPTION HOLDINGS
<TABLE>
<CAPTION>
VALUE AT 12/31/96 AVERAGE OPTION/ VALUE AT 4/25/96 VALUE AT DELTA BETWEEN
SHARES ($56.50/SHARE) SAR BASIS ($47.375/SHARE) $70.00/SHARE CURRENT & $70
=============== =============== =============== =============== =============== ===============
<S> <C> <C> <C> <C> <C>
RESTRICTED STOCK HELD 22,000 $ 1,243,000 NA $ 1,042,250 $ 1,540,000 $ 497,750
UNRESTRICTED STOCK HELD 3,614 $ 204,191 NA $ 171,213 $ 252,980 $ 81,767
EXERCISABLE OPTIONS/SAR'S 181,883 $ 594,400 $ 53.23 $ 0 $ 3,049,821 $ 3,049,821
UNEXERCISABLE OPTIONS/SAR'S 156,667 $ 2,303,800 $ 41.79 $ 874,214 $ 4,418,805 $ 3,544,591
TOTAL VALUE OF HOLDINGS $ 4,345,391 $ 2,087,677 $ 9,261,605 $ 7,173,928
</TABLE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
OTHER ANNUAL RESTRICTED STOCK OPTIONS/SARS
YEAR SALARY CASH BONUS COMPENSATION AWARDS (SHARES) (SHARES)
=============== =============== =============== =============== =============== ===============
<S> <C> <C> <C> <C> <C> <C>
1996 $708,500 $739,500 $190,900 9,500 100,000
1995 $656,500 $ 0 $218,200 6,000 85,000
1994 $626,500 $204,000 2,500 0
1993 $592,500 $385,000 4,000 55,000
1992 $552,900 $267,500 3,880 36,000
1991 $500,000 $150,000 3,350 44,000
</TABLE>
NOTES:
Restricted Stock is awarded January 1st of each year and takes a period of 5
years to vest.
Options and SAR's are granted December 31st of each year and vest at the rate
of 1/3 of the total per year.
There is a current moratorium on the exercise of options and SAR's.
Upon a takeover all vesting requirements are waived and all options/SAR's
become exerciseable.
Other income includes an annual perquisite allowance of $59,400, the usage of
company aircraft for private purposes, and club membership fees and dues.
CONFIDENTIAL
<PAGE> 10
JAMES L. PATE
SUMMARY BIOGRAPHY
Age at 3/31/97: 61 years old
? - 1968 Economics Professor - Monmouth College, Illinois
1968-1972 Senior Economist - Federal Reserve Bank of Cleveland
1972-1974 Director of Business Research & Chief Economist - B.F.
Goodrich Company
1974-1975 Assistant Secretary of Commerce - Gerald Ford Administration
Chief Economist and principal economic advisor to Secretary of
Commerce
1975-1976 Special Adviser to the White House
1977-1981 Chief Economist - Pennzoil
1981-1985 Treasurer - Pennzoil
1985-1989 Senior Vice President Finance & Treasurer - Pennzoil
1989 Elected to Pennzoil Board of Directors
5/89-3/90 Executive Vice President (Put in charge of E&P. Viewed as a
reduction in CEO McDonald's responsibilities)
Feb 1990 Named Chief Operating Officer - Pennzoil (Responsible for all
of Pennzoil's operating divisions and corporate activities)
March 1990 Named President & Chief Executive Officer after sudden
retirement of Randal B. McDonald (McDonald saddled with the
responsibility for the failure of the $250 million Purolator
acquisition since sold by Pennzoil). Liedtke remained
Chairman and was still viewed as the executive calling the
shots.
May 1994 Liedtke retires. Pate named as Pennzoil Chairman and CEO.
10/31/95 Bought 2000 shares of Pennzoil at $38/share after Pennzoil
stock price plummeted upon announcement of cut in the annual
Pennzoil dividend. (Explained that he could not buy more at
the time because he still had 3 kids in graduate school.)
1995 Received no cash bonus in 1995.
1996 Received record cash bonus of $739,500 in 1996 as well as 9500
shares of restricted stock and 100,000 stock options with at
trigger price of $39.625 per share.
<PAGE> 11
JAMES L. PATE
SUMMARY BIOGRAPHY
2/96 Elected to Bowater Inc. Board of Directors (Bowater is U.S.
largest producer of newsprint.)
4/24/97 Up for re-election to the Board of Directors.
Education: Undergraduate studies at University of Maryland
Undergraduate degree from Monmouth College
Masters degree in Business Economics and Public Policy from
Indiana University
Other: Member of Rice University Board of Governors
Member of Monmouth College Senate
Academy of Alumni Fellows at Indiana University
Corporate Governance Task Force of the Business Roundtable
National Petroleum Council
All-American Wildcatters
Executive Committee and Board of Directors of American
Petroleum Institute Board of Trustees of the
Houston Museum of Natural Science
Author of numerous books and articles on economics and finance
<PAGE> 12
HIGHLY CONFIDENTIAL
KEY QUESTION/ARGUMENTS THAT MAY BE RAISED
BY THE MERCURY CEO
[ ] Why is there any urgency to moving forward? Is there any particular
reason you can't give me a few months to focus on other priorities and
give this the consideration it merits?
We are prepared to offer your shareholders a substantial premium right
now. It seems appropriate that we meet to discuss our proposal in
detail.
[ ] The time is not right. We've just begun implementing a strategic plan
that will deliver real value to our shareholders.
We understand and applaud your recent initiatives. However, combined
with UPR you will achieve for your shareholders immediately what could
otherwise take several years. UPR intends to accelerate, not change,
your strategic initiatives, so that your shareholders and our will
also enjoy upside potential.
[ ] Let me turn this around. Would you consider an offer from our
organization?
Of course. My job is to increase shareholder value, and assess the
merits of alternative ways to do that.
[ ] Would this be a merger of equals in fact - or in lip service only?
This is a merger of two very complimentary companies, with strengths
provided and capitalized on by both parties. However, the structure we
are proposing, including a substantial cash component, really does not
fall within the description of "merger of equals".
[ ] What are the guarantees that it would be a merger of equals?
We would guarantee that a top management team composed of the best of
both companies would be quickly put in place. You would be part of
this team, which would develop the remaining organizational structure.
[ ] How, specifically, would you propose to absorb our company?
The top priority would be to keep the current drilling activity
going, and quickly identify additional investment opportunities. We
believe that there is significant potential to increase production and
reserves through additional investment. The E&P staffs would be
combined where appropriate, but we would envision keeping an office in
Houston for the Gulf of Mexico and International.
[ ] Doesn't the global scope and experience of our operations pose any
particular challenge for your company, given its focus?
<PAGE> 13
HIGHLY CONFIDENTIAL
In fact, your excellent global exploration position is extremely
attractive to us. We are currently initiating activities in South
America and your scope and experience would be valuable to those
efforts. Our current focus and expertise in the US would add value to
those parts of your operations.
[ ] Arguably, one of our greatest strengths is our international
positioning, as well as our experience there. We are, for example,
pretty adept at assessing international risks and rewards in some
fairly challenging parts of the world. How will you add to that kind
of capability and help us build on it better than we can on our own?
We do not have some of your skills and experience currently. But, we
have some key skills to contribute, such as horizontal drilling and
3-D seismic applications. We also have one of the largest mid-stream
operations in the US. Top it off with our strong balance sheet and
cash flow, and we can substantially add to your existing skills and
knowledge in assessing international opportunities.
[ ] Do you have the management depth and breadth to absorb our company?
I don't think absorb is the right verb to use. We envision a powerful
business combination. We possess a management team which has presided
over the most active drilling machine in the US for the past five
years, and which has doubled production, while halving operating and
administrative costs. Our record speaks for itself. We also believe
that your company already has the management in place to continue to
strengthen and grow your premier products and franchise businesses.
[ ] Don't you have too much on your plate, since you just went public, to
work effectively with us to build the kind of efficient, highly
competitive company you envision?
On the contrary, it has little impact. While we went public in October
1995, we've been an independent operating company since 1969 when we
became a wholly owned subsidiary of Union Pacific. And the
distractions now are actually less than before. We consistently
delivered results through both our IPO and spin-off periods.
[ ] How, specifically, would you combine the E&P businesses at the
management and operating level?
East Texas, South Texas and West Texas would be combined with our
existing operations, run out of Fort Worth. Our Gulf of Mexico and
International operations would move to Houston. We, like you, are
strong believers in teamwork and process improvement. However, we also
see, and have proven, the advantages of autonomous, accountable
business units. The general managers of our business units have
authority for over 95% of their capital spending, and full P&L
responsibility. This is the key to our speed, and our productivity.
[ ] What would be your plans for the non-E&P businesses - specifically? Do
you see them as
<PAGE> 14
HIGHLY CONFIDENTIAL
part of the combined company in, say, five years?
We like your current direction. We are open to your thoughts on how to
maximize the value of these businesses. Our advisors have told us
about other possible structures, but it looks to be preferable to wait
a couple of years before any decision is made.
[ ] Your focus certainly has not been the kind of brand-name marketing
that is a significant portion of our experience and strength. How are
you going to be able to capitalize on these assets of ours?
The Mercury name is one of the best-known in the world, certainly much
more widely recognized than UPR. We are intrigued by the
possibilities, including keeping your company's name for the combined
company. Our strategic plan includes expanding in gas transportation,
processing and energy marketing. Your skills in brand-name positioning
would be a tremendous asset to these initiatives. In addition, you
personally have spent a lot of time in this area.
[ ] Are you suggesting that somehow we have under performed and you are
going to come in and accomplish what we have not?
Well, I'm sure you would agree that you were not handed a company in
strong shape when you took over. I believe, and apparently so does the
investment community, that you have done a superb job of turning
around the company. You have it on the right path. Nevertheless, I
believe that with our financial strength and unique skills we can add
value and accelerate your growth.
[ ] Where, specifically, do you think we could benefit from your expertise
and experience more than we have on our own?
We have extensive 3-D seismic experience, which includes more than
5,000 square miles of data. We have extensive horizontal drilling
experience, which includes more than 1,400 wells, more than any other
company in the world. We have extensive gathering and processing
experience, which includes more than $700MM in assets and interests in
28 gas processing plants.
We could benefit from your EOR expertise, and your frac-pack
experience in the Gulf of Mexico. We could also benefit from your
international experience, brand name marketing, and brand name
awareness.
[ ] How would you and I interact in the combined entity?
Jack has to answer this.
[ ] How similar or different do you think our cultures are, and how would
you integrate them?
<PAGE> 15
HIGHLY CONFIDENTIAL
Our cultures have more similarities than differences. Our people have
worked with yours on many occasions, and feel very comfortable with
their approach to business and technology. By combining the best of
both companies, and integrating our people in a well-balanced manner,
we will create a new culture. This will be part of the continuous
change that both our organizations have been undergoing. One of the
keys to integrating the cultures is for us the top management team to
be seen working together, and be made up of a balanced mix of your and
our managers. The creation of incentives for business performance will
be a key to getting past the us vs them phase which occurs in all
mergers.
[ ] What, specifically, would be the financial structure of the
transaction?
We would propose a two-step structure. The first step would be a cash
tender for up to 40% of the outstanding shares at around a 50% premium
to today's price, with an option to purchase an additional 11% shares
for cash. The remaining shares would be acquired in a stock-for-stock
merger (tax free) after receiving the appropriate approvals. We would
lock in the exchange ratio at the time of agreement, subject to
adjustments due to price fluctuations within certain ranges.
[ ] How would you manage such a deal financially? What happens to your
balance sheet? Doesn't it change fairly dramatically? Why should we
accept your stock?
Our balance sheet quite honestly could use some more debt. The
combined entity would be much stronger than Mercury is today. Our
stock has performed well relative to our peers, and we have received
favorable reviews in the press, with most analysts targeting us in the
low to mid $30s.
[ ] How do you keep from having some fairly serious dilution to your
shareholders?
Although this would be somewhat earnings dilutive, it would be cash
accretive, which is the key measure for E&P companies. We've examined
recent E&P mergers, and have concluded that a cash flow accretive deal
will improve the stock price on announcement, despite earnings
dilution. Due to our recent spin-off from UP, we are in a purchase
accounting position, which will result in a step-up basis for book
depreciation. However, this does not affect cash flow, and overall
earnings are still in acceptable ranges. We conclude that both Mercury
and UPR shareholders will vies this merger very favorably.
<PAGE> 16
HIGHLY CONFIDENTIAL
UPR + MERCURY COMBINATION
- -------------------------------------------------------------------------------
PRELIMINARY CREDIT ANALYSIS (5/2/97)
<TABLE>
<CAPTION>
DEAL DEAL
TARGET CEILING
----------- -----------
<S> <C> <C>
Mercury Stock Parameters
May 2nd Closing Price ($/sh) $ 49.625 $ 49.625
Transaction Offer Price ($/sh) $ 75.000 $ 85.000
Premium to Market (%) 51.1% 82.3%
UPR Stock Parameters
May 2nd Closing Price ($/sh) $ 27.875 $ 27.875
Transaction Exchange Price ($/sh) $ 28.000 $ 28.000
Premium to Market (%) 0.4% 0.4%
Current UPR/Mercury Exchange Ratio 1.780 UPR shares 1.780 UPR shares
Implied UPR/Mercury Exchange Ratio 2.679 UPR shares 3.036 UPR shares
</TABLE>
OPTION A - FRIENDLY
- - Two Step Approach
- - Cash Tender For 40% of Mercury Equity
- - Back End Merger; UPR Stock For 60% of Mercury Equity
<TABLE>
<CAPTION>
TARGET ($75/sh) CEILING ($85/sh)
-------------------------- --------------------------
COMBINED UPR + MERCURY 1997 1998 1997 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Disc. Cash Flow/Share $ 4.84 $ 4.97 $ 4.66 $ 4.78
Debt/Market Capitalization 34% 33% 35% 34%
Debt/Book Capitalization 56% 55% 55% 55%
Debt/EBITDAX 2.42 Times 2.37 Times 2.52 Times 2.48 Times
EBITDAX/Interest Expense 5.74 Times 5.63 Times 5.47 Times 5.37 Times
PROJECTED CREDIT RATING BBB+ BBB+ BBB BBB
</TABLE>
OPTION B - HOSTILE
- - Two Step Approach
- - Cash Tender for 51% of Mercury Equity
- - Back End Merger; UPR Stock For 49% of Mercury Equity
<TABLE>
<CAPTION>
TARGET ($75/sh) CEILING ($85/sh)
-------------------------- --------------------------
COMBINED UPR + MERCURY 1997 1998 1997 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Disc. Cash Flow/Share $ 5.00 $ 5.13 $ 4.82 $ 4.95
Debt/Market Capitalization 36% 35% 37% 37%
Debt/Book Capitalization 61% 60% 60% 60%
Debt/EBITDAX 2.63 Times 2.59 Times 2.77 Times 2.73 Times
EBITDAX/Interest Expense 5.22 Times 5.13 Times 4.95 Times 4.85 Times
PROJECTED CREDIT RATING BBB BBB BBB- BBB-
</TABLE>
NOTE: ANALYSIS CONSERVATIVELY ASSUMES THAT UPR IS GIVEN NO CREDIT FOR THE VALUE
OF ITS LAND GRANT HOLDINGS AND THE CHEVRON DEBENTURES ARE CONSIDERED AS A FULL
DEBT BURDEN. EXCLUDING THE CHEVRON DEBENTURES, DEBT/BOOK CAPITALIZATION ON 50%
OR LESS IN ALL THE ABOVE CASES.
<PAGE> 17
MARKET CREDIT PERSPECTIVE OF UPR
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
UPR AT 5/2/97
- -------------
<S> <C>
First Call Consensus Cash Flow / Share $4.58
Debt / Market Capitalization 7.47%
Debt / Book Capitalization 26.02%
Debt / EBITDAX 0.45 Times
EBITDAX / Interest Expense 30 Times
Credit Rating A to A-
</TABLE>
HIGHLY CONFIDENTIAL
<PAGE> 18
OPTION A - FRIENDLY $75.00/SH(TARGET) PRELIM. 5/2/97
<TABLE>
<CAPTION>
COMBINED UPR + MERCURY: 1997 1998
- ----------------------- ---- ----
<S> <C> <C>
DCF/Share $ 4.84 $ 4.97
Debt/Market Cap 34% 33%
Debt/Book Cap 56% 55%
DCF/Debt 0.33 0.34
Debt/EBITDAX 2.42 2.37
EBITDAX/Interest Expense 5.74 5.63
------- -------
UPR Discretionary Cash Flow 1,159 1,159
Mercury DCF 438 480
Combined DCF/Share $ 4.84 $ 4.97
------- -------
UPR Market Equity 6,996 6,996
UPR Book Debt 694 378
Mercury Market Equity at P/CF- 6 2,626 2,879
Mercury Debt 4,160 4,445
Combined Debt/Market Cap 33.53% 32.18%
------- -------
UPR Book Equity 1,795 2,074
Mercury Book Equity 2,084 1,927
Combined Debt/Book Cap 55.59% 54.66%
------- -------
UPR EBITDAX 1,283 1,232
UPR Interest Expense 50 51
UPR DCF/Debt 1.85 3.26
UPR Debt/EBITDAX 0.54 0.31
UPR EBITDAX/Interest Expense 25.70 24.21
Combined DCF/Debt 0.33 0.34
Combined Debt/EBITDAX 2.42 2.37
Combined EBITDAX/Interest Expense 5.74 5.63
</TABLE>
HIGHLY CONFIDENTIAL
<PAGE> 19
OPTION B - HOSTILE $75.00/SH(TARGET) PRELIM. 5/2/97
<TABLE>
<CAPTION>
COMBINED UPR + MERCURY: 1997 1998
- ----------------------- ---- ----
<S> <C> <C>
DCF/Share $ 5.00 $ 5.13
Debt/Market Cap 36% 35%
Debt/Book Cap 61% 60%
DCF/Debt 0.30 0.31
Debt/EBITDAX 2.63 2.59
EBITDAX/Interest Expense 5.22 5.13
------- -------
UPR Discretionary Cash Flow 1,159 1,159
Mercury DCF 416 458
Combined DCF/Share $ 5.00 $ 5.13
------- -------
UPR Market Equity 6,996 6,996
UPR Book Debt 694 378
Mercury Market Equity at P/CF- 6 2,496 2,746
Mercury Debt 4,590 4,895
Combined Debt/Market Cap 35.76% 35.12%
------- -------
UPR Book Equity 1,795 2,074
Mercury Book Equity 1,653 1,477
Combined Debt/Book Cap 60.52% 59.75%
------- -------
UPR EBITDAX 1,283 1,232
UPR Interest Expense 50 51
UPR DCF/Debt 1.85 3.26
UPR Debt/EBITDAX 0.54 0.31
UPR EBITDAX/Interest Expense 25.70 24.21
Combined DCF/Debt 0.30 0.31
Combined Debt/EBITDAX 2.63 2.59
Combined EBITDAX/Interest Expense 5.22 5.13
</TABLE>
HIGHLY CONFIDENTIAL
<PAGE> 20
DOCUMENTS/TASKS NECESSARY TO COMMENCE UNFRIENDLY TENDER OFFER
May 2, 1997
<TABLE>
<CAPTION>
Principal Parties
Document When Needed Status responsible
- ------------------ ------------------ ---------------------- -----------------
<S> <C> <C> <C>
Bear Hug Letter Day One We have a draft bear Olympus, Law,
Teddy Bear Letter hug letter seeking to ML&B, SB, SA
force negotiations
w/o commencing a
tender. Can be
revised on short
notice.
Letter to Mercury Day One Not drafted Law, Olympus,
shareholders ML&B, RLM, SA, SB
Tender Offer Day One Second draft in Law, ML&B, SA, SB
Statement (Schedule progress
14D-1)
Form S-4 Day One (may Not drafted Olympus, Law,
change dependent Finance, ML&B,
on structure of SA, SB
transaction)
HSR Filing Day One Work has begun on Law, ML&B
filing and 4(c)
documents
HSR notification Day One Not drafted Law, ML&B
letter to Mercury
Litigation Day One? Strategy discussions Law, SA, ML&B
Strategy/Preparation ongoing, nothing
drafted
Public Relations Day One "Rationale for deal" RLM, Olympus,
campaign document complete; Shareholder
other strategies (press Relations, Public
communications, Relations
government, analyst
and shareholder)
in progress; press
release not drafted
Board Book One week before Day Presentations in Olympus, Law,
One progress, resolutions ML&B, SA, SB
not drafted
Financing One week before Day In progress SB, Finance
One
Select third party Two weeks before Not done. Olympus, Law
agents, vendors Day One Information agent,
forwarding agent,
depositary,
commercial printer.
</TABLE>
HIGHLY CONFIDENTIAL
<PAGE> 21
Mercury Project Contact List
<TABLE>
<S> <C>
Union Pacific Resources Skadden, Arps, Slate, Meagher & Flom LLP
801 Cherry Street, Fort Worth, Texas 76102 919 Third Avenue
(P.O. Box 7, 76101-0007, M.S. 2503) New York, NY 10022-3897
Smith Barney Inc. Robinson Lerer & Montgomery
388 Greenwich Street (34th Floor) 75 Rockefeller Plaza - 6th floor
New York New York 10013 New York, NY 10019
Morgan, Lewis & Bockius LLP
2000 One Logan Square
Philadelphia, PA 19103-6993
</TABLE>
Mercury Project Contact List
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
Name/Title Company Phone Fax E-Mail-Work Home
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Jack Messman UPR 817-877-7516 817-877-7566 [email protected] 817-370-0252
Chairman
George Lindahl III UPR 817-877-7573 817-877-7566 [email protected] 817-738-7046
President & COO
Dick Eales UPR 817-877-7588 817-877-7522 [email protected] 817-732-7593
Exec. VP
Sam Smith Jr. UPR 817-877-7511 817-877-7566 [email protected] 817-294-7865
VP & CFO
Karl Nesselrode UPR 817-877-7104 817-877-6191 [email protected] 817-581-0059
Dir. Olympus
Mike Auflick UPR 817-877-7244 817-877-6191 [email protected] 817-265-0065
Mgr. Deal Struc.
Dan Sprouse UPR 817-877-7103 817-877-6191 [email protected] 817-283-6522
Mgr. Strateg. Advisor
</TABLE>
CONFIDENTIAL
<PAGE> 22
Mercury Project Contact List
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
Name/Title Company Phone Fax E-Mail-Work Home
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Tom Heinzler UPR 817-877-6592 817-877-6191 [email protected] 817-459-2467
Mgr. Merg & Acquis.
Steve Broder UPR 817-877-6857 817-877-6191 [email protected] 972-732-0868
Sr. Associate
Andy Katz UPR 817-877-6800 817-877-6191 [email protected] 817-451-7830
Transition Mgment.
Joe LaSala UPR 817-877-7557 817-877-7522 [email protected] 817-370-9421
VP & Gen. Counsel
Kerry Brittain UPR 817-877-7540 817-877-7522 [email protected] 817-763-8687
Asst. Gen Counsel
Mark Jones UPR 817-877-7595 817-877-7522 [email protected] 817-332-8657
Attorney
Barabara Turley UPR 817-877-6614 817-877-6021 [email protected] 817-441-9619
Tax
John Thompson UPR 817-877-6616 817-877-6021 [email protected] 817-465-5380
Tax
Ralph Watts SB 212-816-8706 212-816-7475 [email protected] 914-472-1417
Mg. Director
Chad Weiss SB 212-816-8812 212-816-7949 [email protected] 516-624-8973
Mg. Dir. Energy
Fred Pevow SB 212-816-8165 212-816-7470 [email protected] 212-861-3605
Director
Vince Cubbage SB 212-816-7393 212-816-7457 [email protected] 212-666-5906
Vice President
</TABLE>
CONFIDENTIAL
<PAGE> 23
Mercury Project Contact List
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
Name/Title Company Phone Fax E-Mail-Work Home
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Peter Marquis SB 212-816-7840 212-816-7475 [email protected] 212-541-9080
Associate
Howard Shecter ML&B 212-309-6384 212-309-7044 [email protected]
215-963-5442 215-963-5444 215-735-5442
Jeff Klauder ML&B 215-963-5694 215-963-5299 [email protected]
Bob Comfort ML&B 215-963-5210 215-963-4444 [email protected]
Paul Schnell SASM&F 212-735-2322 212-735-3597 [email protected] 212-799-2272
917-951-3064 mbl
Rich Grossman SASM&F 212-735-2116 212-735-3645 [email protected]
Jon Lerner SASM&F 212-735-2550 212-735-3013 [email protected]
Linda Robinson RLM 212-484-6794 212-484-7765 W [email protected] 212-751-4063
212-751-4083 H 860-868-0389
860-868-2775 H
Walter Montgomery RLM 212-484-6721 212-484-7765 W [email protected] 914-591-5012
914-591-4075 H 914-591-8797
917-996-7696 pgr 917-856-8122 mbl
Don Nathan RLM 212-484-7782 212-484-7765 W [email protected] 212-267-8408
212-571-6172 H
John Burke RLM 212-484-7541 212-484-7765 W [email protected] 914-693-8754
914-674-8559 H
Jim Badenhausen RLM 212-484-7205 212-484-7765 W [email protected] 201-891-4834 or
201-891-4834 H 201-848-9737
888-586-6369 pgr
</TABLE>
CONFIDENTIAL
<PAGE> 24
Mercury Project Contact List
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
Name/Title Company Phone Fax E-Mail-Work Home
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
John Franklin RLM 212-484-7693 212-484-7765 W [email protected] 718-852-8108
[email protected] (H)
Steve Sigmund RLM 212-484-7230 212-484-7765 W [email protected] 212-684-6624
888-425-1887 pgr
Ben Dworkin RLM 212-484-7966 212-484-7765 [email protected] 201-222-9101
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
CONFIDENTIAL
<PAGE> 1
EXHIBIT 63
[IVINS, PHILLIPS & BARKER LETTERHEAD]
June 3, 1996
SIXTH SUPPLEMENT
TO REQUEST FOR RULING
DATED OCTOBER 17, 1995
BY MESSENGER DELIVERY
Ms. Susan Edlavitch
CC:DOM:CORP:1
Room 4408
Internal Revenue Service
1111 Constitution Avenue, NW
Washington, DC 20224
RE: Union Pacific Corporation
Union Pacific Resources Group Inc.
Sections 332, 351, 355 and 368 (a)(1)(D)
Dear Ms. Edlavitch:
This is the Sixth Supplement to the request for ruling (the "Request")
filed on behalf of the taxpayers named above. The Request is dated October 17,
1995. First, Second, Third, Fourth and Fifth Supplements to the Request were
filed on December 20, 1995, and April 30, May 6, May 9 and May 14, 1996,
respectively. Additional information was provided by letters dated March 26,
April 2, April 10, and April 11, 1996.
Unless otherwise indicated, the defined terms used in the Request and
in the earlier supplements are used herein. A revised Schedule of Defined
Terms, reflecting the defined terms used in the Request and in all the
supplements to date, is attached.
The alphabetical sequence of exhibits, begun in the Request and
continued in the earlier supplements, is continued herein. A Schedule of
Exhibits is attached to the Request, and revised Schedules of Exhibits are
attached to the First and Fourth
HIGHLY CONFIDENTIAL
<PAGE> 2
Ms. Susan Edlavitch
June 3, 1996
Page 2
Supplements. A further revised Schedule of Exhibits, listing the exhibits
attached to the Request and all the supplements to date, is attached.
The purpose of this Sixth Supplement is to provide the information you
requested during a telephone conference with Robert H. Wellen and David A.
Heywood on May 17, 1996. This information relates to Controlled's need to use
its own stock as currency for acquisitions. This subject is discussed in the
Request. See part C. of STATEMENT OF FACTS-BUSINESS PURPOSES FOR THE
TRANSACTIONS, at pages 14-17, part D.1.c. of STATEMENT OF AUTHORITIES, at pages
54-56, and the letter from Smith Barney Inc. (The "Smith Barney Letter"),
attached to the Request as Exhibit F. In Rev. Rul, 76-527, 1976-2 C.B. 103,
the Service recognized this business purpose under section 355, even if
specific acquisitions have not yet been agreed to or identified.
Specifically, you requested additional information and documentation
in the following areas:
A. Acquisitions completed by Controlled (1) during the past three
years (i.e., since January 1, 1993).
B. Controlled's long-term plans for acquisitions after the
Spinoff.
C. Controlled's need to complete acquisitions and to use its own
stock as acquisition currency, including descriptions of
situations where Controlled believes that it lost acquisition
opportunities due to an inability to use stock.
The information you requested is provided in this Sixth Supplement and the
attached exhibits. We believe this Sixth Supplement, together with the
discussions in the Request and the Smith Barney Letter, establishes and
documents that Controlled urgently needs to complete large, "strategic"
acquisitions of oil and gas companies, and that, with equal urgency,
Controlled needs to be able to use its own publicly-traded stock as acquisition
currency, in order to compete effectively in the acquisition market.
- --------------------
(1) As used in this Sixth Supplement, the term "Controlled" refers to
Controlled and its current subsidiaries, including Resources.
HIGHLY CONFIDENTIAL
<PAGE> 3
Ms. Susan Edlavitch
June 3, 1996
Page 3
A. PAST ACQUISITION ACTIVITIES
1. COMPLETED ACQUISITIONS
Since January 1, 1993, Controlled and its subsidiaries have completed
two significant corporate acquisitions. In March 1994, Controlled purchased
the stock of Amax Oil & Gas Inc. ("Amax"), with a section 338(h)(10) election;
for $819 million cash.(2) See Request at page 14. In May 1995 Controlled
acquired substantially all the assets of Gemini Exploration Company ("Gemini"),
for $39.5 million cash. In both the Amax and Gemini acquisitions, the sellers
expressed a preference for cash. Attached as Exhibit X are portions of the
offering materials relating to these acquisitions showing this preference.
During the same period, Controlled and its subsidiaries have completed
15 smaller acquisitions, for a total of approximately $123 million cash. These
acquisitions were not "corporate" acquisitions, but rather acquisitions of oil
and gas properties and related assets.(3)
For the reasons discussed in the Request, at pages 14-17, and in part
C.2., below, Controlled's management believes that, during this period, several
acquisition opportunities were lost because Controlled could not use stock
(especially publicly-traded stock of an oil and gas company) as acquisition
currency.
2. ACQUISITION PLANNING
The acquisitions described above occurred as a result of strategic
planning begun by Controlled in 1992 and continuing until the present time.
Even before 1992, Controlled was active in the acquisition market. As
examples--
* In 1989, Controlled competed unsuccessfully to acquire Tana Production
Company ("Tana"), which ultimately was acquired by Texaco Oil Company
("Texaco") for nearly $500 million in stock and cash. See part C.2.c.,
below.
* In 1990, Controlled considered an acquisition of Royal Oil & Gas
("Royal"), which ultimately was acquired by Dekalb Energy for cash.
See part C.2.d., below.
- ------------------
(2) Immediately after the acquisition, Resources divested itself of some of
the Amax properties to an unrelated party for $94.5 million.
(3) These acquisitions do not include numerous smaller transactions in which
Controlled acquired mineral leases or other interests in mineral
properties.
<PAGE> 4
Ms. Susan Edlavitch
June 3, 1996
Page 4
In 1992, Controlled began more systematic consideration of large
"strategic" acquisitions and also enhanced its ongoing efforts with respect to
small "tactical" or "complementary" acquisitions. Controlled's long range and
strategic planning process had identified the need for a large strategic
acquisition to provide a sufficient drill site inventory that would maintain
production growth. In the fall of 1992, an acquisition team was formed to
secure additional drill site inventory through acquisitions. In May 1993,
Controlled's management held a strategy session with Michael Robert, an
independent consultant, and concluded that Controlled had a continuing need to
increase its drill site inventory and create a new core area. From 1992 through
1993, Controlled made several tactical acquisitions. During this period,
Controlled also competed for several larger acquisitions (more than $ 100
million) but was not successful.
In 1993 through early 1994, Controlled competed for acquisitions of
two strategic targets - Amax and Washington Energy Resources Company ("WERCO").
Evaluation teams were assembled for both acquisitions, and, although attempts
at privately-negotiated acquisitions failed, aggressive bids were prepared for
review by Distributing. Controlled was, of course, successful in its bid for
Amax. Controlled did not submit a bid for WERCO, principally due to its
inability to use stock as acquisition currency, as the seller had requested.
The WERCO situation is discussed in the Request, at page 15, and is discussed
further in part C.2.a., below.
After the Amax acquisition, Controlled focused again on smaller
tactical acquisitions. The goal for both 1994 and 1995 was to acquire
properties located near Controlled's core areas, for total aggregate annual
purchase prices of $100 million.
During 1994 and 1995, Controlled also evaluated larger acquisitions,
but these acquisitions proved to be impractical during this period, for two
reasons:
First, during this time, Distributing was engaged in substantial
efforts to expand its core railroad business. During 1994, Distributing
attempted unsuccessfully to acquire Santa Fe with its own stock.(4) In April and
June 1995, Distributing completed the acquisition of CNWT for cash.(5) In
September 1995, Distributing reached the agreement that will lead to the SP
Acquisition later in 1996.(6) This expansion of Distributing's railroad
business required a great deal of capital and also
- --------------
(4) See Fourth Supplement, at page 6.
(5) See Request, footnote 17.
(6) See part B. of STATEMENT OF FACTS - COMPLETED AND PROPOSED TRANSACTIONS,
in the Request, at pages 36-40.
<PAGE> 5
Ms. Susan Edlavitch
June 3, 1996
Page 5
reduced the relative importance of the oil and gas business to Distributing as
a whole.(7) Given Distributing's concentration on expanding the railroad
business, Controlled's management concluded that Distributing would not be
willing to devote any substantial amount of Distributing stock to acquire oil
and gas properties.
Second, the planning surrounding the IPO and the Spinoff in 1995
caused any plans for large acquisitions to be postponed. During the time
leading up to the IPO, there was significant concern that any large transaction
could distort the market's valuation of Controlled. Since the IPO, with the
Spinoff pending, use of stock as acquisition currency has become completely
impractical. Use of Controlled stock could jeopardize Distributing's section
368(c) "control" of Controlled, and, with Controlled about to become a separate
entity, it would make no sense for Distributing stock to be used in an
acquisition by Controlled.
B. CONTROLLED'S LONG-TERM PLANS FOR ACQUISITIONS AFTER THE SPINOFF
Controlled has determined that, to remain competitive, it must engage
in a program of regular acquisitions once it becomes an independent entity. In
addition to continuing its pattern of smaller tactical or complementary
acquisitions, Controlled has engaged in substantial preparation and planning
for one or more large, strategic acquisitions, as soon as possible after the
Spinoff. These plans by Controlled reflect the general practice in the oil and
gas industry and Controlled's needs in particular.
1. ACQUISITIONS IN THE OIL AND GAS INDUSTRY IN GENERAL
Acquisitions are common practice in the oil and gas industry. Oil and
gas properties are wasting assets. Production from each property declines over
time, as the property becomes exhausted. Thus, if an oil and gas company does
not take action to maintain or increase production, the company is
self-liquidating. This issue is discussed in Controlled's Prospectus issued for
the IPO (Exhibit Al). See RISK FACTORS - Need to Replace Reserves, in the
Prospectus, at page 17.
Attached as Exhibit Y is a transcript of a roundtable discussion
published in the February 1995 "Special Report Supplement" to Oil and Gas
Investor. In this discussion, executives of several oil and gas companies
discuss the importance of acquisitions and divestitures to their companies and
to the industry. Attached as Exhibit Z are extracts from the 1994 annual
reports of six oil and gas companies, all
- -------------------
(7) The Request discusses the reduction in the relative size of the oil and
gas business. See part B.1.a of STATEMENT OF FACTS - BUSINESS PURPOSES FOR THE
TRANSACTIONS, at pages 8-9. The Request also discusses the conclusion by
Controlled's management that the capital needs of the railroad business are
hindering Controlled's expansion. See part A.2. of STATEMENT OF FACTS -
BUSINESS PURPOSES FOR THE TRANSACTIONS, at pages 7-8.
<PAGE> 6
Ms. Susan Edlavitch
June 3, 1996
Page 6
discussing acquisitions as elements of their businesses. Attached as Exhibit AA
are several news articles (from Oil & Gas Interests Newsletter and Bloomberg's
Business News), describing major corporate acquisitions in the oil and gas
industry during January through April 1996. This information supplements the
list of acquisitions contained in the Smith Barney Letter (Exhibit F). Although
we have not attempted to tabulate the acquisitions described in Exhibit AA, it
is apparent that many, if not most, of these acquisitions involve stock of the
acquiring company.
2. CONTROLLED'S NEED FOR ACQUISITIONS
Like other oil and gas companies, Controlled must complete large,
strategic acquisitions, in order to maintain and increase its production
levels. To understand this point, it is important to understand Controlled's
recently completed long range planning process and the strategic conclusions
derived therefrom.
Controlled's Long Range Plan represents a detailed compilation of its
most current forecasts for existing production and drill site inventory,
combined with projections for the quantity and timing of acquisitions necessary
to meet Controlled's publicly-stated objective for Controlled's production to
grow by an average of 10% per year.(8) Controlled recently completed its Long
Range Plan for 1997 through 2001.
The foundation of the Long Range Plan consists of two essential
components.
The first component is Controlled's base forecast that production from
its currently-producing properties will decline, until the properties reach
their economic limit and are plugged and abandoned. This forecast is reviewed
and updated at least quarterly and provides the basis for calculating the value
of reserves, as reported in Controlled's public filings.
The second component is a projection of how Controlled will use its
discretionary cash flow and manpower resources to exploit its drill site
inventory. A projection of the drill site inventory and how it will be
exploited is maintained on an ongoing basis for each of Controlled's core
areas. This drill site inventory includes both proven, undeveloped locations on
Controlled's acreage position and a risk-weighted estimate of possible and
probable locations which may exist on Controlled's acreage.
- ----------------
(8) Controlled's senior management has made public statements to more than
100 audiences (composed principally of investment bankers and analysts) at
"road shows" leading to the IPO to the effect that Controlled intends
substantial growth, and that acquisitions are part of the plan. Attached as
Exhibit BB are (1) three slides used in these road shows, showing a goal of 12%
volume growth and (2) a presentation made to Distributing's Board of Directors
in February 1994, regarding Amax, stating Controlled's goal of 10% growth per
year. See also Controlled's 1995 Annual Report (Exhibit T) at page 7.
<PAGE> 7
Ms. Susan Edlavitch
June 3, 1996
Page 7
The base Long Range Plan model (composed of these two components but
before the consideration of acquisitions) reflects significant negative trends
for Controlled. Over the past five years, Controlled's increased activity in
the Austin Chalk and the successful infill drilling of its tight sand gas
reservoirs in East Texas and the Rockies were largely responsible for
Controlled's production growth.(9) Now, however, there is significant
uncertainty as to how much further the Austin Chalk production can be
economically extended, and the vast majority of Controlled's tight sand gas
infill locations have been drilled. Consequently, management has concluded that
Controlled cannot maintain its current levels of production from existing
properties, and that acquisitions are necessary to do so.
Specifically, the current Long Range Plan projects that, for
1997-2001, Controlled's production in the Austin Chalk will decline by an
average of 12% per year, and its production from both East Texas and the
Rockies will decline by an average of 2% per year. Due to the steep decline of
the production curve, Austin Chalk reserves are projected to drop by an average
of 34% per year, and East Texas reserves by an average of 12% per year during
the same period. Controlled anticipates that drilling its remaining marginal
prospects in the Rockies will help to keep the declines in the Rockies reserves
to a minimum or zero level. Modest increases in reserves and production are
projected for Controlled's smaller and less-exploited Plains/Canada and Gulf
Coast core areas, but these increases will not come close to offsetting the
declines in the Austin Chalk and East Texas. Quite simply, Controlled's current
drill site inventory is not sufficient to keep Controlled's overall production
and reserves from declining significantly in the near future.
The strategic implication is quite obvious and compelling. Controlled
must complete acquisitions, in order to offset the decline in its current
reserve base and to provide additional drill sites for continued growth in
production. (Controlled's management refers to the trend of steep declines in
production from existing properties as the "valley of despair," and to the goal
of 10% growth per year, in spite of such declines, as "walking up the down
escalator.") For Controlled to maintain average production growth of 10% per
year for 1997-2001, the Long Range Plan projects that Controlled will need to
add, through acquisitions during this period, approximately 750 million barrels
of oil equivalent ("MMBOE") or 4.5 trillion cubic feet equivalent ("TCFE") of
gas reserves - an amount substantially greater than Controlled's current proved
reserves. Acquisitions of such an amount of reserves can be expected to cost a
total of $3-4 billion.
Controlled cannot meet this goal with small, cash-flow-funded tactical,
acquisitions. Such acquisitions are already part of Controlled's ongoing
strategy. Even assuming an average of $25 million per tactical acquisition (an
amount far in excess
- ----------------
(9) A map showing Controlled's core production areas is located in the inside
front cover of the IPO prospectus (Exhibit A1).
<PAGE> 8
Ms. Susan Edlavitch
June 3, 1996
Page 8
of the historical average for these acquisitions), Controlled would need to
complete 120-160 such transactions in five years to meet its production goals.
Controlled's historical average for tactical acquisitions (excluding Amax, a
strategic acquisition) is fewer than 10 per year and less than $100 million per
year invested. Moreover, Controlled's recent experience shows that existing
drill sites cannot be acquired at reasonable prices. Recently, for example,
Controlled bid on two packages of properties owned by one seller in Wyoming.
Based on its analysis, Controlled bid a total of $34.9 million. The winning
bids, however, totaled $87 million, even though there appears to have been no
appreciable difference between Controlled's reserve estimates and those of the
winning bidders.
Thus, Controlled is faced with a difficult combination of fundamental
business conditions - a declining reserve base, a strategic objective to
increase production by 10% per year and a recognition that it is impractical to
make enough tactical acquisitions at reasonable prices. If Controlled is to
increase its drill site inventory and meet its goals for growth, it must make
large, strategic acquisitions. Specifically, management has concluded that
Controlled needs to complete at least one such acquisition by the end of 1997
and two or more by the end of 2001.
3. CONTROLLED'S CURRENT ACQUISITION PLANS
After the IPO in October 1995, Controlled intensified its preparations
for future acquisitions. In addition to setting a $100 million goal for
tactical acquisitions in 1996, Controlled formed two other acquisition teams:
a. The New Opportunity Team focuses on properties outside
Controlled's existing core areas where Controlled can use its
petrotechnical strengths (such as in horizontal drilling,
hydraulic fracturing and 3D-seismic techniques) to establish
new core areas. (These acquisitions are expected to be
relatively small and generally are not the type of acquisition
that would involve stock as acquisition currency.)
b. Project Olympus (previously called "NEBO" or "NEXBO," for the
"next big one") focuses on large (more than $500 million)
strategic transactions.
Project Olympus has absorbed a great deal of management time and
energy and continues to be a high priority item. Attached as Exhibit CC are
memoranda, items of correspondence, meeting agendas, etc., documenting the work
of Project Olympus and its predecessor working groups. As this material shows,
Controlled management has devoted considerable resources to analyzing the
prospects for both domestic acquisitions and international acquisitions
(principally in Canada), but the primary concentration has been on the domestic
side. Also included in Exhibit CC is a spreadsheet showing a "long list" of
acquisition prospects for Project Olympus
<PAGE> 9
Ms. Susan Edlavitch
June 3, 1996
Page 9
(including some Canadian prospects), along with financial information regarding
each such prospect.
Included in Exhibit CC is a memorandum summarizing the status of
Project Olympus as of March 18, 1996, with handwritten notes summarizing
progress since that date. As this memorandum states, the Project Olympus
working group's next task will be to apply its modeling and analysis to
develop a short list of potential targets for intensive scrutiny and analysis.
This short list will be from among the attached "long list" of prospects.
C. Need to Use Controlled Stock as Acquisition Currency
1. General Desirability and Use of Stock In Acquisitions
As discussed in the Request, at pages 14-15, it is important for
Controlled to be in a position to use its stock as acquisition currency. As the
Smith Barney Letter (Exhibit F) states, publicly-traded stock is often
desirable to shareholders of target companies, because receiving stock enables
them to defer tax liability on the acquisition while maintaining liquidity.
Stock in an oil and gas company is particularly desirable, because such
shareholders are likely to be comfortable with continuing equity interests in
the oil and gas industry, and the market currently values "pure play"
investments.
The desirability of stock means that, in some situations, an
acquisition can be completed at a lower price, if stock is used instead of
cash. Again, the Smith Barney Letter shows that, during 1990-1995, more than
half of the large corporate acquisitions in the oil and gas industry involved
the stock of the acquiring oil and gas company as acquisition currency. The
market for acquisitions in the oil and gas industry is highly competitive. See
the discussions of competition in Controlled's IPO prospectus (Exhibit A1), at
pages 21 and 67. Consequently, in situations where Controlled cannot use stock
and its competitors can, Controlled is likely to be outbid, and it may be
unable to participate at all in the acquisition process.
Finally, there are distinct advantages to Controlled itself in the use
of stock, instead of cash, in acquisitions. Much of the cash used in
acquisitions will be obtained through borrowing, and, like any other
corporation, Controlled's borrowing capacity is not unlimited. As borrowing
increases, the debt-to-equity ratio and other measures of financial health
become less favorable, and such trends lead to increased costs and less
favorable terms of borrowing. Thus, at some point, it would become advisable,
or even necessary, to raise cash by issuing new stock in the market.
Controlled's management believes that it is more efficient to issue stock in
acquisitions, rather than to pay cash obtained (directly or indirectly) through
sales of stock. Stock issued in acquisitions is likely to be issued on more
favorable terms, because of the tax deferral in the acquisition.
<PAGE> 10
Ms. Susan Edlavitch
June 3, 1996
Page 10
2. "LOST" ACQUISITION OPPORTUNITIES
As discussed in part A., above, from 1992 until mid-1995 (when
planning for the IPO and the Spinoff began in earnest), Controlled competed for
several large acquisitions but was successful only in acquiring Amax and the
Gemini assets. In both of these successful instances, the target company had
expressly stated that it was interested in a cash acquisition. See part A.1.,
above, and Exhibit X.
Controlled's management believes that Controlled's lack of success in
several other situations was due largely to the inability to use Controlled
stock as acquisition currency.(10) Five of these situations are described in the
Request, at pages 14-16. As described below, in four of these situations
- - WERCO, ERSO, Inc. ("ERSO"), Tana and Royal - the target was acquired by
another oil and gas company. In three of these four situations - WERCO, ERSO and
Tana - stock of the acquiring oil and gas company was most or all of the
consideration used in the acquisition. In the fifth situation - Cockrell Oil
Corporation ("Cockrell") - no acquisition has occurred, but the documentation
supports management's conclusion that Controlled was not able even to consider
a serious proposal, because it could not use its own stock as acquisition
currency.
Apart from these five situations, Controlled management has become
aware of another possible acquisition opportunity where Controlled stock would
be desirable as acquisition currency. This situation involves Verado Energy,
Inc. ("Verado"). Although this acquisition opportunity is not yet "lost," it is
an example of the type of transaction that would be far easier for Controlled
to accomplish, if it could use its own stock as acquisition currency.
The facts surrounding each of these situations are as follows:
a. WERCO
A narrative describing Controlled's attempt to acquire WERCO is set
forth in the Request, at page 15. Attached as Exhibit DD are materials relating
to the WERCO acquisition:
i. A memorandum, dated December 10, 1993, describing possible deal
structures for an acquisition of WERCO. Two of the five deal
structures would have involved Distributing stock. (Use of
Controlled stock was not considered, because Controlled was a
wholly-owned subsidiary of
- -------------------
(10) The lack of ready availability of Distributing stock as acquisition
currency was an aggravating factor. See Request at page 14.
<PAGE> 11
Ms. Susan Edlavitch
June 3. 1996
Page 11
Distributing. Securities law and accounting implications, inter
alia, made any use of Controlled stock impractical.)
ii. A memorandum, dated January 10, 1994, from V. R. Eales,
Executive Vice President of Controlled, to a distribution list
(composed principally of Distributing's senior legal and
financial officers), analyzing aspects of a WERCO acquisition.
This memorandum makes the point that the seller would prefer an
exchange of WERCO for stock "representing a 20%-49% ownership
position in a publicly-held exploration and producing company."
It goes on to analyze advantages and disadvantages of using
stock and concludes that the disadvantages of using stock "are
ameliorated due to the substantial amount of development and
exploratory opportunities in WERCO."
iii. A memorandum, dated January 12, 1994, from John Gremillion, Vice
President - Taxes of Distributing, to L. White Matthews III,
Executive Vice President - Finance of Distributing, analyzing
the comparative advantages and disadvantages of using stock
versus cash in an acquisition.
iv. Three memorandums, dated January 19, January 28 and February 6,
1994, describing an acquisition structure in which WERCO would
be acquired for Distributing stock, with the Distributing stock
being subject to an "equity swap" for a basket of stocks in
small energy companies. This equity swap was intended to
substitute for the "stock in a publicly-held exploration and
producing company," as desired by the seller. See paragraph ii.,
above.
v. A letter from Lehman Brothers, dated January 25, 1994, setting
forth the "Guidelines for Submitting Formal Proposals for
Washington Energy Resources." This letter makes clear that the
seller intends to accomplish the acquisition in a tax-free
reorganization. Convertible preferred stock is mentioned.
vi. An article from Bloomberg's Business News, dated February 25,
1994, stating that Cabot Oil & Gas had acquired WERCO for $180
million in Cabot stock and assumed debt.
Thus, the seller of the WERCO stock made clear that it wished WERCO to
be acquired in a tax-free reorganization, involving stock of an oil and gas
company. As described in the Request, at page 15, Distributing's Board of
Directors delayed in authorizing an offer of Distributing stock in this
acquisition. The resulting delay may have prevented the submission of a prompt
bid. Even if a bid could have been submitted, it is not clear whether the
seller would have been interested in Distributing
<PAGE> 12
Ms. Susan Edlavitch
June 3, 1996
Page 12
stock. The "equity swap" idea was intended to provide the seller with an
interest in oil and gas, but such an idea would have been expensive to
implement, and it would have been less tax-efficient to the seller than an
acquisition in which the seller received stock of an oil and gas company
directly (assuming that the seller wished to retain its interest in oil and
gas). Ultimately, WERCO was acquired for stock of an oil and gas company, as
the seller had originally desired.
b. ERSO
The ERSO transaction is described in the Request, at page 16. ERSO
represented an especially desirable acquisition prospect for Controlled,
because its properties included one of the last infill drilling opportunities
in the heart of Controlled's core area in East Texas (the Carthage Valley). The
seller desired a tax-deferred exchange of working interests in the properties
for publicly-traded common stock. The size of the deal was estimated at $20-40
million.
Attached as Exhibit EE are materials relating to ERSO. The first item
is a memorandum, dated September 30, 1994, from Tom Powell, Assistant
Controller--Planning and Analysis of Distributing, to senior finance and tax
executives of Distributing. This memorandum describes a proposed acquisition
structure involving stock of Distributing. This structure was intended to
respond to the seller's desire to receive publicly-traded stock.
Distributing's management was not receptive to this proposal, because
of a reluctance to use Distributing's stock in this manner. In fact, the
handwritten notes on the attached copy of the Powell memorandum are those of L.
White Matthews III, Executive Vice President - Finance of Distributing. Among
other things, these notes state that "DL" (i.e., Drew Lewis, Chairman of the
Board of both Distributing and Controlled) wanted to reduce Distributing's
outstanding stock, "not put out more stock." Ultimately, Distributing's Board
of Directors authorized issuance of up to $25 million of Distributing stock. By
this time, however, Enron Oil & Gas Company ("Enron") had replaced Controlled
as the leading competitor.
Controlled continued negotiations and was able to structure a possible
transaction that would have involved issuance of $40 million of Distributing
stock to various parties. Because of constraints imposed by Distributing's
Board of Directors, however, Controlled could not commit itself to this
transaction in a timely manner. Ultimately, Enron was able to acquire ERSO for
stock, using a structure similar to the one originally proposed by Controlled.
Included in Exhibit EE is an extract from a presentation by Enron to
securities analysts in March 1996, where Enron highlighted its success in
drilling the East Texas properties acquired from ERSO. (Controlled has obtained
copies of documents used in Enron's acquisition of ERSO. These documents are
not attached, however, due to their length.)
<PAGE> 13
Ms. Susan Edlavitch
June 3, 1996
Page 13
c. TANA
This failed acquisition, which occurred in 1989, is described in the
Request, at pages 14-15. As with WERCO and ERSO, the seller expressed a clear
preference for stock of an energy company. As set forth in the Request,
however, Distributing would not allow its stock to be used, because of
accounting implications for a "Dutch auction" buy-back of Distributing stock.
Texaco eventually acquired Tana in exchange for $381.4 million of a new class
of preferred stock and $95.1 million in cash.
Attached as Exhibit FF are the following materials relating to Tana:
i. A memorandum, dated August 8, 1989, by Michael C. Auflick,
then Manager - Asset Evaluations and Special Projects of
Controlled, analyzing Tana's properties.
ii. A letter, dated August 10, 1989, from Controlled to Morgan
Stanley acknowledging Tana's desire to be acquired in a
tax-free reorganization.
iii. A file memorandum, dated August 14, 1989, by Mr. Auflick,
describing Distributing's concerns relating to the Dutch
auction repurchase of its stock and concluding that this
was the reason "that the acquisition process stopped."
iv. Copies of two press releases, dated October 20 and November
13, 1989, describing the acquisition of Tana by Texaco.
d. ROYAL
This acquisition is described in the Request, at page 15. Although
Royal ultimately was purchased for cash, the sellers originally expressed a
preference for stock as consideration. As structured, an acquisition by
Controlled would have required Distributing to issue a new class of preferred
stock, and Distributing was unwilling to issue such stock. Subsequently, it
developed that Royal's corporate structure was not appropriate for a
tax-deferred acquisition involving stock. It was for this reason that Dekalb
Energy's cash bid was accepted.
Attached as Exhibit GG are the following materials regarding Royal:
i. A chronology of events up to the final due date for bids,
May 11, 1990.
ii. A memorandum, dated March 15, 1990, by Mr. Auflick stating,
inter alia, that "Royal has expressed a preference for a
tax-free exchange of stock."
<PAGE> 14
Ms. Susan Edlavitch
June 3, 1996
Page 14
iii. A letter, dated March 23,1990, from Controlled to Morgan
Stanley acknowledging Royal's preference for a tax-free
reorganization.
iv. A memorandum, dated April 12,1990, from Rebecca Robinson,
then Senior Analyst of Asset Evaluations and Special
Projects of Controlled to Mr. Auflick, analyzing the terms
of the Tana acquisition by Texaco (see paragraph c., above)
and concluding that preferred stock of the type used by
Texaco might be attractive to the owners of Royal and to
Distributing. The memorandum also raises the question of
whether the creation and issuance of a new class of
preferred stock by Distributing would be feasible.
v. A letter, dated May 30,1990, from Morgan Stanley to
Controlled confirming that Royal had agreed to be acquired
by Dekalb.
Here, a stock acquisition was not practical, for reasons peculiar to
Royal's corporate structure. Nevertheless, before these problems became
apparent, Royal expressed a preference for a stock acquisition. If nothing
else, this situation illustrates the prevalence of stock acquisitions in the
oil and gas industry and the expectations of owners of oil and gas companies
(even if not always realistic) that their companies can be acquired for stock.
These expectations are consistent with the prevalence of stock acquisitions in
the industry. See Exhibits F, Z and AA. Thus, it may be inferred that, if an
acquiring company is not in a position to offer stock, it may be excluded from
consideration as a possible acquiror, before the process even starts.
e. COCKRELL
This acquisition is described in the Request, at page 15. As described
there, the sellers made it clear that they were interested in receiving equity
in an oil and gas business. Attached as Exhibit HH are two memoranda relating
to Cockrell:
i. A memorandum, dated July 13, 1995, from D. H. Marcell of
Controlled to V. R. Eales, Executive Vice President of
Controlled, describing a meeting the previous day with
Cockrell. This memorandum states, inter alia, that Cockrell
"would like to do a tax free merger with pooling of
interests or a stock swap," but that an acquisition
involving stock, with no pooling (like the attempted
acquisition of ERSO, discussed in paragraph b., above),
would be preferable.
ii. A memorandum, dated August 10, 1995, from Michael C.
Auflick, then Manager - Corporate Development of
Controlled, to Mr. Eales, analyzing an acquisition
structure for Cockrell that would involve Controlled stock.
<PAGE> 15
Ms. Susan Edlavitch
June 3, 1996
Page 15
Controlled has not made a bid for Cockrell, because, while the Spinoff is
pending, the use of Controlled stock in an acquisition is considered
ill-advised. (See discussion in part A.2. at pages 4-5, above.) Cockrell has
not been acquired.
f. VERADO
Verado is an example of an acquisition opportunity that Controlled
could negotiate much more easily, if it had its own stock to use as acquisition
currency.
Since May 1995, Controlled has been in discussions with Verado. The
Verado properties are located in and around the Oakhill Field in East Texas,
an area where Controlled has significant properties. Early discussions included
the possibility that Controlled would acquire all of Verado's properties or,
alternatively that Controlled and Verado would form a drilling partnership.
During summer 1995, natural gas prices continued to be depressed, and
the principal owners of Verado decided to focus on a disposition of the Oakhill
properties. The owners had a strong preference for a tax-deferred
stock-for-stock exchange, because they have a low tax basis in their Verado
shares.
Verado met with members of Controlled's acquisition team in October
1995. Controlled estimated that Verado's properties were worth approximately
$70 million. Verado stated again that the principal owners had a strong
preference for a tax deferred exchange, such as an exchange of stock.
Controlled explained that a stock transaction could not be considered until
after the Spinoff. Controlled expressed an interest in a cash transaction, but
the principal owners of Verado were not interested in a cash sale at that time.
As recently as May 1996, Verado contacted Controlled again, inquiring
as to Controlled's ability to structure a tax-free stock-for-stock acquisition.
Controlled advised Verado that the Spinoff still had not been completed, and
that, as before, Controlled was effectively precluded from considering a stock
deal until after the Spinoff. Verado expressed more willingness to consider a
cash sale but advised that the cash sale price would need to be increased to
cover a substantial portion of the capital gain tax. Controlled stated that it
was unlikely that Controlled would be willing to offer more consideration in a
cash-for-stock deal (before the Spinoff) than in a stock-for-stock deal (after
the Spinoff). Currently, then, no transaction is pending.
D. CONCLUSIONS
The business purpose of using stock as acquisition currency is
discussed in the Request, at pages 13-17 and 53-55. This Sixth Supplement
further explains and
<PAGE> 16
Ms. Susan Edlavitch
June 3, 1996
Page 16
documents Controlled's urgent need to complete major acquisitions and the
further need for Controlled to use its own, publicly-traded stock as
acquisition currency.
Part A. shows that, like its competitors in the industry, Controlled
has been active in the acquisition market during recent years.
Part B.1. shows that acquisitions are a basic part of the oil and gas
business, especially because oil and gas properties are wasting assets.
Companies need to engage in acquisitions to maintain and increase their
production. Part B.2. applies this analysis to Controlled's specific situation
and makes clear that acquisitions are essential for Controlled to avoid a
"valley of despair," i.e., to maintain itself and grow, even in the near
future. Controlled's need for acquisitions constitutes an urgent and exigent
corporate business need. Part B.3. shows that Controlled's management is fully
aware of this exigency and has been actively planning major acquisitions for
several years.
Part C. adds to the discussion on pages 14-17 of the Request and in
the Smith Barney Letter (Exhibit F). This material shows conclusively that, for
several years and in many situations, Controlled has been hampered in its
efforts to complete specific, worthwhile acquisitions, because it has not been
able to use its own stock as acquisition currency. Exhibits DD through HH
document Controlled's difficulties. Controlled's management believes strongly
that, if it has Controlled stock available as acquisition currency, Controlled
will be able to compete effectively for the acquisitions that it needs to
complete.
Controlled stock would be more attractive to the owners of acquisition
targets than is Distributing stock, because of the "pure play" in oil and gas.
Even if Distributing stock itself were attractive to prospective sellers,
experience has shown that such stock may not be available when and as needed,
because of Distributing's business, accounting or legal priorities and concerns
that are unrelated to Controlled.
As the Smith Barney Letter shows, more than half of the recent, major
acquisitions in the oil and gas business have involved stock of an oil and gas
company as acquisition currency. To compete effectively in the acquisition
market, Controlled needs to be able to use its stock in this way. As stated
above, in Rev. Rul. 76-527, 1976-2 C.B. 103, the Service has recognized the need
to complete acquisitions as an appropriate business purpose under section 355,
even where specific acquisitions have not yet been agreed to or identified. The
Request and this Sixth Supplement establish and document the importance and
immediacy of Controlled's need to complete acquisitions and to use its stock as
acquisition currency. Accordingly, the "business purpose" requirement under
section 355 has been amply satisfied.
<PAGE> 17
Ms. Susan Edlavitch
June 3, 1996
Page 17
MISCELLANEOUS
If you have any questions, or if additional information is required,
please telephone Robert H. Wellen (direct dial, 202/662-3401; switchboard,
202/393-7600).
Respectfully submitted,
IVINS, PHILLIPS & BARKER
Attorneys for the Taxpayers
By: /s/ ROBERT H. WELLEN
------------------------------
Robert H. Wellen
cc: David A. Heywood, Esq.
<PAGE> 18
REQUEST FOR RULING
FILED OCTOBER 17, 1995
-----------------
SIXTH SUPPLEMENT
FILED JUNE 3, 1996
Re: Union Pacific Corporation
Union Pacific Resources Group Inc.
Sections 332, 351, 355 and 368(a)(1)(D)
REVISED SCHEDULE OF DEFINED TERMS
<TABLE>
<CAPTION>
Request, Exhibit, Supplement,
Defined Term Page Page Page
------------ ---- ---- ----
<S> <C> <C> <C>
Persons and Groups
Amax Sixth, 2
Anschutz 36
Anschutz Shareholders 36
Big Island 20
Bitter Creek 20
BN Fourth, 6
CNW Holdings 18,22 (n.17)
CNWT 8 (n.2),22
Cockrell 16 Sixth, 10
Controlled 1,16,18,19 A,1
Controlled Subsidiaries 5
Distributing 1,17 A,1
Distributing Subsidiaries 5
Enron Sixth, 12
ERSO 16 Sixth, 10
Gemini Sixth, 3
Group C,1
I&CTI 26
MICO 23
MPC 18,23
MPRR 22,23
MRTX 23
MSLEF II 36
Overnite 13(n.9),18
Parent
(see Distributing) B,1
Prospect Point 20
Quality Aggregate 20
</TABLE>
<PAGE> 19
Revised Schedule of Defined Terms
Sixth Supplement
Page 2
<TABLE>
<CAPTION>
Request, Exhibit, Supplement,
Defined Term Page Page Page
------------ ---- ---- ----
<S> <C> <C> <C>
Persons and Groups
(continued)
Recipient B,7
Resources Holding 18,25
Rock Springs 20
Royal 15 Sixth, 3
RPW, LP 20
Santa Fe Fourth, 5
SP 6,22,36
Subsidiary
(see UP Holdings) B,1
Tana 14 Sixth,3
Taxpayers 1 A,1
UIDC 24
Texaco Sixth,3
UP Acquisiton 22
UP Holdings 18
Upland Industries 23
UPLRC 24
UP Rail 22(n.17)
UPRC 15,19,25
UP Realty 18,23
UPRR 6,18,21
UP Technologies 18,26
UPT Global 26
UPTTSI 26
Verado Sixth, 10
WERCO 15 Sixth, 4
Other Terms
Anschutz/Distributing
Shareholder Agreement 39 D/A,D1
Anschutz/Controlled
Shareholders Agreement 39 D/D,D1
Cash Flow 9
Code 1
Controlled EIP 9 A,5
DSO 11
Employee Broad-Based
Stock Program Second, 2
</TABLE>
-2-
<PAGE> 20
Revised Schedule of Defined Terms
Page 3
<TABLE>
<CAPTION>
Request, Exhibit, Supplement,
Defined Term Page Page Page
------------ ---- ---- ----
<S> <C> <C> <C>
Other Terms
(continued)
First Supplement First, 1
Fifth Supplement Fifth, 1
Fourth Supplement Fourth, 1
FTC Fourth, 6
ICC Fourth, 4
Initial Transfer C,1
IPO 5,19,32 A,3
Land Grant 24
MMBOE Sixth, 7
1971 Plan 30
1971 Plan Modification 30
1995 Controlled Stock Option
and Retention Plan 10 A.1.10/10
Request 1 A,1
Retention Shares 33(n.21) A,3
Second Supplement Second, 1
Separate Account Third, 2
Sixth Supplement Sixth, 1
Smith Barney Letter F Sixth, 2
Spinoff 4 A,2
SP Acquisiton Fourth, 4
SP Tender Offer 6,37
SP-UPRR Merger 6,37,38
SP-UPRR Merger
Agreement 6,37 D
STB Fourth, 4
Subsequent Transfer C,1
TCFE Sixth, 7
Third Supplement Third, 1
UPLRC Real Property 24
</TABLE>
-3-
<PAGE> 1
EXHIBIT 64
March 31, 1997 (9:15am)
Board Presentation
V. R. Eales
4/3/97
Slides 1L & 1R
o George listed these four modifications to our Exploration & Production
Strategy shown on the left and discussed the first two. I am going to talk
about the two highlighted actions on this slide:
- Increase property purchases.
- Make strategic upstream acquisitions.
o Along the way, I am also going to address some of the financial and
transaction issues mentioned by Jack:
- Market valuation of UPC stock.
- Unwanted assets.
- Target stock.
o Let's start with property purchases.
Slides 2L & 2R
o Property purchases have been, in recent years, one of the four primary
sources of drill sites for UPR. The fifth source, strategic acquisitions,
has recently been added to this slide since, as an independent company,
UPR is now better able to consider them. Property purchases are not
extraordinary events for us; they are a normal, ongoing activity, just as
are exploration, farm-ins and development drilling on our existing
acreage.
[HIGHLY CONFIDENTIAL]
1
<PAGE> 2
o For the reasons set forth by George, we intend to markedly increase our
property purchase from a level of about $100 million per year to the
range of $300 - 500 million per year.
o Let me give you some background on this activity.
Slides 3L & 3R
o Since the beginning of 1994, we have purchased about $275 million of
producing properties. We also bought Amax Oil & Gas, which you might call
a strategic property purchase, for $725 million. Our 1997 budget includes
$100 million of property purchases.
o The objectives of our property purchase efforts have been:
o Obtain drill sites.
o Acquire production.
o Reduce operating costs
in Existing Core Areas.
o We need to make 2 changes to our efforts.
o In the past, we focused only on our existing core areas because we already
had operations there which provided us better purchase economics.
o In the future, we will look for purchase opportunities in areas we can
gain a foothold and create new core areas through additional transactions
such as leasing, farm-ins and more purchases.
[HIGHLY CONFIDENTIAL]
2
<PAGE> 3
o As Sam will discuss, the second change is that we have to change our
hurdle rates to match the lower risk nature of these assets and to make us
more competitive. We have a good track record of finding more hydrocarbons
in these old fields than we knew about when we bought them.
o Let's move to strategic acquisitions.
Slide 4L
o How do we define our strategic acquisition program?
- First, we are targeting companies here with attractive exploration and
production assets and operations. As discussed later, they may have
other energy operations, but our focus is on E & P.
- Another criterion is size. We are talking here about large deals, as
much as $6 billion including assumed debt.
- At this point, we are targeting North American oriented companies,
with emphasis on the lower 48. We are also looking in Canada.
- Another criterion is obvious. There is no requirement for geographic
fit with existing UPR operations. In fact we want to create new core
areas.
- Finally, we are talking here primarily about entire companies, not
just property purchases.
Slide 5R
o Why are we interested in transactions of this nature?
- First, we are not 100% sure we can meet our basic growth objectives
through the four other sources of drill sites. We may need the drill
sites we can bring in through a strategic acquisition.
[HIGHLY CONFIDENTIAL]
3
<PAGE> 4
Slide 6R
oo Another reason is to be able to grow shareholder value faster than
the 10% per year implied by our aggressive internal production growth
target of 10% per year.
Slide 7R
oo We can achieve greater geographical diversity. For example, we are
not active or are under represented in some important areas in North
America, such as the Gulf of Mexico, the Mid Continent, Permian Basin
and the Alberta Basin. An acquisition may also give us an
international presence.
Slide 8R
oo We may be able to gain complementary skills such as heavy oil
technology, water flooding and other secondary and tertiary recovery,
or deep water production skills.
Slide 9R
oo As George has outlined, we are probably penalized by the market
because of our short reserve life. Acquisitons may be able to help,
although I should point out that it will be hard to move our reserve
life much, due to our size in comparison to targeted companies.
Slide 1OR
oo Also, large transactions have three advantages simply because they
are large:
- There is less competition from other buyers.
[HIGHLY CONFIDENTIAL]
4
<PAGE> 5
- We think it will be much easier and less disruptive to close and
assimilate a single large deal than several smaller ones.
- And, larger companies are more likely to have under exploited
properties.
Slide 11R
oo Finally, size itself is beneficial. As we increase our
exploration, some of which will involve big ticket wells, move
into deep water and, move overseas, size is an advantage. Also,
size is protection against unwanted suitors of UPR.
o Before I talk about specific transactions, I want to cover two financial
and transaction issues. The specific deals we are considering are impacted
by both.
Slide 12L
o The first, and most important, issue is that a sizeable E & P acquisition
will result in significant dilution in earnings per share. You heard Jack
say earlier that just an increase in our exploration spending will lower
earnings. The dilution caused by an acquisition is even larger. This is
obviously an issue because we want to increase, not decrease, UPR's stock
price.
o So, the underlying question is: how will a large E & P acquisition affect
our stock price?
o Cutting directly to the heart of the matter, the answer depends primarily,
but not exclusively, on whether UPR's stock is valued on earnings or cash
flow.
[HIGHLY CONFIDENTIAL]
5
<PAGE> 6
Slide 13L
o And the answer to that question is: UPR is now valued primarily on
cash flow per share.
Slides 14L & 14R
o To refresh your memory: earnings are well understood: It is net income
after taxes. Cash flow is called discretionary cash flow in the E & P
business because exploration expense is added to the sum of:
net income, plus
depreciation, depletion and amortization (or "DD & A"), plus
deferred taxes.
o As shown on the right chart, UPR's budgeted 1997 cash flow per share of
$4.64 is 3.5 times budgeted net income of $1.32.
o Why do I say UPR's stock is valued on cash flow? The reasons are that
Exploration & Production companies are valued on this basis and UPR is now
classified by Wall Street as an E & P company.
o Let's look at E & P stock valuation.
Slide 15L
o This plot shows price to cash flow and price to earnings ratios for 17 E &
P companies.
[HIGHLY CONFIDENTIAL]
6
<PAGE> 7
o Price to earnings ratios range from 12 to over 50. They are much more
variable than price to cash flow ratios, which range from 4 to 10.
o The lack of correlation between the two ratios is obvious.
o More importantly, there are reasonable explanations for the variations in
the price to cash flow valuations. It is very difficult to explain the
variations in price:earnings valuations.
o The point here is that one or the other is the primary valuation
determinant, not both, and the one value determinant is cash flow.
o So, E & P companies are valued on cash flow. Is UPR an E & P company in
terms on how the market values our stock?
o To answer this, I want to digress very briefly, because it is relevant to
both this issue and to target stock, which I will cover later.
Slide 16L
o In the energy industry, exploration and production is the only business
for which cash flow is the primary value determinant.
o Other energy businesses, such as gathering and processing, pipelines,
refining, marketing and gas and electric utilities are valued based on
earnings.
o Many energy companies have both E & P and other, non-E & P, operations.
[HIGHLY CONFIDENTIAL]
7
<PAGE> 8
o For example, UPR and most of its peers have gathering, processing and
marketing operations. As you know, UPR is more heavily involved in these
gas value chain activities than its peers.
o Also, some gas pipeline companies and utilities and, of course, the
integrated oil companies have E & P operations, as well as refining and
retail gasoline marketing assets.
o The market, meaning both the sell side (Wall Street) and the buy side
(mutual and pension funds), handles this complexity by ignoring it and
assigning a company to a category and valuing its stock primarily on the
basis used for that category, either earnings or cash flow.
o Simply stated, in the energy industry, you're either an E & P company or
you're not
Slide 17R
o UPR is classified by the market as an E & P company. We are followed by
E & P analysts in both the buy and sell side institutions. We are included
in lists of other E & P companies and are valued compared to them on
several basis, the most important one being cash flow per share.
o We read a lot of analysts' reports and talk to a lot of analysts and
shareholders. There is no question that they like that we have earnings.
But, when pressed, they will all say that cash flow is the primary
valuation parameter.
[HIGHLY CONFIDENTIAL]
8
<PAGE> 9
Slide 18L
o Okay, so E & P companies are valued on cash flow and UPR is an E & P
company. Let me return to dilution in earnings per share caused by an E & P
acquisition.
o E & P company acquisitions cause dilution in earnings per share because of
purchase accounting and the premiums over book value at which E & P
companies are valued.
o I should note that the transaction requirements to qualify for pooling
accounting are very stringent but, in any case, UPR cannot use pooling,
even if we meet these requirements, because we have not been an
independent company for two years.
o So we have to use purchase accounting and under purchase accounting, the
book value of the assets acquired has to be written up to equal the price
paid for them.
o This write-up leads to significantly higher DD & A charges on these
assets by the acquiror than were being taken by the acquired company.
Slides 19L & 19R
o This is a simplified example of how purchase accounting works. On the left
is a simple balance sheet of a target company as it now exists.
o On the right, I have added a premium for the cost of the stock of the
target over its book value. This premium will increase the book value of
the
[HIGHLY CONFIDENTIAL]
9
<PAGE> 10
target's assets on our books.
o This premium has to be written off over the life of the assets, causing
significant increases in amortization.
o These are non cash charges, so they do not reduce cash flow.
o I should also note that these additional charges are not deductible for
tax purposes.
Slide 20L
o Let's look at some specific numbers.
o The left slide shows estimates of the percentage increase in DD & A
charges applicable to the acquisition of 8 companies.
o The first column of numbers is the current book value of the companies'
equity and debt.
o The second column is the sum of the acquisition value of each company's
equity plus its current debt. The equity value used in this column includes
a 28% acquisition premium over the current trading value of the stock.
According to Salomon Bros., this is the average acquisition premium for
recent E & P transactions. The difference between the two columns is an
approximation of the write-up in book value of the assets on the acquiring
companies' books.
[HIGHLY CONFIDENTIAL]
10
<PAGE> 11
o The third column shows the percentage increase in book value, which is also
an approximation of the percentage increase in annual DD & A charges.
o I am really comparing this amount to this amount and calculating the
percentage increase.
o For example, if we acquired Oryx, the DD & A applicable to Oryx's assets
when owned by us would be 286% higher than Oryx's current DD & A.
Incidently, Oryx has a negative equity book value but a stock market value
of $2.1 billion.
o So that is why we see dilution in earnings per share. The exact amount
depends on several factors including, the premium paid over book value, the
size of the deal, how the target is capitalized and the form of the
consideration given.
o Let's look at some transaction examples.
Slide 21R
o This slide shows pro forma calculations of the effects on UPR's 1997
earnings and cash flow per share of several E & P acquisitions. For these
examples we assumed we did the deal for 50% cash and 50% UPR stock. The
calculations include the 28% acquisition premium I mentioned.
o The results are pretty dramatic. Look again at Oryx. On a pro forma basis,
that is, just adding their forecast 1997 results to ours, after adjusting
for the
[HIGHLY CONFIDENTIAL]
11
<PAGE> 12
additional interest charges and additional outstanding UPR shares, cash
flow per share would increase 19%. But earnings per share would drop by a
whopping 90%.
o All of the transactions shown result in significant earnings per share
dilution. However cash flow per share increases in most cases.
o I'm going to talk more about Pennzoil in a minute. Note that, for an
acquisition of Pennzoil, pro forma cash flow per share increases 8% and
earnings per share decreases by 40%.
o Now that I shocked you, please bear in mind that these are worst case
examples. They do not incorporate savings in overhead and other expenses
or our ability to crank up income from the acquired assets.
o In fact, we must see increases in cash flow per share and be able to
convince the market they will occur. And we do have to decrease or
eliminate the dilution in earnings per share as fast as possible.
o How would UPR stock react to these deals? It will go up, because cash flow
per share will rise, after we apply expense savings and income enhancement
factors.
o This is obviously an oversimplification. The market will react to the sum
total of the deal - strategic fit, assessment of the acquired assets, our
story, and the outlook for cash flow and, to some extent, earnings, among
other things. Dilution in earnings will not, by itself, decrease UPR's
stock price.
[HIGHLY CONFIDENTIAL]
12
<PAGE> 13
Slide 22L
o The companies used on this slide also illustrate another transaction issue.
All of these companies have assets we may not want - non E & P operations
or international assets, or both.
o International E & P operations are not really a problem. They can either be
sold or, kept, if they fit with our emerging international strategy.
o Non E & P operations are more complex, but we have the same basic keep or
sell options.
o For example, Sonat's pipelines and gas and power marketing operations could
be part of an expanded gas value chain for UPR. More from Don on this
subject later.
o Pennzoil has refineries, is the world's leading marketer of motor oil and
owns and franchises oil change centers. I will run through more information
on these operations in a minute.
o We could plan from the outset to sell these operations, either as part of
the initial transaction or later, after they reach a higher value plateau.
Or they could be part of a more vertically integrated UPR.
Slide 23L
o At previous Board meetings, I have talked a little about our strategic
acquisition program. In recent months, we have surveyed many U.S.
[HIGHLY CONFIDENTIAL]
13
<PAGE> 14
oriented upstream companies and have progressively narrowed our focus
through successive analyses.
o Our screening has concentrated on the assets and operations of the
potential targets - not initially on stock market valuation or, even,
apparent willingness to consider being acquired. These latter factors
obviously become crucial when you decide to move on a specific target.
o When we look at a potential acquisition, we assess such things as:
Operatorship
Working Interest
oo We want high percentages of both.
Concentration
oo So we can apply our skills at intensive development.
Most important, we want to see.
Development Potential
Under Exploited Properties
Technology Opportunities
o Why are we concerned with these factors? It is because acquisitions of
upstream companies are initially expensive. There is always a significant
going concern premium versus the cost of buying packets of producing
properties.
o However, these deals provide potential access to assets that would simply
not otherwise be available. Companies tend to keep their best properties,
those with most upside potential, and sell the less valuable ones.
[HIGHLY CONFIDENTIAL]
14
<PAGE> 15
Acquisitions can work and work well. But to work, some things have to
happen.
o First, expenses must be reduced. Overhead and operating costs have to be
cut. Selective divestitures can help and steps taken on debt and contracts.
o But the crucial factor is the ability to increase income from the acquired
assets, by applying UPR's manufacturing approach to drilling, our capital,
technology and management skills.
o Every deal is different. But so far, we haven't seen any that work without
a significant step up in drilling, leading to production increases from
the acquired assets in excess of that foreseen by the market
o I told you in February that Pennzoil is our leading target. The next few
slides provide summary data on Pennzoil.
Slide 24L
o At its current stock price of $50, Pennzoil has a total equity market
value of about $2.3 billion. At $80 per share, equity value is a little
over $3.7 billion.
o I have used $80 per share here because we currently think Pennzoil stock
is worth as much as the high 70's or low 80's per share.
o Adding Pennzoil's debt of about $2.2 billion to equity results in a market
enterprise value of about $ 5.9 billion.
[HIGHLY CONFIDENTIAL]
15
<PAGE> 16
o I show adjusted enterprise values, by subtracting $900 million of debt
which is in the form of debentures exchangeable into Chevron common stock
held by Pennzoil. This liability is offset by the stock and both will go
away when the exchange occurs.
o The figures on the bottom give a breakdown of 1996 operating income and
pre tax cash flow among Pennzoil's three business segments. E & P
operations contributed about 75% of the Company's operating income and
about 80% of pre tax cash flow.
Slides 25L & 25R
o In its E & P operations Pennzoil has high operatorship, at 80%, and high
working interests, at 70%, both desirable. Its U.S. operations are
concentrated in the Gulf of Mexico and East, South and West Texas.
o As shown on the map, many of Pennzoil's properties are geographically near
UPR operations and will provide synergies. (Pennzoil is in green, UPR in
red.) However, they would significantly increase our presence in the Gulf
of Mexico and South Texas, and give us a presence in attractive new areas,
such as the Permian Basin in West Texas and the Uinta Basin in Utah.
o Most important, we believe that Pennzoil's U.S. properties have very
promising development potential. They are way behind the curve on the use
of 3-D seismic, horizontal drilling and other technologies.
o Pennzoil has been over leveraged in recent years and has dedicated major
portions of expenditures to international E & P and the lubricating
business.
[HIGHLY CONFIDENTIAL]
16
<PAGE> 17
We think they have neglected their U.S. E & P assets.
Slide 26R
o Pennzoil has assets in Canada and in five areas outside of North America.
It has small amounts of production in Canada and Venezuela; The other
areas are primarily exploration plays, although Azerbaijan includes the
development of a huge oil field. These projects could jump start our
international program.
Slide 27R
o The slide on the right compares Pennzoil and UPR on the basis of proved
reserves and production. Pennzoil's proved reserves are about 68% of
UPR'S. Its production is 65% of ours.
o Pennzoil is less weighted toward gas than UPR. Also note the small current
contribution from its international assets.
Slide 28L
o The second largest business segment is motor oil and refined products.
Pennzoil owns two refineries, in Pennsylvania (16,500 BD) and Louisiana
(46,200 BD), which specialize in lubricating oil stocks, but also produce
a range of products including gasoline, healing oil and jet fuel.
o In December of last year, production started at Excel Paralubes, a 50/50
joint venture with Conoco. This is an 18,000 barrel per day hydrocracker
to produce base oils for lubricants.
[HIGHLY CONFIDENTIAL]
17
<PAGE> 18
o In the last three years, Pennzoil has invested over $500 million in its
refining assets.
o These projects have made Pennzoil self sufficient in base oils for its
lubricants and motor oil business.
o Pennzoil motor oil has been the top selling brand in the U.S. for eleven
consecutive years and has a 21% market share, by far the largest.
o Pennzoil is leveraging its brand name and distribution network to expand
its product line and its geographic coverage.
o It now markets in 62 countries.
o Pennzoil is forecasting significant near term growth in this segment, due
to its capital programs and marketing initiatives.
Slide 29R
o The third segment is called Franchise Operations, but really consists of
Jiffy Lube. As you probably know, Jiffy Lube are automobile service
centers that focus on quick oil change, but also provide other services
such as lubrication.
o Pennzoil acquired Jiffy Lube in two transactions in 1990 and 1991 when the
operation was in financial trouble.
[HIGHLY CONFIDENTIAL]
18
<PAGE> 19
o At year end 1996, there were 1,380 Jiffy Lube service centers, of which
525 were company owned.
o Jiffy Lube has about a 50% share of the quick oil change market.
o Jiffy Lube has an alliance with Sears whereby Jiffy Lube will operate fast
oil change units within Sears Auto Centers. 116 of these were open at the
end of 1996.
o The Company forecasts growth in this segment of 15% to 20% over the next
five years.
o We have constructed a model for Pennzoil which enables us to forecast
financial results and look at the results of transactions at different
acquisition prices and different terms.
Slides 30L & 30R
o These two slides show one example. Looking at the left slide - here we
assume:
o We pay $70 per share or $3,262 million for Pennzoil's stock.
Pennzoil is now selling at about $50. This would be a 40% premium.
o We pay in the form of 50% cash and 50% UPR stock, with our stock at
$26 per share.
o On this basis, we would pay $1,631 million in cash and issue 62.7
million UPR shares.
o Including Pennzoil's existing debt of about $2.2 billion,
the total
HIGHLY CONFIDENTIAL
19
<PAGE> 20
purchase cost would be about $5.5 billion.
o UPR's resulting capitalization is shown at the bottom. Our current debt
to book capitalization ratio is 31%. This transaction would increase it
to 59%.
o The debt to market capitalization would be 36%, compared to about 10% now.
o At these levels, we would lose our A rating, but we think we would retain
an investment grade rating.
o The graph on the right plots the forecasts of cash flow and earnings per
share on the incremental shares outstanding - 62.7 million shares in this
example.
o The graph also shows our 1997 budgeted per share results (cash flow of
$4.64 represented by the red dot and earnings of $1.32, the yellow dot).
o Cash flow per incremental share is very high, starting at about $7.43 per
share, in contrast to our budgeted $4.64 per share, and rises nicely
thereafter. Pro forma combined 1997 cash flow per share for all UPR shares
would increase about 12%.
o In this example, the earnings on the incremental shares is actually
negative in the first year and then increases as we cut expenses and step
up investment in the acquired properties. Earnings on the incremental
shares are below our budgeted 1997 figure of $1.32 until the year 2000.
Pro forma
HIGHLY CONFIDENTIAL
20
<PAGE> 21
combined 1997 earnings per share would be $.84, a decrease of 36% from the
1997 budget.
o Jack visited with Jim Pate, Pennzoil's CEO on March 4th. Pate was polite
but said he felt it was too soon for Pennzoil to be acquired.
o He talked about anticipated rapid growth from the lubricating business-due
to recently completed capital programs, tie-in marketing programs and
international expansion - and from exploration and production, now that
Pennzoil was in better financial shape and could step up its drilling
activities. He talked about being able to increase value by 40% by
splitting up the company and about having a $100 stock by the year 2000.
o We interpret his response either as a soft no, or, here are some
indications of value if you want to move forward.
o Where do we go from here?
o We are going to try very hard to move forward on a friendly basis. So we
will continue the courtship.
o Next week Jack will invite Pate to come to Fort Worth and get to know us
better. If he accepts, we'll give him a show, in effect, trying to recruit
him to join the team.
o We also want him to start thinking that a transaction is inevitable.
[HIGHLY CONFIDENTIAL]
21
<PAGE> 22
o If he declines, we will step up the pressure in a selective way, probably
by inviting him and a director to visit us.
Slide 31L
o If we drop Pennzoil, for whatever reason, we will move to the next target.
Our current belief is that the next target is on this list. Again, these
figures incorporate a 28% acquisition premium.
o I put Tom Brown at the top of the list because the CEO of Tom Brown has
said he is interested in a transaction with UPR. We are analyzing the
properties, and will move ahead rapidly on this prospect. At this point,
the company looks quite expensive based on reported results and reserves.
The key to the valuation will be the potential of Tom Brown's extensive
acreage position in the Wind River Basin of Wyoming, which is north of the
Land Grant.
o None of the companies here, except Tom Brown, are obviously available.
There are rumors from time to time about some of them, notably Louisiana
Land, Oryx and Enserch. But none has said 'come get us.'
o We have not ruled out a hostile takeover, but we would rather find a
willing partner. We will approach targets on a friendly basis and be ready
to act as a white knight if one of our targets comes under attack from an
unwanted suitor.
o In certain cases, we will use the threat of a hostile to create a
friendly. We may want to back up our threat, but I hope we do not have to
go that far.
[HIGHLY CONFIDENTIAL]
22
<PAGE> 1
EXHIBIT 65
================================================================================
Smith Barney Presentation:
PROJECT MERCURY
Valuation Discussion and Operational Review
January 1997
================================================================================
HIGHLY CONFIDENTIAL SMITH BARNEY, INC.
<PAGE> 2
TABLE OF CONTENTS PROJECT MERCURY
- -------------------------------------------------------------------------------
TAB
---
SEGMENT VALUATION AND SPIN-MERGE OVERVIEW.................................. A
EXPLORATION AND PRODUCTION SEGMENT VALUATION............................... B
INTERNATIONAL EXPLORATION AND PRODUCTION OPERATIONS AND VALUATION.......... C
MARKETABLE SECURITIES HOLDINGS AND VALUATION............................... D
PETROLEUM PRODUCTS AND REFINING OPERATIONS AND VALUATION................... E
AUTOMOTIVE SERVICE FRANCHISING OPERATIONS AND VALUATION.................... F
HIGHLY CONFIDENTIAL [SMITH BARNEY LOGO]
<PAGE> 3
PROJECT MERCURY
================================================================================
PRELIMINARY MERCURY VALUATION - SPIN-MERGE STRUCTURE
<TABLE>
<CAPTION>
"OLD" MERCURY (ACQUIRED)
-------------------------------------------------------------------------------
"CORE" U.S. INTL AND OTHER PENN UNION CHEVRON STOCK
E&P ASSETS E&P ASSETS GAS MARKETING & SECURITIES TOTAL
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ENTERPRISE $3,791 $4,190 $300 $400 -- -- $1,294 $5,384 $5,883
VALUE
VALUATION Multiples Multiple of Net Market
METHODOLOGY EBITDAX for Asset Value Value on
TO RECOGNIZE 1996 and 1997 determined from 01/25/97
HIGHEST VALUE precedent transactions.
LESS: -- -- 35 70 -- -- 254 289 324
ESTIMATED
TAXES
LESS: 1,344 1,344 -- -- -- -- 1,184 2,528 2,528
DIRECT DEBT
OR VALUE OF
SHARES
SURRENDERED
-------------- ----------- ------------- ------ --------------
NET ASSET $2,447 $2,846 $265 $330 $0 $0 ($144) $2,568 $3,032
VALUE
FD SHARES 46.8 46.8 46.8 46.8 46.8
OUTSTANDING(1)
NAV $52.33 $60.86 $5.67 $7.06 $0.00 $0.00 ($3.08) $54.91 $64.84
PER SHARES
</TABLE>
<TABLE>
<CAPTION>
--------------------------------------------- --------------
SPINCO (MERCURY)
--------------------------------------------- TOTAL VALUE
PRODUCTS JIFFY TO MERCURY
COMPANY LUBE TOTAL SHAREHOLDERS
--------------------------------------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ENTERPRISE $1,075 $1,188 $218 $241 $1,293 $1,429 $6,677 $7,312
VALUE
VALUATION Multiples of Multiples of
METHODOLOGY SB projected SB projected
TO RECOGNIZE 1997 EBIT and 1997 EBIT and
HIGHEST VALUE EBIT EBITDA
LESS: -- -- -- -- -- -- 289 324
ESTIMATED
TAXES
LESS: 10 10 15 15 25 25 2,553 2,553
DIRECT DEBT
OR VALUE OF
SHARES
SURRENDERED
-------------- ----------- ------------- --------------
NET ASSET $1,065 $1,178 $203 $226 $1,268 $1,404 $3,835 $4,435
VALUE
FD SHARES 46.8 46.8 46.8 46.8
OUTSTANDING(1)
-------------- ------------ ------------- --------------
NAV $22.77 $25.19 $4.34 $4.83 $27.11 $30.02 $82.02 $94.86
PER SHARES
- ------------------------------------------------------------- --------------
</TABLE>
Notes:
- ----------------------
(1) Shares outstanding includes 46,537,819 shares outstanding at September 30,
1996 in addition to 219,760 option which are exercised under the treasury
method of accounting.
HIGHLY CONFIDENTIAL [SMITH BARNEY]
<PAGE> 4
PROJECT MERCURY
- -------------------------------------------------------------------------------
PRELIMINARY MERCURY VALUATION - BREAKDOWN BY BUSINESS SEGMENT
<TABLE>
<CAPTION>
IMPLIED
ENTERPRISE
MULTIPLE RANGE VALUE CHOSEN MULTIPLES EST. ENTERPRISE VALUE
--------------- ------------- ---------------- -------------------
RESULT LOW HIGH LOW HIGH LOW HIGH LOW HIGH
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
"CORE" U.S. E&P OPERATIONS
EBITDAX 1996 486.4 4.9x 13.8x 2,383 6,712
1997 586.8 4.7 12.0 2,758 7,041 6.5x 7.1x 3,791 4,190
-------------------------
AVERAGE 3,791 4,190
- --------------------------------------------------------------------------------------------------------------
INTERNATIONAL E&P OPERATIONS
Net Asset Value 300 400
-------------------------
AVERAGE 300 400
- --------------------------------------------------------------------------------------------------------------
PENN UNION GAS MARKETING
EBIT 1995
-------------------------
AVERAGE
- --------------------------------------------------------------------------------------------------------------
PRODUCTS COMPANY
EBITDA 1996 104.4 6.3 10.4 658 1,086 8.6x 9.6x 905 998
1997 132.3 5.4 9.2 714 1,217 7.6 8.4 1,005 1,111
EBIT 1996 68.9 10.9 20.8 751 1,433 17.5 19.3 1,204 1,331
1997 93.9 9.6 14.8 901 1,390 12.6 14.0 1,186 1,311
-------------------------
1,281 AVERAGE 1,075 1,188
- --------------------------------------------------------------------------------------------------------------
JIFFY LUBE INTERNATIONAL
EBITDA 1996 40.1 5.3x 8.9x 213 357 6.4x 7.0x 255 282
1997 43.6 4.9 8.2 214 357 5.2 5.8 228 252
EBIT 1996 22.1 6.1 12.7 135 281 9.3 10.3 206 228
1997 25.6 6.0 12.5 154 320 7.1 7.9 182 202
-------------------------
AVERAGE 218 241
- --------------------------------------------------------------------------------------------------------------
CHEVRON STOCK AND MARKETABLE SECURITIES
Market Value (1) 1,293.7 1.0x 1.0x 1,294 1,294 1.0x 1.0x 1,294 1,294
----------------------------------
TOTAL ENT. VALUE 6,677 7,312
- --------------------------------------------------------------------------------------------------------------
</TABLE>
Notes:
- -----------
(1) Includes 18.1 million shares of Chevron stock, $62.5 million of marketable
securities and $47.5 million of notes receivable as of September 30, 1996.
HIGHLY CONFIDENTIAL [SMITH BARNEY LOGO]
<PAGE> 5
PROJECT MERCURY
- --------------------------------------------------------------------------------
MERCURY FIVE-YEAR TRADING PERFORMANCE
[LINE GRAPH]
(1) Comparable companies include AHC, FI, KMG, MUR and ASH.
HIGHLY CONFIDENTIAL [SMITH BARNEY LOGO]
<PAGE> 6
PROJECT MERCURY
- --------------------------------------------------------------------------------
EXCHANGE RATIO SINCE UNICORN'S IPO
[LINE GRAPH]
HIGHLY CONFIDENTIAL [SMITH BARNEY LOGO]
<PAGE> 7
PROJECT MERCURY
- --------------------------------------------------------------------------------
MERCURY PROJECTED U.S. EXPLORATION AND PRODUCTION INCOME
<TABLE>
<CAPTION>
HISTORICAL
-------------------------------------------------
1990 1991 1992 1993 1994 1995
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
PRICE ASSUMPTIONS (1)
Average WTI Oil Price $17.00 $17.00 $17.00 $16.94 $17.14 $18.42
Mercury Effective Oil Price 21.09 17.00 16.95 14.90 15.00 15.00
Delta 4.09 0.00 -0.05 -2.04 -2.14 -3.42
Average Henry Hub $1.90 $1.90 $1.90 $1.97 $1.77 $1.51
Mercury Effective Gas Price 1.78 1.54 1.81 2.04 2.00 1.80
Delta 0.12 0.36 0.09 -0.07 -0.23 -0.29
PRODUCTION AND REVENUE (2)
Oil and NGL Production (Mmbbls) 11 12 15 24 24 22
Oil and NGL Revenue $232 $204 $254 $358 $360 $330
Gas Production (Bcf) 137 147 161 220 244 218
Gas Revenue $244 $226 $291 $449 $488 $392
Other Revenue $44 $46 $29
TOTAL US E&P REVENUE $476 $430 $546 $850 $894 $751
OPERATING EXPENSES (2) $205 $212 $237 $354 $331 $288
Lifting Cost ($/Mcfe) $1.01 $0.97 $0.94 $0.97 $0.85 $0.82
------ ------ ------ ------ ------ ------
EBITDAX $271 $218 $309 $496 $563 $463
DEPRECIATION (2) 135 142 174 273 302 185
Depreciation ($/Mcfe) $0.66 $0.67 $0.73 $0.77 $0.91 $0.64
EXPLORATION EXPENSE (2) 21 34 9 69 48 20
------ ------ ------ ------ ------ ------
EBIT $115 $42 $126 $154 $213 $258
</TABLE>
<TABLE>
<CAPTION>
PROJECTED
----------------------
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
PRICE ASSUMPTIONS (1)
Average WTI Oil Price $22.00 $19.50 $19.50
Mercury Effective Oil Price 15.05 15.48 15.48
Delta -6.95 -4.02 -4.02
Average Henry Hub $2.20 $2.10 $2.10
Mercury Effective Gas Price 1.90 2.10 2.10
Delta -0.30 0.00 0.00
PRODUCTION AND REVENUE (2)
Oil and NGL Production (Mmbbls) 20 21 22
Oil and NGL Revenue $308 $328 $339
Gas Production (Bcf) 210 228 246
Gas Revenue $399 $479 $517
Other Revenue $25 $25 $25
TOTAL US E&P REVENUE $731 $832 $881
OPERATING EXPENSES (2) $245 $245 $240
Lifting Cost ($/Mcfe) $0.74 $0.69 $0.64
------ ------ ------
EBITDAX $486 $587 $641
DEPRECIATION (2) 210 225 230
Depreciation ($/Mcfe) $0.86 $0.92 $0.96
EXPLORATION EXPENSE (2) 25 40 40
------ ------ ------
EBIT $251 $322 $371
</TABLE>
Notes:
- -------------------------------
(1) Pricing assumptions are based on Smith Barney research estimates and
historical pricing spreads.
(2) Production and expenses are based on Wall Street consensus projections.
[HIGHLY CONFIDENTIAL] [SMITH BARNEY LOGO]
<PAGE> 8
VALUATION OF SELECTED EXPLORATION AND PRODUCTION COMPANIES PROJECT MERCURY
- --------------------------------------------------------------------------------
(US$ in millions, except for per share and multiple data)
<TABLE>
<CAPTION>
ENTERPRISE VALUE (4)/
--------------------------------------
EQUITY EBITDAX(5) EBIT
PRICE AT MARKET ENTERPRISE ----------------- -------------------
COMPANY 1/28/97 VALUE(1) VALUE(4) 1996E(3) 1997E(3) 1996E(3) 1997E(3) IMVR(6)
----------------------------------------------------------------------------------------
LARGE INDEPENDENT EXPLORATION & PRODUCTION COMPANIES
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Anadarko Petroleum Corp. $63.50 $ 3,843 $ 4,515 13.5x 11.7x 26.8x 23.3x $ 4,202
Apache Corporation 36.75 3,330 4,709 8.3 6.8 18.7x 15.3x 4,445
Burlington Resources 49.13 6,172 7,387 8.4 7.6 15.2x 15.1x 6,914
ENSERCH Exploration 10.75 1,354 1,727 8.4 8.4 NM NM 1,503
Enron Oil & Gas 23.50 3,787 4,078 7.8 6.7 18.9x 14.9x 3,923
Louisiana Land & Expl. 54.38 1,881 2,374 5.8 6.1 16.9x 21.8x 2,324
Noble Affiliates, Inc. 44.00 2,567 3,605 6.5 6.3 17.9x 16.1x 3,506
Vastar Resources, Inc. 38.13 3,713 4,490 7.1 6.9 16.7x 14.7x 4,543
Average: $ 3,331 $ 4,111 8.2x 7.6x 18.7x 17.3x $ 3,920
Median: 3,521 4,284 8.0 6.8 17.9 15.3 4,063
High: 6,172 7,387 13.5 11.7 26.8 23.3 6,914
Low: 1,354 1,727 5.8 6.1 15.2 14.7 1,503
<CAPTION>
IMVR(6)/
--------------------------------
FULLY DEV.(8)
TOTAL PROVED
SEC-10 ----------------------
COMPANY VALUE(7) Mcfe PRICE Mcfe
--------------------------------
<S> <C> <C> <C>
Anadarko Petroleum Corp. 179% $ 1.51 $ 1.22
Apache Corporation 182% 1.75 1.30
Burlington Resources 177% 1.10 0.96
ENSERCH Exploration 95% 1.11 0.99
Enron Oil & Gas 196% 1.17 1.06
Louisiana Land & Expl 163% 1.58 1.41
Noble Affiliates, Inc. 124% 1.75 1.47
Vastar Resources, Inc. 149% 1.77 1.58
Average: 158% $ 1.47 $ 1.25
Median: 170% 1.54 1.26
High: 196% 1.77 1.58
Low: 95% 1.10 0.96
</TABLE>
Notes:
- -------------------------------------------------
(1) Equity Market Value = Total Shares Outstanding (calculated by the treasury
method) *Current Common Stock Price.
(2) Latest Twelve Months as of 9/30/96.
(3) Forward projections are IBES earnings with Smith Barney research add-backs.
(4) Enterprise Value = Entity Market Value + Market Value of Preferred + Total
Debt (principal amount) + Minority Interest - Cash and Marketable
Securities.
(5) EBITDAX includes exploration expense in addition to depreciation.
(6) IMVR = Indicated Market Value of Reserves, equity market value less
non-reserve assets, plus non-reserve liabilities.
(7) SEC-10 value is pre-tax for domestic reserves and after-tax for
international reserves.
(8) Fully developed ratios include future development costs of undeveloped
proved reserves, equivalents are calculated at 6:1.
HIGHLY CONFIDENTIAL [SMITH BARNEY LOGO]
<PAGE> 9
PROJECT MERCURY
- --------------------------------------------------------------------------------
LEVERAGE RATIOS OF SELECTED EXPLORATION AND PRODUCTION COMPANIES
(US$ in millions, except for per share and multiple data)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL DEBT/ EQUITY MARKET
SENIOR CAPITALIZATION TOTAL DEBT/ NET DEBT/ 1997E VALUE/
UNSECURED TOTAL ----------------- 1997E NET NET DEBT/ 1997E EBITDAX/ TANGIBLE
COMPANY CREDIT RATING DEBT BOOK(1) MARKET(2) EBITDAX DEBT ASSET VALUE EBITDAX INTEREST BOOK VALUE(3)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
LARGE INDEPENDENT EXPLORATION & PRODUCTION COMPANIES
Anadarko Petroleum Corp. A3/BBB+ $ 716 42% 16% 1.9x $ 672 27% 1.7x 9.4x 4.0x
Apache Corporation Baa1/BBB 1,392 49% 29% 2.0 1,379 54% 2.0 11.2 2.3
Burlington Resources A3/A- 1,347 38% 18% 1.4 1,215 29% 1.3 9.2 2.8
ENSERCH Exploration NR/NR 225 17% 13% 1.1 223 14% 1.1 15.9 1.4
Enron Oil & Gas A3/A- 301 20% 7% 0.5 291 15% 0.5 47.0 3.1
Louisiana Land & Expl. Baa2/BBB 505 53% 21% 1.3 493 32% 1.3 12.5 4.2
Noble Affiliates, Inc. Baa2/BBB 1,129 71% 31% 2.0 1,038 36% 1.8 10.4 5.5
Vastar Resources, Inc. Baa2/BBB 799 78% 18% 1.2 777 25% 1.2 12.4 16.0
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
-------------------------------------------------------------------------------------------------------
AVERAGE: $ 796 33% 17% 1.4X $ 756 28% 1.3X 18.5X 2.7X
MEDIAN: 1,031 40% 17% 1.6 944 28% 1.5 10.3 2.5
HIGH: 1,392 49% 29% 2.0 1,379 54% 2.0 47.0 4.0
LOW: 225 17% 7% 0.5 223 14% 0.5 9.2 1.4
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTES:
- ---------------------
(1) Book Capitalization = Total Debt + Common Book Equity + Preferred (at
liquidation preference) + Minority Interest
(2) Market Capitalization = Total Debt + Common Equity Market Value + Preferred
Market Value + Minority Interest.
(3) Numbers as of 9/30/96
HIGHLY CONFIDENTIAL [SMITH BARNEY LOGO]
<PAGE> 10
PROJECT MERCURY
Asset and Operating Characteristics of Selected Exploration and Production
Companies
(US$ in millions, except for per share and multiple data)
<TABLE>
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
RESERVE LIFE- PROVED 3 - YEAR
PROVED PROVED DEVELOPED/ GAS A % OF RESERVE LOE/ G&A/
SEC-10 RESERVES DEVELOPED PROVED PROVED REPLACEMENT MCFE MCFE
COMPANY VALUE(2) (BTU BCFE) (YEARS) RESERVES RESERVES /PRODUCTION PRODUCED PRODUCED
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
Large Independent Exploration & Production Companies
Anadarko Petroleum Corp. $2,347 3,158 10.2 70% 58% 234% $0.68 $0.34
Apache Corporation 2,448 2,704 6.7 81% 57% 249% 0.70 0.11
Burlington Resources 3,900 6,688 9.8 83% 82% 147% 0.64 0.19
ENSERCH Exploration 1,581 1,612 8.0 69% 78% 252% 0.70 0.21
Enron Oil & Gas 2,001 3,591 6.4 56% 92% 326% 0.35 0.16
Louisiana Land & Expl 1,426 1,560 6.2 84% 63% 145% 0.67 0.19
Noble Affiliates, Inc. 2,837 2,035 6.9 95% 64% 433% 0.49 0.20
Vastar Resources, Inc. 3,040 2,725 5.3 82% 76% 103% 0.43 0.15
- -----------------------------------------------------------------------------------------------------------------------------------
Average: $2,455 3,551 8.2 72% 73% 242% 0.62 $0.20
Median 2,397 2,931 8.9 75% 68% 241% 0.69 0.20
High: 3,900 6,688 10.2 83% 92% 326% 0.70 0.34
Low: 1,581 1,612 6.4 56% 57% 147% 0.35 0.11
- -----------------------------------------------------------------------------------------------------------------------------------
MERCURY $2,765 2,675 6.0 86% 55% 74% $0.58 $0.28
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Notes:
- ------------------------------------------
(1) Asset information based on financials as of 12/31/95.
(2) SEC-10 value is pre-tax for domestic reserves and after-tax for
international reserves.
(3) Reserve equivalents are calculated on a 6:1 basis.
(4) Numbers as of 9/30/96.
HIGHLY CONFIDENTIAL [SMITH BARNEY LOGO]
<PAGE> 11
Project Mercury
================================================================================
SELECTED EXPLORATION AND PRODUCTION ACQUISITIONS IN THE GULF OF MEXICO
(US Dollars in millions)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
PURCHASE PRICE OF RESERVES(1)
-----------------------------
ACQUIROR/ DATE DATE TRANSACTION PROVED SEC-10
SELLER ANNOUNCED EFFECTIVE VALUE BOE VALUE
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Noreen Energy Resources Ltd. 12/11/96 12/11/96 37 NA NA
Flores & Rucks, Inc.
American Exploration/ 09/30/96 09/15/96 39 6.04 166%
Zilkha Energy Company
Houston Exploration IPO 05/24/96 09/19/96 347 5.95 122%
Panaco, Inc./ 08/27/96 10/01/96 40 5.90 75%
Amoco Corporation
Vastar Resources, Inc./ 07/17/96 03/01/96 37 5.44 NA
Conoco Inc.
Flores & Rucks/ 07/10/96 09/30/96 119 5.34 NA
Mobil Corp.
Noble Affiliates/ 07/02/96 07/31/96 1,068 6.58 102%
Energy Development Corp.
Burlington Resources/ 06/06/96 06/03/96 77 5.70 NA
Gulfstream Resources
American Exploration/ 03/18/96 03/01/96 56 5.66 NA
Private Company
Hunt Pet/W&T Offshr/ 02/28/96 01/01/96 200 5.47 72%
Columbia Gas
Forcenergy Inc./ 06/02/95 08/02/95 40 5.00 101%
Ashlawn Energy Inc.
</TABLE>
<TABLE>
<CAPTION>
RESERVE STATISTICS
TRANSACTION --------------------------------------------
VALUE / PROVED
ACQUIROR/ LTM RES. LIFE PERCENT PERCENT REGIONS OF
SELLER EBITDA (YEARS) GAS DEVLPD OPERATIONS
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Noreen Energy Resources Ltd. NA NA NA NA Gulf of Mexico
Flores & Rucks, Inc.
American Exploration/ 0.9 6.0 44% 100% Gulf of Mexico
Zilkha Energy Company
Houston Exploration IPO 5.5 8.2 98% 73% Gulf of Mexico
Panaco, Inc./ NA 9.0 69% 87% Gulf of Mexico
Amoco Corporation
Vastar Resources, Inc./ NA 8.9 66% 90% Gulf of Mexico
Conoco Inc.
Flores & Rucks/ NA 1.7 38% NA Gulf of Mexico
Mobil Corp.
Noble Affiliates/ 5.3 7.7 67% 84% Gulf of Mexico
Energy Development Corp.
Burlington Resources/ NA 9.2 60% 80% Gulf of Mexico
Gulfstream Resources
American Exploration/ NA 6.5 76% 72% Gulf of Mexico
Private Company
Hunt Pet/W&T Offshr/ NA 6.3 70% 84% Gulf of Mexico
Columbia Gas
Forcenergy Inc./ 5.1 15.0 30% 71% South Pass 24,
Ashlawn Energy Inc. Varmillion 28
</TABLE>
Average: $ 187 $5.71 106% 4.2x 7.9 62% 82%
Median: 56 5.68 102% 5.2 8.0 67% 84%
High: 1,068 6.58 166% 5.5 15.0 98% 100%
Low: 37 5.00 72% 0.9 1.7 30% 71%
- --------------------------------------------------------------------------------
(1) The purchase price of reserves is the transaction value adjusted for
acquired non-oil and gas assets and assumed liabilities, including
development costs.
HIGHLY CONFIDENTIAL [SMITH BARNEY LOGO]
<PAGE> 12
PROJECT MERCURY
- --------------------------------------------------------------------------------
SELECTED EXPLORATION AND PRODUCTION ACQUISITIONS OF U.S. ONSHORE PROPERTIES
(US Dollars in millions)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
PURCHASE PRICE OF RESERVES (1) TRANSACTION
------------------------------ VALUE/
ACQUIROR/ DATE DATE TRANSACTION PROVED SEC-10 LTM
SELLER ANNOUNCED EFFECTIVE VALUE BOE VALUE EBITDA
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Lomak Petroleum Inc./ 01/03/97 01/03/97 $400 $9.22 83% 7.4
American Cometra, Inc.
KCS Energy/ 10/17/96 01/03/97 236 5.19 97% 5.2
MidAmerican Energy
Devon Energy/ 10/17/96 Pending 297 5.05 90% 3.5
Kerr-McGee
Abraxas Petroleum/ 09/18/96 09/30/96 28 5.98 81% NA
State Street Research
Questar Corp./ 08/23/96 04/01/96 111 4.27 NA NA
PMC Reserve Acquisition Co.
Energen (Taurus Exploration)/ 07/15/96 07/01/96 61 3.66 384% NA
Burlington Resources
Houston Exploration/ 07/01/96 05/01/96 65 3.49 NA NA
TransTexas Gas
National Energy Group/ 06/20/96 08/29/96 107 6.17 89% 9.5
Alexander Energy Corp.
DLB Oil and Gas/ 06/03/96 01/01/96 35 4.45 NA NA
Amerada Hess
Enron C&T/CALPERS/ 05/24/96 09/01/96 51 4.85 81% 4.9
Clinton Gas Systems
Magnum Petroleum/ 05/21/96 04/01/96 37 3.87 NA NA
Burlington Resources
ONEOK/ 04/22/96 12/01/95 47 5.47 NA NA
SCANA Petroleum
Denbury Resources/ 04/17/96 01/01/96 42 5.78 NA NA
Amerada Hess
Medallion Production/ 04/17/96 04/01/96 45 4.61 82% 3.8
Enron C&T
Municipal Light & Power/ 04/17/96 01/01/97 120 2.88 NA NA
Shell Western E&P
Enron C&T/ 04/15/96 03/31/96 171 6.01 73% 5.6
Hardy Oil & Gas
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
RESERVE STATISTICS
----------------------------------------------------------------------------------
PROVED
ACQUIROR/ RES. LIFE PERCENT PERCENT REGIONS OF
SELLER (YEARS) GAS DEVLPD. OPERATIONS
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Lomak Petroleum Inc./ 13.5 78% 67% Onshore Texas
American Cometra, Inc. Gulf of Mexico
KCS Energy/ 7.3 76% 86% Sawyer Canyon, Arklatex
MidAmerican Energy Anadarko, Gulf Coast
Devon Energy/ 8.8 53% 94% Permian Basin
Kerr-McGee and Rockies
Abraxas Petroleum/ 22.0 34% 100% Portilla & Happy Fields, Texas
State Street Research
Questar Corp./ 18.8 62% 70% Permian Basin
PMC Reserve Acquisition Co. Mid-Continent
Energen (Taurus Exploration)/ 22.2 100% 100% Black Warrior Basin
Burlington Resources
Houston Exploration/ 7.4 100% 49% Zapata Co., TX
TransTexas Gas
National Energy Group/ 11.1 88% 66% Anadarko, Arkoma, and
Alexander Energy Corp. Cotton Valley
DLB Oil and Gas/ 13.4 57% 95% Oklahoma
Amerada Hess
Enron C&T/CALPERS/ 9.4 79% 84% Appalachia
Clinton Gas Systems
Magnum Petroleum/ 11.2 100% 95% Texas Panhandle, Oklahoma
Burlington Resources
ONEOK/ 7.7 85% 87% Oklahoma
SCANA Petroleum
Denbury Resources/ 13.5 20% 80% Mississippi, Louisiana
Amerada Hess
Medallion Production/ 6.2 99% 95% Sutton County, West Texas
Enron C&T
Municipal Light & Power/ 23.4 100% 100% Beluga River Field, AK
Shell Western E&P
Enron C&T/ 9.8 71% 82% Texas and Gulf Coast
Hardy Oil & Gas
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The purchase price of reserves is the transaction value adjusted for
acquired non-oil and gas assets and assumed liabilities, including
development costs.
HIGHLY CONFIDENTIAL [SMITH BARNEY LOGO]
<PAGE> 13
PROJECT MERCURY
================================================================================
SELECTED EXPLORATION AND PRODUCTION ACQUISITIONS OF U.S. ONSHORE PROPERTIES
(US Dollars in millions)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
PURCHASE PRICE OF RESERVES(1)
-----------------------------
ACQUIROR/ DATE DATE TRANSACTION PROVED SEC-10
SELLER ANNOUNCED EFFECTIVE VALUE BOE VALUE
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Chesapeake Energy/ 04/13/96 01/01/96 $35 $3.60 NA
Amerada Hess
Louis Dreyfus/ 04/09/96 01/01/96 30 2.99 NA
Coastal Oil and Gas
Lomak Petroleum/ 04/08/96 01/01/96 36 2.81 NA
Private Company
Seagull Energy/ 03/26/96 01/01/96 26 4.40 NA
Private Company
HS Resources/ 02/26/96 06/18/96 235 7.50 186%
Tide West Oil Company
Floyd Oil/ 02/07/96 01/01/96 33 4.01 NA
Private Company
Contour Production/ 01/23/96 02/15/96 163 9.14 178%
Kelley Oil & Gas
Comstock Resources/ 01/22/96 01/01/96 104 4.79 70%
Blackstone Inc.
Patina Oil Corporation/ 01/17/96 05/03/96 229 3.68 46%
Gerrity Oil & Gas
Joint Energy Dev Inv/ 10/31/95 02/16/96 290 5.36 128%
Coda Energy, Inc.
Louis Dreyfus/ 06/13/95 01/01/95 93 4.79 184%
American Exploration
Barrett Resources/ 05/03/95 07/08/95 347 4.89 131%
Plains Petroleum
Coho Energy, Inc./ 11/11/94 12/08/94 50 2.92 96%
Interstate Natural Gas
</TABLE>
<TABLE>
<CAPTION>
RESERVE STATISTICS
TRANSACTION --------------------------------------------
VALUE / PROVED
ACQUIROR/ LTM RES. LIFE PERCENT PERCENT REGIONS OF
SELLER EBITDA (YEARS) GAS DEVLPD OPERATIONS
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Chesapeake Energy/ NA 10.7 91% 95% S. Oklahoma
Amerada Hess
Louis Dreyfus/ NA 13.4 83% 85% Anadarko
Coastal Oil and Gas
Lomak Petroleum/ NA 25.4 83% 79% TX, OK, NM, Rocky Mtn
Private Company
Seagull Energy/ NA 8.0 86% 85% Oklahoma, Texas
Private Company
HS Resources/ 11.0 8.7 90% 87% Anadarko, Arkoma, East Texas
Tide West Oil Company
Floyd Oil/ NA 21.8 59% 73% OK, TX, NM, MS
Private Company
Contour Production/ 14.9 11.4 96% 58% N & S Louisiana
Kelley Oil & Gas
Comstock Resources/ 5.2 NA 76% 72% Polk Co, Texas
Blackstone Inc.
Patina Oil Corporation/ 5.8 10.7 67% 75% DJ Basin
Gerrity Oil & Gas
Joint Energy Dev Inv/ 9.5 16.0 14% 56% West Texas, Kansas, Oklahoma
Coda Energy, Inc.
Louis Dreyfus/ NA 8.8 100% 68% Sawyer Field, West Texas
American Exploration
Barrett Resources/ 11.2 12.1 83% 89% Hugoton and Permian,
Plains Petroleum and Offshore La
Coho Energy, Inc./ 4.4 13.4 100% 100% Monroe Field, La
Interstate Natural Gas
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Average: $112 $4.74 125% 7.3x 13.0 77% 82%
Median 63 4.70 93% 5.6 11.2 83% 85%
High: 347 9.14 384% 14.9 25.4 100% 100%
Low: 26 2.81 46% 3.5 6.2 14% 49%
- ---------------------------------------------------------------------------------------------
</TABLE>
- -------------
(1) The purchase price of reserves is the transaction value adjusted for
acquired non-oil and gas assets and assumed liabilities, including
development costs.
HIGHLY CONFIDENTIAL [SMITH BARNEY LOGO]
<PAGE> 14
PROJECT MERCURY
- --------------------------------------------------------------------------------
INTERNATIONAL AND POTENTIAL NON-CORE E&P ASSETS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
MERCURY
COUNTRY AREA/FIELDS WI OPERATOR/PARTNERS PROJECT DESCRIPTION OTHER COMMENTS
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Azerbaijan Azeri, Chiraq 4.8175% Consortium including o Located in 400 feet of o Completed the sale of 5.0% of its
and deepwater BP (17.1%), Amoco water 120 miles offshore working interest in the project to
portion of the (17%), SOCAR (10%), in the southern portion of Exxon, ITOCHU and Unocal for
Gunashli Fields Lukoil (10%), Statoil the Caspian Sea $130 million, consisting of $88
("ACG") (8.6%), Unocal million received and subsequent
(9.5%) and 5 others o Aggregate capital installments of $22 million at
investment estimated at first production and $20 million
between $7-8 billion to when the unit reaches production
develop an estimated 4 of 200,000 bopd
billion BOE over a 30
year project life o The acquirers will fund all of
Mercury's future obligations in
o Mercury should begin to the project retroactive to January
receive income from the 1, 1996 until all such
project about 2003 due to expenditures and accrued interest
the sale agreement are recovered from Mercury's shared
of production from the project
Karabakh Project 30.0% Lukoil, AGIP, LUKAgip o Located north of the Gunashli
and SOCAR field in the Caspian Sea
o Should begin drilling in 1997
after completion of 3-D seismic
survey
o Estimated unrisked recoverable
reserves of between 1-2 billion
BO; but untested structure
o Transports approximately o The sale of the 5.0% interest in
Gunashli Natural 49.0% Mercury, Exxon, 150 mmcfd of gas to shore the ACG project conveyed the
Gas Gathering ITOCHU and Unocal previously being vented by right to receive 51% of payments
and Compression Gunashli field due Pennzoil for reimbursement
Project of the gas utilization project
o Creditable against Mercury's
share of a bonus payable to
the Azerbaijani government
for the ACG and Karabakh
projects
</TABLE>
HIGHLY CONFIDENTIAL [SMITH BARNEY LOGO]
<PAGE> 15
PROJECT MERCURY
- --------------------------------------------------------------------------------
INTERNATIONAL AND POTENTIAL NON-CORE E&P ASSETS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
MERCURY
COUNTRY AREA/FIELDS WI OPERATOR/PARTNERS PROJECT DESCRIPTION OTHER COMMENTS
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Egypt Southeast Gulf of 50% Repsol - The Block is approximately the
Suez Block size of 44 Gulf of Mexico
blocks, located offshore
- Seismic is being evaluated and a
well should be spudded in the
first quarter of 1997
Southwest Gebel 87.5% Mercury/Forum - The Block is approximately the
El-Zeit Block size of 26 Gulf of Mexico
(adjoins SE Gulf blocks, located offshore
of Suez Block)
- Farm-in agreement signed in 1995
with Forum Exploration
Company
- Seismic acquistion in progress
- A well should be spudded in mid-1997
West Feiran 50.0% AGIP - The block is approximately the
Block size of 17 Gulf of Mexico blocks
- A well will be spudded near the
end of 1997 after completion of
3-D seismic work
Central Gulf of 100.0% -- - The Block covers 34 square
Suez kilometers and was awarded in
June 1996, subject to
verification by Egyptian
Parliament
</TABLE>
HIGHLY CONFIDENTIAL [SMITH BARNEY LOGO]
<PAGE> 16
PROJECT MERCURY
- --------------------------------------------------------------------------------
INTERNATIONAL AND POTENTIAL NON-CORE E&P ASSETS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
MERCURY
COUNTRY AREA/FIELDS WI OPERATOR/PARTNERS PROJECT DESCRIPTION OTHER COMMENTS
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Qatar Block 8 100.0% -- - A 1,055 square mile concession
adjacent to three producing
oilfields in the offshore Arabian
Gulf
- Drilling of the first of four
planned wells will begin in first
quarter of 1997, with estimated
recoverable reserves between 3-
4 billion barrels
Venezuela East Falcon Unit NA Mercury, Vinnecler SA - Service agreement with
in NW Venezuela Maraven in which Maraven
pays all costs, subject to a per-
bbl fee from production
- Field reactivation with
production expected to reach
2,000 bopd by year end 1996
and current gross proved
reserves of 12 MMBO
- Also includes two undeveloped
gas fields and several
exploration prospects
Canada Zama area in NA - Joint Gulf Canada - Natural gas exploration area
northern Alberta Venture
</TABLE>
HIGHLY CONFIDENTIAL [SMITH BARNEY LOGO]
<PAGE> 17
PROJECT MERCURY
- -------------------------------------------------------------------------------
SELECTED CENTRAL ASIAN EXPLORATION AND PRODUCTION TRANSACTIONS
(US Dollars in millions)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
TRANSACTION VALUE
-------------------------
ACQUIROR(S) / DATE TRANSACTION DEVELOPED RECOVERABLE
SELLER ANNOUNCED VALUE BOE BOE
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
LUKoil/ 01/16/97 NA NA NA
Chevron Corp.
Atlantic Richfield / 09/19/96 $5,000 NA NA
AO Lukoil Holding
Melrose Energy / 09/05/96 15 $0.53 $0.18
Evikhon Oil
Hurricane Hydrocarbons / * 08/29/96 340 2.99 1.07
JSC Yuzhneftegaz
Exxon, Itochu and Unocal / 07/30/96 132 NA 0.66
Pennzoil Co.
Mobil Corp. / 05/03/96 1100 NA 0.73
Republic of Kazakhstan
Undisclosed / 04/11/96 10 3.42 NA
Snyder Oil Corp.
Itochu Corp. / 03/12/96 NA NA NA
McDermott International, Inc.
Fountain Oil Inc. / 2Q 1995 8 0.30 0.09
Undisclosed
Petro-Hunt / 02/13/95 50 5.68 0.81
Vanguard Petroleum
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
ACQUIROR(S) / REGIONS OF
SELLER OPERATIONS COMMENTS
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LUKoil/ Tenghiz, Kazakhstan Chevron sold 5% interest in Tenghiz project to
Chevron Corp. LUKoil to increase Russian interest in
Kazakh project
Atlantic Richfield / Caspian Sea, Kazakhstan, Azerbaijan Joint venture to develop several significant
AO Lukoil Holding projects over the next ten years.
Melrose Energy / Siberia, Russia Melrose acquired Caraline Trading Ltd., which
Evikhon Oil represents 20% of Evikhon
Hurricane Hydrocarbons / * Kazakhstan Hurricane Hydrocarbons acquired the Kazakh
JSC Yuzhneftegaz Government's interest in Yuzhneftegaz for
$120mm, plus $220mm in development costs.
Exxon, Itochu and Unocal / Azer-Chiraq-Gunashli, Azerbaijan Companies will fund PZL's obligations until all
Pennzoil Co. expenditures and accrued interest are recovered
from Pennzoil's share of production from the
ACG unit.
Mobil Corp. / Tenghiz, Kazakhstan Government of Kazakhstan sold Mobil 50% of its
Republic of Kazakhstan stake in the Tenghiz project.
Undisclosed / Logovskoye, Russia Snyder sold 15.4% of its interest in its
Snyder Oil Corp. Russian subsidiary, SOCO Perm Russia.
Itochu Corp. / Azeri-Chiraq-Gunashli, Azerbaijan McDermott sold its 2.45% interest in the ACG
McDermott International, Inc. unit.
Fountain Oil Inc. / Maylop Field, Russia Fountain acquired a private company with a 31%
Undisclosed interest in the Maykop gas condensate field.
Petro-Hunt / Siberia, Russia Petro-Hunt acquired a 20% interest in Magma Oil
Vanguard Petroleum Company, which operates the Yuzhnoye field in
Siberia.
</TABLE>
<TABLE>
---------------------------------
<S> <C> <C>
Average: $2.58 $0.59
Median: $2.99 $0.70
High: $5.68 $1.07
Low: $0.30 $0.09
---------------------------------
</TABLE>
Note:
- -----
* Transaction cost includes present value of future development costs
HIGHLY CONFIDENTIAL [SMITH BARNEY LOGO]
<PAGE> 18
PROJECT MERCURY
- -------------------------------------------------------------------------------
SELECTED MIDDLE EAST/NORTH AFRICAN EXPLORATION AND PRODUCTION TRANSACTIONS
(US Dollars in millions)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
TRANSACTION VALUE
-----------------------
ACQUIROR/ DATE TRANSACTION DEVELOPED RECOVERABLE
SELLER ANNOUNCED VALUE BOE BOE
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Seagull Energy/ 07/22/96 $516 $8.83 NA
Global Natural Resources
Apache Energy/ 03/28/97 $372 $7.11 NA
Phoenix Resources
Seagull Energy 07/22/96 $ 74 $7.71 $4.35
Exxon Corp.
NOMECO 02/28/95 $ 49 $2.47 NA
Walter International
Canadian Leader Energy 03/01/96 $ 11 $1.58 $1.31
Marathon Oil
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
ACQUIROR/ REGIONS OF
SELLER OPERATIONS COMMENTS
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Seagull Energy/ Gulf Coast, Egypt, Russia, Seagull acquired international presence in the E&P arena
Global Natural Resources Indonesia, and other through acquisition.
Apache Energy/ Egypt Increases Apache's exposure to operations in the Qurun
Phoenix Resources and Khalda Blocks
Seagull Energy Egypt Acquisition of Exxon's Egyptian properties supplemented
Exxon Corp. Seagull's presence in the region.
NOMECO Congo, Equitorial Guinea, Tunisia NOMECO acquired properties through the issuance of
Walter International it parents stock (CMS Energy) and cash.
Canadian Leader Energy Offshore Tunisia Canadian Leader acquired Marathon's two Tunisian
Marathon Oil subsidiaries for $11.4mm in cash.
</TABLE>
----------------------------
Average: $5.54 $2.83
Median: $7.11 $2.83
High: $8.83 $4.35
Low: $1.58 $1.31
----------------------------
HIGHLY CONFIDENTIAL [SMITH BARNEY LOGO]
<PAGE> 19
PROJECT MERCURY
- --------------------------------------------------------------------------------
SUMMARY OF CHEVRON STOCK OWNED BY MERCURY
o Mercury owns 18,071,036 shares of Chevron stock ("CHV", trading price
of $65.50) worth approximately $1,184 million
o These shares are deposited with exchange agents for possible exchange
for $402.5 million principal amount of 6.50% Senior Debentures due 2003
and %500.0 million principal amount of 4.75% Senior Debentures due 2003
o Mercury has a tax basis equal to its cost basis of $33.68 per share
less $8.28 per shares for a tax basis of $25.40, indicating a current
potential taxable gain of $725 million and a tax liability of $254
million at a 35% corporate rate if the shares were exchanged today
o The true present value of the liability depends on several factors:
(i) When one believes the shares will be exchanged, which is a
function of the current yield of the two debentures versus
the dividend yield on CHV stock
<TABLE>
<CAPTION>
6.50% SENIOR DEBS 4.75% SENIOR DEBS
DUE 2003 DUE 2003 CHV COMMON
------------------ ----------------- ----------------
<S> <C> <C> <C>
TRADING PRICE (1/28/97) $156.50 $114.88 $65.50
ANNUAL PAYMENT $6.50 $4.75 $2.16
CURRENT YIELD 4.15% 4.13% 3.30%
</TABLE>
(ii) The expected growth rate of CHV common stock versus the
cost of carry
(iii) Negative current arbitrage of approximately $10.9 million
per year, which will narrow as the dividend increases
HIGHLY CONFIDENTIAL [SMITH BARNEY LOGO]
<PAGE> 20
Mercury Products Company PROJECT MERCURY
- -------------------------------------------------------------------------------
SUMMARY OF BUSINESS
Mercury's refining and marketing operations are conducted through Mercury
Products Company (MPC), a wholly owned subsidiary. MPC is Mercury's second
largest business segment with identifiable assets of $871.5 million as of
January 1, 1996, which constitutes approximately 20% of total assets. MPC
manufactures and markets refined products such as motor oils, lubricants and
other industrial specialty products principally under the Mercury trade name.
In 1995, operating income for the segment was $68.9 million, a significant drop
from the 1993 high of $90 million. Industry analysts expect the 1997 operating
income to return to the $90 million range. Smith Barney estimates a valuation
for MPC in the $1,075 million to $1,200 million range.
ACHIEVEMENTS, OBJECTIVES AND HIGHLIGHTS
Mercury's motor oil has been the top selling brand in the United States for the
past eleven years and continues to gain market share. Two major downstream
capital projects should further strengthen MPC's leading position. These
involve a $200 million residual fuel conversion of the Louisiana Atlas refinery
and the $500 million Excel Paralubes joint venture with Conoco. Together, these
projects are expected to boost pretax earnings by $25 million in 1997.
MPC continues to emphasize international growth as the Company entered into new
ventures in Peru, Venezuela, China, India and Russia. MPC markets motor oil
and lubricant products in 62 countries through ten company owned distribution
centers and 51 distributors and joint ventures. On January 22, 1997 MPC
announced that it is launching a worldwide advertising campaign called "Stop.
Go. Mercury" designed to change the way people think about motor oil. With
increased refining capacity, international expansion and new advertising focus,
MPC appears to be poised to enter a period of significant expansion.
HIGHLY CONFIDENTIAL [SMITH BARNEY LOGO]
<PAGE> 21
Products PROJECT MERCURY
- -------------------------------------------------------------------------------
In addition to Mercury brand motor oil and lubricants, MPC manufactures and/or
distributes the following brand name products:
o GUMOUT: fuel injector and carburetor cleaners
o WOLF'S HEAD: value-priced line of lubricants
o GOJO: hand cleaner products
o PRESTONE: antifreeze
o FRIGC FR-12: refrigerant
o Z-Line: spray and marine protective lubricant
In addition to MPC's strategy of developing new products, the Company seeks to
acquire entities with associated product lines that can be efficiently
distributed through MPC's existing distribution system. In September, 1995, MPC
acquired the assets of Viscosity Oil division of Case Corporation for $33.6
million. Viscosity Oil is a leading supplier of premium quality lubricants to
the United States and Canadian off-road industry and of factory-fill lubricants
for Case's North American manufacturing plants. Viscosity Oil is an example of
an acquisition that complements MPC's existing product lines and moves the
Company toward the eventual goal of becoming a consumer products company with
broad product categories.
HIGHLY CONFIDENTIAL [SMITH BARNEY LOGO]
<PAGE> 22
REFINING PROJECT MERCURY
- -------------------------------------------------------------------------------
MPC owns and operates two small refineries and is completing construction of a
base oil facility:
o ROUSEVILLE, PENNSYLVANIA REFINERY
0 lube oil and specialty refinery with capacity of 16,500 b/d
0 experienced a fire in October 1995 that killed five workers
0 production dropped 30% while the refinery was repaired
0 historically operates at 95% capacity
o SHREVEPORT, LOUISIANA ATLAS REFINERY
0 lube oil and specialty refinery with capacity of 46,200 b/d
0 $200 million residual fuel conversion just completed
0 Gasoline and middle distillate production is expected to increase from
23,000 b/d to 40,000 b/d as a result of the upgrade
o EXCEL PARALUBES BASE OIL FACILITY
0 50-50 joint venture with Conoco for a base oil facility at Conoco's Lake
Charles refinery
0 lube oil hydrocracker/isodewaxer with capacity of 18,000 b/d of base oil
0 construction cost of $500 million was project financed and is off
balance sheet for Pennzoil
HIGHLY CONFIDENTIAL [SMITH BARNEY LOGO]
<PAGE> 23
REFINING (CONT.) PROJECT MERCURY
- -------------------------------------------------------------------------------
The two refineries are located in proximity to major areas of oil production.
Historically, approximately 40-50% of MPC's refinery crude feedstock and 58% of
its base oil needs have been supplied through Mercury's domestic production.
The remainder is purchased from other suppliers at higher cost. Mercury has
taken steps to supply more of its domestic crude feedstock to MPC's refineries
and the Excel Paralubes joint venture should alleviate dependence on external
suppliers of base oils (1). Such cost savings should result in higher earnings
margins in 1997.
Since MPC is principally a motor oil and lubricants producer, it is exposed to
variations in refining margins because two thirds of its products are composed
of gasoline, naptha and middle distillates. Consequently, MPC hedges against
commodity price variations. Such hedges have recently depressed earnings in a
high commodity price market environment.
- ---------------------------
(1) Base oils are primary feedstock for motor oil.
HIGHLY CONFIDENTIAL [SMITH BARNEY LOGO]
<PAGE> 24
MERCURY PRODUCTS SUMMARY INCOME INFORMATION AND VALUATION PROJECT MERCURY
- -------------------------------------------------------------------------------
The Rouseville refinery fire and capital demands for the Shreveport refinery
upgrade have limited capital expenditure on operating activities. With the
completion of the capital projects and the initiation of production at Excel
Paralubes, operating income and EBITDA numbers are expected to rebound
significantly.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenues 1,539.4 1,509.7 1,507.6
EBIT 93.9 68.9 68.9 86.8 90.0
DD&A 38.4 35.5 30.5 27.6 27.0
EBITDA 132.3 104.4 99.4 114.4 117.0
EBITDA Growth (%) 27% 5% -13% -2%
- --------------------------------------------------------------------------
</TABLE>
VALUATION
In order to conduct a preliminary valuation of MPC, we have used a weighted
average comparable traded company analysis. In analyzing MPC's multiple lines
of business, we could not clearly identify a publicly traded company that was
involved in similar activities. Therefore, we focused on the characteristics of
each of MPC's segments and selected comparable companies that closely fit such
segments. Thus, we put together comparable public company analysis for chemical
products manufacturers, refiners and retail automotive suppliers. After
calculating multiples for each of the three comparable company segments, we
weighted each segment by its contribution to the MPC. As a result, we achieved
precise multiples to effectively value the MPC.
The valuation methodology applied is based on multiples of operating income,
and EBITDA. This analysis is attached and is summarized in Tab 1. Based on the
weighted average comparable traded multiple analysis we estimate MPC's current
value to be in the $1,075 to $1,200 range.
HIGHLY CONFIDENTIAL [SMITH BARNEY LOGO]
<PAGE> 25
Strategic Rationale: Trade Sale Project Mercury
- -------------------------------------------------------------------------------
If Unicorn determines that MPC is a non-strategic segment, a trade sale
for cash would be the simplest transaction structurally and would also
meet two important objectives: (1) raising significant cash proceeds
and (2) removing management involvement.
Positive Features
i) A clean trade sale to an industry purchaser would enhance market
perception of the acquisition
ii) MPC's market position is such that it would be material enough
to be a strategic acquisition for large players
Negative Features
i) Perception that Unicorn is a forced seller
ii) Unicorn may be trying to sell near the bottom of the cycle
iii) Potential purchasers are also likely to be financially
constrained
HIGHLY CONFIDENTIAL [SMITH BARNEY LOGO]
<PAGE> 26
Strategic Rationale: Recapitalization and Sale of a
Significant Interest Via IPO Project Mercury
- -------------------------------------------------------------------------------
In such a transaction, Unicorn would recapitalize the company by
taking on a significant amount of external debt. Subsequently, Unicorn
would sell a significant portion (or all) of the equity of the newly
formed company via an IPO. Such a transaction is well suited for the
current strength in the equity markets.
Positive Features
i) Strong market position and well known brand name
ii) Established operational management
iii) Established sector in stock market
iv) Would be perceived as a recovery play
Negative Features
i) May raise less cash than outright disposal
ii) Dependent on unpredictability of equity and IPO markets
iii) Retained management involvement, at least for the short to
medium term
HIGHLY CONFIDENTIAL [SMITH BARNEY LOGO]
<PAGE> 27
Strategic Rationale: Spin-Out to Shareholders Project Mercury
- -------------------------------------------------------------------------------
In such a disposal, Unicorn would recapitalize the company by taking
on a significant amount of external debt. Subsequently, Unicorn would
spin-out the equity in the company to its shareholders. Alternatively,
Unicorn could adopt a hybrid approach by selling a small portion of
the equity via an IPO to establish a trading price with the remainder
of the equity being distributed to Unicorn's shareholders, e.g. as in
the Unicorn Corporation/Unicorn Resources transaction.
Positive Features
-----------------
i) Higher confidence of successful outcome than an IPO
ii) Low capital expenditure requirements may enable Unicorn to
increase leverage in the spun-out vehicle
iii) Removes management involvement
iv) May enhance earnings and cashflow in short-to-medium term
Negative Features
-----------------
i) Raises less cash than a trade sale
HIGHLY CONFIDENTIAL [SMITH BARNEY LOGO]
<PAGE> 28
Strategic Rationale: Retention of Business Project Mercury
- -------------------------------------------------------------------------------
MPC has a leading market position and the Mercury name is known
worldwide. Unicorn may choose to retain MPC and use it as a vehicle
for international expansion and for natural gas distribution business.
Positive Features
-----------------
i) Market leadership position
ii) Name recognition
iii) Vehicle to expand into power and natural gas distribution
businesses
Negative Features
-----------------
i) Does not realize cash
ii) Lack of operational synergies with Unicorn's existing
businesses
iii) Exposure to refining margins
iv) Possible market valuation of Unicorn as an integrated company
HIGHLY CONFIDENTIAL [SMITH BARNEY LOGO]
<PAGE> 29
PROJECT MERCURY
- -------------------------------------------------------------------------------
VALUATION OF SELECTED COMPOSITE PETROLEUM PRODUCTS, REFINING AND PRODUCT
MARKETING COMPANIES
(US$ in millions, except for per share and multiple data)
<TABLE>
<CAPTION>
ENTERPRISE VALUE(2) /
--------------------------------------------------
EQUITY EBIT(3) EBITDA(4)
PRICE AT MARKET ENTERPRISE ----------------------- -----------------------
COMPANY 1/28/97 VALUE(1) VALUE(2) 1995(5) 1996E(5) 1997E(5) 1995(5) 1996E(5) 1997E(5)
- ------- ------- ------ ------ ----- ----- ----- ----- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
LUBE OIL MANUFACTURERS
Quaker State $ 14.00 $ 503 $ 699 25.0x 17.0x 15.5x 10.4x 8.4x 8.0x
WD-40 Company 51.00 395 388 11.7 12.1 10.5 11.4 11.4 9.9
Witco 30.75 1,744 2,600 19.4 16.2 15.7 11.0 9.9 9.7
Petrolite Corp. 46.50 527 528 35.2 48.0 22.0 15.5 18.2 12.3
Quaker Chemical 16.25 139 155 11.1 11.1 14.1 7.1 6.7 7.8
Lubrizol Corp. 33.63 2,004 2,076 10.6 11.3 11.0 7.7 7.9 7.7
- --------------------------------------------------------------------------------------------------------------------
Average - Weighted 60% 18.8x 19.3x 14.8x 10.5x 10.4x 9.2x
- --------------------------------------------------------------------------------------------------------------------
REFINERS AND MARKETERS
Total Petroleum N.A $ 10.00 $ 399 $ 837 nm 49.3x 24.6x 11.8x 10.3x 8.5x
Holly Corp. 26.25 217 241 6.3 7.3 6.0 4.2 4.5 3.7
Giant Industries 15.50 173 259 12.3 5.9 5.6 7.6 4.2 4.1
- --------------------------------------------------------------------------------------------------------------------
Average - Weighted 25% 9.3x 20.8x 12.1x 7.9x 6.3x 5.4x
- --------------------------------------------------------------------------------------------------------------------
AUTOMOTIVE RETAIL SUPPLIERS
Echlin Inc. $ 30.13 $1,880 $2,630 10.4x 10.7x 9.3x 8.0x 7.8x 6.7x
Genuine Parts Co. 43.75 5,267 5,253 10.3 9.5 8.6 9.5 8.9 7.9
Goodyear Tire & Rubber 54.25 8,428 9,945 8.7 7.8 7.0 6.4 6.2 5.2
Snap-on Incorporated 37.13 2,261 2,412 19.2 15.3 13.4 11.0 9.9 10.7
SPX Corporation 41.13 603 864 16.3 11.2 9.8 10.2 8.4 7.9
- --------------------------------------------------------------------------------------------------------------------
Average - Weighted 15% 13.0x 10.9x 9.6x 9.0x 8.3x 7.6x
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE 15.6x 18.4x 13.3x 9.6x 9.1x 8.0x
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
EQUITY VALUE(1)
----------------------------------------------------
AFTER-TAX CASH FLOW(6) NET INCOME
------------------------ -----------------------
Company 1995(5) 1996E(5) 1997E(5) 1995(5) 1996E(5) 1997E(5)
- ------- ----- ----- ---- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
LUBE OIL MANUFACTURERS
Quaker State 7.7x 6.8x 6.6x 28.0x 21.0x 20.1x
WD-40 Company 17.2 18.0 15.8 18.8 19.8 17.2
Witco 9.7 10.3 9.9 26.4 30.6 27.7
Petrolite Corp. 15.5 16.0 13.5 43.9 35.2 25.1
Quaker Chemical 9.3 10.7 9.3 19.9 19.9 15.5
Lubrizol Corp. 8.9 8.8 8.6 15.0 15.7 15.3
- --------------------------------------------------------------------------------------
Average - Weighted 60% 11.4x 11.7x 10.6x 25.3x 23.7x 20.1x
- --------------------------------------------------------------------------------------
REFINERS AND MARKETERS
Total Petroleum N.A 36.3x 33.3x 14.3x nm nm nm
Holly Corp. 5.7 5.9 4.8 11.4 13.5 10.3
Giant Industries 7.5 4.2 4.1 21.6 8.6 8.2
- --------------------------------------------------------------------------------------
Average - Weighted 25% 16.5x 14.4x 7.7x 16.5x 11.1x 9.3x
- --------------------------------------------------------------------------------------
AUTOMOTIVE RETAIL SUPPLIERS
Echlin Inc. 7.4x 6.8x 6.2x 12.2x 13.2x 11.1x
Genuine Parts Co. 14.4 13.6 12.5 17.0 16.2 14.2
Goodyear Tire & Rubber 7.4 6.9 6.5 13.0 12.2 10.7
Snap-on Incorporated 16.8 15.4 12.0 20.0 18.0 15.7
SPX Corporation 12.4 9.9 8.3 113.8 32.6 19.8
- --------------------------------------------------------------------------------------
Average - Weighted 15% 11.7x 10.5x 9.1x 35.2x 18.5x 14.3x
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
WEIGHTED AVERAGE 12.7x 12.2x 9.7x 24.6x 19.7x 16.5x
- --------------------------------------------------------------------------------------
</TABLE>
Notes:
- --------------------------
(1) Equity Market Value = Total Shares Outstanding (calculated by the treasury
method) * Current Common Stock Price.
(2) Enterprise Value = Equity Market Value + Market Value of Preferred + Total
Debt (principal amount) + Minority Interest - Cash and Marketable
Securities.
(3) EBIT = Earnings before interest, and taxes.
(4) EBITDA = Earnings before interest, taxes, depreciation, and amortization.
(5) Historical numbers and forward projections are Smith Barney estimates based
on Wall Street research.
(6) After-Tax Cash Flow = Net Income + deferred taxes + depreciation + other
non-cash items.
HIGHLY CONFIDENTIAL [SMITH BARNEY LOGO]
<PAGE> 30
Overview of Jiffy Lube Project Mercury
- -------------------------------------------------------------------------------
BUSINESS SUMMARY
Jiffy Lube franchises, owns and operates automotive lubrication and fluid
maintenance service centers and is the domestic market leader in this business.
At December 31, 1996 there were over 1,400 Jiffy Lube service centers in the US
and 9 centers internationally, of which 486 were company-owned. During 1996,
Jiffy Lube centers serviced over 19 million cars. Jiffy Lube's services
includes changing engine motor oil and filter, lubricating the chassis and
checking and replenishing various fluids. System sales for Jiffy Lube centers
amounted to $656.6 million in 1995, an increase of approximately 8% over 1994.
Mercury completed the acquisition of 80% of the common stock of Jiffy Lube
through a restructuring in January 1990. In August 1991, a newly formed
Mercury subsidiary commenced a tender offer for the remaining outstanding
shares. Post-tender, Mercury owned in excess of 93% of Jiffy Lube. In October
1991, Mercury exchanged the remaining outstanding share of Jiffy Lube for $6
cash and completed the "going-private" transaction. Jiffy Lube's tender and
exchange acquired the outstanding interest for $9.2 million, implying a total
equity value of $52.3 million for the entire company. However, Jiffy Lube had a
significant amount of debt outstanding, amounting to $110 million in total.
The "going-private" transaction gave rise to litigation brought by franchisees.
As part of a settlement with one of the franchisees, Jiffy Lube agreed to
reduce the royalties paid by franchisees to 5% of gross sales or 4% if paid
promptly.
ACHEIVEMENTS, OBJECTIVES AND HIGHLIGHTS
Under Mercury's control, Jiffy Lube has achieved many successes. Operationally,
Jiffy Lube has brought in new management, consolidated operations, settled
litigation with franchisees, instituted a new marketing program and established
a new point-of-sale ("POS") system. Financially, Mercury has increased revenues
by approximately 8.5% per year and increased average ticket price per car by 2%
annually which in 1994, finally led to profitability.
<TABLE>
<CAPTION>
SYSTEM-WIDE INFORMATION
- -----------------------------------------------------------------------
As of Year End:
===================================================
1991 1992 1993 1994 1995
<S> <C> <C> <C> <C> <C>
System Sales - mm's $ 474.7 $ 500.5 $ 539.3 $ 607.5 $ 656.6
Stores 1,076 1,055 1,071 1,141 1,207
Daily Customers/Store 43.4 43.7 44.9 47.5 47.7
Average Ticket Price $ 32.15 $ 33.23 $ 33.60 $ 34.09 $ 34.71
- -----------------------------------------------------------------------
</TABLE>
HIGHLY CONFIDENTIAL [SMITH BARNEY LOGO]
<PAGE> 31
PROJECT MERCURY
- --------------------------------------------------------------------------------
OVERVIEW OF JIFFY LUBE
Since assuming control, Mercury has increased its number of stores from 1,076
to over 1,400 and, more importantly, has rationalized the system by closing
non-performers and improving the overall quality of its franchisees. At the
same time, Jiffy Lube has maintained its 50+ percent share of the quick oil and
lube market.
JIFFY LUBE CENTERS
[GRAPH]
Jiffy Lube is expected to continue to benefit from improved general economic
conditions and increasing environmental concerns over the disposal of used
motor oil. Largely due to these two factors, Mercury forecasts that the
installed share of motor oil sales volumes, compared to Do-It-Yourself (DIY),
will continue to increase to approximately 50% in the next few years.
HIGHLY CONFIDENTIAL [SMITH BARNEY LOGO]
<PAGE> 32
PROJECT MERCURY
- --------------------------------------------------------------------------------
NATIONWIDE DISTRIBUTION NETWORK OF OVER 1,400 JIFFY LUBE CENTERS
[MAP OF UNITED STATES]
HIGHLY CONFIDENTIAL [SMITH BARNEY LOGO]
<PAGE> 33
Industry Review Project Mercury
- -------------------------------------------------------------------------------
The installed oil market is a highly fragmented industry. There is tremendous
risk of market saturation and overlap. In addition, there are few real barriers
to entry and many competitors are becoming more willing to discount the price
of Jiffy Lube's services in order to build customer traffic to increase their
other, higher margin repair services.
However, Jiffy Lube has demonstrated that as a system it is relatively nimble
and able to implement strategic changes. The centers are willing to compete
with local competitors and are quite satisfied to gain market share through
converting the DIY market. Environmental concerns for used motor oil and the
increasing complexity of new cars combine to make do-it-yourself maintenance
less attractive. Demographically, the increasing average age and number of cars
on the road suggests that the overall market may be expanding.
An important element of success in the future will be Jiffy Lube's ability to
expand its operations and build customer traffic on a same-store basis. The
Jiffy Lube-Sears agreement is a good example of a strategic alliance that
should benefit both entities. Jiffy Lube will receive several hundred new,
low-cost sites, the existing oil change and lubrication business of Sears' auto
centers, and the additional traffic brought in by Jiffy Lube's national brand
name. Sears will receive rent and a royalty from the lube business, additional
traffic for its products and repair centers generated by Jiffy Lube's customer
base, and association with a trusted name. This type of alliance is expected to
spread throughout the industry as competitors seek lower costs, greater
customer traffic and increased opportunities to cross-sell.
U.S. CARS IN REGISTRATION (1) AVERAGE AGE OF U.S. VEHICLE FLEET (2)
- -------------------------------------------------------------------------------
[BAR GRAPH] [BAR GRAPH]
[LINE GRAPH] [LINE GRAPH]
(1) AMERICAN AUTOMOBILE (2) WARD'S AUTOMOTIVE YEARBOOK
MANUFACTURER'S ASSOCIATION
HIGHLY CONFIDENTIAL [SMITH BARNEY LOGO]
<PAGE> 34
PROJECT MERCURY
- --------------------------------------------------------------------------------
SUMMARY INCOME INFORMATION
REVENUES TO MERCURY EBITDA TO MERCURY
[LINE GRAPH] [LINE GRAPH]
Although Jiffy Lube's five year annual revenue growth is less than 10%,
operating income has grown dramatically. Finally, free from restructuring,
equipment spending, litigation, store closures and environmental charges that
have hindered operating results for the past four years, Jiffy Lube appears to
be poised for growth. Wall Street analysts anticipate 15 to 30 percent growth
over the next three years as Mercury finally realizes the benefits of the
acquisition and restructuring.
SEGMENT FINANCIAL INFORMATION
<TABLE>
<CAPTION>
YEARS ENDED
- ------------------------------------------------------------------------------------------------------
$ MILLIONS 1991 1992 1993 1994 1995
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues $129.7 $174.4 $219.9 $258.1 $289.2
EBITDA 0.1 (2.1) (3.5) 18.6 31.3
Operating Income (7.8) (13.4) (17.6) 2.8 13.2
Depreciation 7.9 11.3 14.1 15.8 18.1
Capital Expenditure 4.9 25.8 21.7 18.9 40.8
Identifiable Assets 270.2 289.8 305.7 304.4 340.0
- ------------------------------------------------------------------------------------------------------
</TABLE>
HIGHLY CONFIDENTIAL [SMITH BARNEY LOGO]
<PAGE> 35
PROJECT MERCURY
- -------------------------------------------------------------------------------
VALUATION
In the absence of more detailed specific information we have valued Jiffy Lube
based on comparable trading EBITDA and EBIT multiples. THIS WOULD YIELD AN
ENTERPRISE VALUE OF $200 TO $225 MILLION FOR THE ENTIRE COMPANY. WE VIEW THIS
AS A CONSERVATIVE VALUATION DUE TO THE POTENTIAL UPSIDE IN THE BUSINESS AND
JIFFY LUBE'S CURRENT DOMINANT POSITION AND STRATEGY. We summarize our findings
in Tab 1 and a multiples valuation is attached.
STRATEGIC RATIONALE
As with Mercury's Motor Oil and Automotive Products division, we do not believe
that the Jiffy Lube operations would be strategic to Olympus and it would
accordingly be a candidate for disposal post acquisition. We believe the market
would be receptive to a national brand name such as Jiffy Lube as a stand alone
auto industry company. However, in view of the operational synergies with
Mercury's motor oil business, which appears to be the driving motivation behind
the original Jiffy Lube acquisition in 1990, we believe it may be more
attractive to sell these operations in combination with Mercury Products
Company.
HIGHLY CONFIDENTIAL [SMITH BARNEY LOGO]
<PAGE> 36
PROJECT MERCURY
- --------------------------------------------------------------------------------
VALUATION OF SELECTED AUTO SERVICE COMPANIES
(US$ in millions, except for per share and multiple data)
<TABLE>
<CAPTION>
ENTERPRISE VALUE(2)/ EQUITY VALUE(1)
------------------------------------ --------------------------------
EQUITY EBITDA(3) EBIT(4) NET INCOME 1995
PRICE AT MARKET ENTERPRISE ----------------- ----------------- ----------------- -------------
COMPANY 01/28/97 VALUE(1) VALUE(2) 1996E(5) 1997E(5) 1996E(5) 1997E(5) 1996E(5) 1997E(5) SALES OUTLETS
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
WHILE-YOU-WAIT AUTO SERVICE COMPANIES
Lucor, Inc. $ 6.00 $ 17 $ 33 22.5x 5.4x NM 8.1x NM 14.6x 0.6x $0.28
Grease Monkey Holdings 1.88 8 19 na na na na na na 0.4 0.04
Monro Muffler Brake Inc. 17.00 123 167 5.7 4.9 8.0 6.8 11.9 9.9 1.1 0.45
Speedy Muffler King Inc. 8.21 104 281 5.7 5.1 9.2 8.2 9.9 7.6 0.2 0.12
Average: $ 63 $ 125 11.3x 5.1x 8.6x 7.7x 10.9x 10.7x 0.6x $0.22
- ---------------------------------------------------------------------------------------------------------------------------------
Median: 17 33 14.1 5.2 8.0 7.5 11.9 12.2 0.6 0.28
- ---------------------------------------------------------------------------------------------------------------------------------
TIRE AND AUTOPART SALES COMPANIES
Autostock Inc. $3.60 $ 52 $ 62 8.9x 8.2x 12.7x 12.5x 21.0x 21.0x 0.4x $0.17
The Pep Boys 29.63 1,792 2,148 8.7 7.5 11.5 9.7 18.0 14.7 1.3 3.54
TBC Corporation 7.5 179 238 5.3 5.3 6.1 6.0 9.4 8.8 0.3 0.85
Average: $ 674 $ 816 7.7x 7.0x 10.1x 9.4x 16.1x 14.8x 0.7x $1.52
- ---------------------------------------------------------------------------------------------------------------------------------
Median: 179 238 8.7 7.5 11.5 9.7 18.0 14.7 0.84 0.85
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Notes:
(1) Equity Market Value = Total Shares Outstanding (calculated by the treasury
method) * Current Common Stock Price.
(2) Enterprise Value = Equity Market Value + Market Value of Preferred + Total
Debt (principal amount) + Minority Interest - Cash and Marketable
Securities.
(3) EBITDA = Earnings before interest, taxes, depreciation and amoritization.
(4) EBIT = Earnings before interest, and taxes.
(5) Forward projections are calculated using IBES earnings with Smith Barney
research and Wall Street consensus add-backs.
HIGHLY CONFIDENTIAL [SMITH BARNEY LOGO]
<PAGE> 37
PROJECT MERCURY
- -------------------------------------------------------------------------------
LEVERAGE RATIOS OF SELECTED AUTO SERVICE COMPANIES
(US$ in millions, except for per share and multiple data)
<TABLE>
<CAPTION>
TOTAL DEBT/ LTM EQUITY MARKET
SENIOR CAPITALIZATION TOTAL DEBT/ NET DEBT/ LTM EBITDA- VALUE/
UNSECURED TOTAL ---------------- LTM NET LTM EBITDA/ CAPEX/ TANGIBLE
COMPANY CREDIT RATING DEBT BOOK(1) MARKET(2) EBITDA DEBT EBITDA INTEREST INTEREST BOOK VALUE(1)
- -----------------------------------------------------------------------------------------------------------------------------------
WHILE-YOU-WAIT AUTO
SERVICE COMPANIES
- -----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Lucor, Inc. NR/NR $ 17 34% 47% 10.2x $ 14 8.6x 2.0x (13.0) 0.5x
Grease Monkey Holdings NR/NR 11 86% 57% 7.2 10 6.7 2.8 (42.8) 4.6
Monro Muffler Brake Inc. NR/NR 49 47% 28% 2.2 43 1.9 9.0 (1.3) 2.2
Speedy Muffler King, Inc. NR/NR 179 34% 63% 1.3 177 1.3 56.8 46.5 0.3
Average: $ 64 50% 49% 5.2x $ 61 4.6x 17.6x -2.6x 1.9x
Median: 17 47% 47% 7.2 14 6.7 2.8 (13.0) 2.2
TIRE AND AUTOPART SALES COMPANIES
- ---------------------------------
Autostock Inc. NR/NR $ 10 23% 16% 1.1x $ 10 1.1x 6.0x 3.6x 1.6x
The Pep Boys NR/NR 367 36% 17% 1.9 356 1.8 78.0 3.8 2.7
TBC Corporation NR/NR 83 42% 32% 2.0 60 1.5 6.5 3.3 1.5
Average: $154 34% 22% 1.7x $ 142 1.5x 30.2x 3.6x 1.9x
Median: 83 36% 17% 1.9 60 1.5 6.5 3.6 1.6
</TABLE>
Notes
- ----------------------
(1) Book Capitalization = Total Debt + Common Book Equity + Preferred (at
liquidation preference) + Minority Interest.
(2) Market Capitalization = Total Debt + Common Equity Market Value +
Preferred Market Value + Minority Interest.
HIGHLY CONFIDENTIAL [SMITH BARNEY LOGO]
<PAGE> 38
PROJECT MERCURY
- -------------------------------------------------------------------------------
OPERATING RATIOS OF SELECTED AUTO SERVICE COMPANIES
(US$ in millions, except for per share and multiple data)
<TABLE>
<CAPTION>
1995 MARGINS 1995 SAME 3 YEAR AVERAGE
----------------------- SG&A INTEREST STORE ----------------------------
GROSS EBITDA EBIT AS A % OF AS A % OF SALES REVENUE/ INCOME/ INCREASE IN
COMPANY MARGIN(1) MARGIN MARGIN 1995 SALES 1995 SALES GROWTH(2) OUTLET OUTLET OUTLET
- --------------------------------------------------------------------------------------------------------------------------
WHILE-YOU-WAIT AUTO
SERVICE COMPANIES
- -----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Lucor, Inc. 40% 8% 5% 11.3% 14.2% 14.0% $0.52 $0.02 31%
Grease Monkey Holdings 31% 9% 5% 23.9% 12.6% 3.0% 0.03 0.00 3%
Monro Muffler Brake Inc. 49% 19% 13% 30.1% 7.0% -3.9% 0.45% 0.03 15%
Speedy Muffler King, Inc. 31% 24% 23% 27.2% 1.6% 4.0% 0.57 0.01 8%
Average: 38% 15% 11% 23.1% 8.8% 0.0x $0.39 $0.01 14%
Median: 40% 9% 5% 23.9% 12.6% 0.0 $0.45 $0.02 15%
TIRE AND AUTOPART SALES COMPANIES
- ---------------------------------
Autostock Inc. 26% 9% 7% 16.9% 7.4% 4.7% $0.40 $0.02 4%
The Pep Boys 31% 14% 11% 21.0% 0.8% 4.5% 2.87 0.15 12%
TBC Corporation 8% 6% 5% 2.6% 44.4% -2.9% 2.63 0.09 NA
Average: 29% 11% 8% 13.5% 17.6% 0.0x $1.96 $0.09 8%
Median: 35% 13% 9% 19.0% 4.1% 0.0 $1.63 $0.08 8%
</TABLE>
Notes
- ----------------------
(1) Gross margin is revenues less costs of goods sold as a ratio of revenues.
(2) Same store sales growth is the increase in sales generated from stores
which were in operation at the beginning of the year.
HIGHLY CONFIDENTIAL [SMITH BARNEY LOGO]
<PAGE> 1
EXHIBIT 66
Project Mercury
- -------------------------------------------------------------------------------
PROJECT MERCURY
STRATEGY AND PRELIMINARY VALUATION DISCUSSION
MARCH 18, 1997
HIGHLY
CONFIDENTIAL [SMITH BARNEY LOGO]
<PAGE> 2
PROJECT MERCURY
- -------------------------------------------------------------------------------
TABLE OF CONTENTS
1 SUMMARY OVERVIEW
2 RECENT TRADING ANALYSIS
3 RISK FACTORS OF INITIATING A HOSTILE TAKEOVER PROPOSAL
4 WHITE KNIGHT ANALYSIS
5 TAKEOVER STRATEGY REVIEW
6 DECISION TREE ANALYSIS
A. PROPOSED MERCURY MEETING AGENDA
7 EXHIBITS - UPDATED VALUATION
A. EXPLORATION AND PRODUCTION SEGMENT
B. PETROLEUM PRODUCTS SEGMENT
C. QUICK LUBE SEGMENT
HIGHLY CONFIDENTIAL [SMITH BARNEY LOGO]
<PAGE> 3
PROJECT MERCURY
- --------------------------------------------------------------------------------
SUMMARY OVERVIEW
HIGHLY CONFIDENTIAL [SMITH BARNEY LOGO]
<PAGE> 4
PROJECT MERCURY
- --------------------------------------------------------------------------------
PRELIMINARY MERCURY VALUATION
<TABLE>
<CAPTION>
BREAKDOWN BY BUSINESS SEGMENT
-------------------------------------------------------------------------------------------
MULTIPLE RANGE IMPLIED ENTERPRISE VALUE
-------------- ------------------------
RESULT LOW HIGH LOW HIGH
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
U.S. E&P OPERATIONS
EBITDA 1997 $590 4.3x 10.6x $2,537 $6,254
1998 624 4.0 9.3 2,496 5,803
Average
INTERNATIONAL E&P OPERATIONS
Net Asset Value
Average
PENN UNION GAS MARKETING
Average
PRODUCTS COMPANY
EBITDA 1997 $132 5.1x 11.6x $ 675 $1,535
1998 141 6.5 8.5 917 1,199
EBIT 1997 94 9.2 14.5 864 1,362
1998 106 8.7 14.0 922 1,484
Average
JIFFY LUBE INTERNATIONAL
EBITDA 1997 $ 41 6.4x 10.6x $ 264 $ 437
1998 42 5.1 9.3 212 386
EBIT 1997 21 8.9 14.4 190 308
1998 24 7.3 14.2 172 334
Average
CHEVRON STOCK AND MARKETABLE SECURITIES
Market Value(1) $1,532 1.0x 1.0x $1,532 $1,532
Total Ent. Value
<CAPTION>
BREAKDOWN BY BUSINESS SEGMENT
---------------------------------------------------------------------------
CHOSEN MULTIPLES EST. ENT VALUE
---------------- --------------
LOW HIGH LOW HIGH
---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. E&P OPERATIONS
EBITDA 1997 5.5x 6.0x $3,269 $3,564
1998 5.0 5.5 3,145 3,457
--------------
Average $3,207 $3,510
INTERNATIONAL E&P OPERATIONS
Net Asset Value $ 400 $ 500
--------------
Average $ 400 $ 500
PENN UNION GAS MARKETING
Average 0 0
PRODUCTS COMPANY
EBITDA 1997 7.6x 8.4x $1,005 $1,111
1998 7.3 8.1 1,031 1,140
EBIT 1997 12.7 14.1 1,195 1,321
1998 9.3 10.3 987 1,091
--------------
Average $1,055 $1,166
JIFFY LUBE INTERNATIONAL
EBITDA 1997 6.5x 7.1x $ 266 $ 294
1998 6.1 6.7 252 279
EBIT 1997 9.0 10.0 193 213
1998 7.8 8.6 183 203
--------------
Average $ 224 $ 247
CHEVRON STOCK AND MARKETABLE SECURITIES
Market Value(1) 1.0x 1.0x $1,532 $1,532
--------------
Total Ent. Value $6,417 $6,955
</TABLE>
(1) 18.1 million shares of Chevron at $67.375 as of 3/14/97, $34.4 million of
cash, $48.9 million of notes receivable and $51.5 million of marketable
securities as of 12/31/96, and 3,311,921 outstanding options exercised at the
weighted average exercise price of $54.20.
MERCURY TOTAL ENTERPRISE VALUE HAS DECREASED NOMINALLY SINCE OUR FIRST
VALUATION.
HIGHLY CONFIDENTIAL [SMITH BARNEY LOGO]
<PAGE> 5
PROJECT MERCURY
- -------------------------------------------------------------------------------
PRELIMINARY MERCURY VALUATION (Cont'd)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
MKT VALUE PER
SEGMENT FULLY-DILUTED
EST. ENT. VALUE DEBT OR MKT VALUE SHARE(4)
---------------- SHARE -----------------------------------
LOW HIGH SURRENDERED EST. TAXES LOW HIGH LOW HIGH
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. E&P Operations $3,207 $3,501 ($1,311) -- $1,895 $2,199 $37.79 $43.84
International E&P Operations 400 500 -- -- 400 500 7.98 9.97
Penn Union Gas Marketing -- -- -- -- -- -- -- --
Products Company 1,055 1,166 -- -- 1,055 1,166 21.03 23.25
Jiffy Lube International 224 247 (7) -- 217 240 4.32 4.79
Chevron Stock(1) 1,218 1,218 (1,218) (99) (99) (99) (1.97) (1.97)
Cash, Marketable Securities and 135 135 -- -- 135 135 2.69 2.69
Notes Receivable(2)
Cash from Exercised Options(3) 180 180 -- -- 180 180 3.58 3.58
------ ------ ------ ------ ------ ------ ------ ------
TOTAL $6,417 $6,955 ($2,536) ($99) $3,782 $4,320 $75.41 $86.14
</TABLE>
(1) 18.1 million shares of Chevron at $67.375 as of 3/14/97.
(2) Includes $34.4 million of cash, $48.9 million of notes receivable and
$51.5 million of marketable securities as of 12/31/96.
(3) 3,311,921 outstanding options exercised at the weighted average exercise
price of $54.20.
(4) 50,151,478 fully-diluted shares outstanding as of 01/31/97.
A FULL BREAK-UP VALUE OF THE SEGMENTS OF MERCURY JUSTIFIES A VALUATION IN THE
MID $80'S
HIGHLY CONFIDENTIAL [SMITH BARNEY LOGO]
<PAGE> 6
PROJECT MERCURY
- --------------------------------------------------------------------------------
RECENT TRADING ANALYSIS
HIGHLY CONFIDENTIAL [SMITH BARNEY LOGO]
<PAGE> 7
PROJECT MERCURY
- --------------------------------------------------------------------------------
RECENT MERCURY NEWS
* MARCH 14, 1997 - REDEMPTION OF 9% DEBENTURES - Mercury announced the
redemption of $38.5 million of senior debentures via the company's call
option at 104.5% of par value.
* FEBRUARY 27, 1997 - MERCURY SETTLES OIL SPILL COMPLAINT - Mercury agreed
to pay penalties of $867,000 to settle federal environmental complaints
regarding a series of more than 100 small oil spills from pipelines in
West Virginia and Pennsylvania which had occurred between 1993 and 1996.
* FEBRUARY 26, 1997 - MERCURY AND COASTAL CORP. ARE NAMED IN A RACIAL
DISCRIMINATION LAWSUIT - Mercury and Coastal Corp. are named in racial
discrimination lawsuits filed by the law firm of Bernstein, Litowitz,
Berger & Grossman, which handled a discrimination suit against Texaco
Inc. during 1996. The plaintiffs claim the companies limited
opportunities for minority workers and are suing for $300 million from
Mercury and $400 million from Coastal.
* FEBRUARY 21, 1997 - GERALD SMITH NOMINATED TO MERCURY BOARD - Mercury
announced that Gerald B. Smith will be nominated to serve a three-year
term on Mercury's board of directors. Gerald Smith is chairman, chief
executive officer and co-founder of Smith, Graham & Co., a fixed income
investment management firm.
* FEBRUARY 11, 1997 - STEPHEN CHESEBRO NAMED EVP OF MERCURY AND HEAD OF
OIL AND GAS EXPLORATION UNIT - Mercury announced that Stephen Chesebro,
55, has been named head of the company's oil and gas exploration unit.
Mr. Chesebro was chief executive of Tenneco Energy, Tenneco's natural
gas pipeline business. He left in December after Tenneco Energy was sold
to El Paso Energy Company.
THERE HAVE BEEN RECENT CHANGES IN MERCURY'S MANAGEMENT, MOST NOTABLY IN THE
COMPANY'S OIL AND GAS SEGMENT.
HIGHLY CONFIDENTIAL [SMITH BARNEY LOGO]
<PAGE> 8
PROJECT MERCURY
- --------------------------------------------------------------------------------
RECENT MERCURY NEWS (CONT'D)
* FEBRUARY 5, 1997 - MERCURY ANNOUNCES 1996 RESULTS - Mercury announces
net income of $134 million, or $2.88 per share, compared to a net loss
of $305 million, or $6.60 per share for 1995. 1995 results reflect $297
million in after-tax charges resulting from the adoption of new
accounting standards.
* JANUARY 27, 1997 - MERCURY BEGINS OIL EXPLORATION IN THE PERSIAN GULF
OFF QATAR COAST - Mercury announced that it has begun exploration work
on Block 7, off of the coast of Qatar. Mercury has committed to drill
four wells and to complete geologic surveys on the area, which covers
about 2,850 square kilometers.
* JANUARY 27, 1997 - MERCURY IS AWARDED OIL CONCESSION IN EGYPT - Mercury
is awarded Block E, the West Beni Suef exploration block in Egypt's
western desert. Mercury has committed to spend $7 million to acquire 2-D
seismic on the block and to drill three exploration wells within three
years of official approval. Including the latest award, Mercury now has
five exploration blocks in Egypt covering a total of 9.2 million acres.
* JANUARY 27, 1997 - MERCURY AND ENTERPRISE OIL DISCOVER CRUDE OIL IN THE
GULF OF MEXICO - Mercury and Enterprise Oil plc, announced a crude oil
discovery in the Garden Banks 161 No. 1 well. Garden Banks 161, located
in the deep water of the Gulf of Mexico is operated by Mercury. More
than 220 feet of potentially productive sand was logged in three
separate intervals.
MERCURY IS ACTIVELY PROMOTING ITS EXPLORATION ACTIVITIES.
HIGHLY CONFIDENTIAL [SMITH BARNEY LOGO]
<PAGE> 9
PROJECT MERCURY
- --------------------------------------------------------------------------------
RECENT MERCURY NEWS (Cont'd)
* JANUARY 27, 1997 - MERCURY APPROVES 1997 CAPITAL BUDGET OF $460
MILLION - Mercury has approved a 1997 capital budget of $460
million. $338 million is targeted towards the oil and gas
segment, $98 million on motor products and refined products and
$24 million on franchise operations and other projects. The
1997 budget includes an increase of $26 million in oil and gas
spending. The increase will be offset by an anticipated $134
million decline in capital spending on motor oil and refined
products, primarily due to the completion of the upgrade of
Mercury's Atlas refinery.
* JANUARY 13, 1997 - THOMAS HAMILTON MOVES TO ENSERCH
EXPLORATION - Thomas Hamilton, 53, former president and Mercury
employee of 5 years is named chairman, president and chief
executive officer of Enserch Exploration.
* JANUARY 13, 1997 - IGOR EFFIMOFF JOINS MERCURY AS PRESIDENT OF
MERCURY CASPIAN CORPORATION - Mr. Effimoff was formerly chief
executive officer of Larmag Energy N.V., which operates
producing fields in the Caspian Sea. Mr. Effimoff has 25 years
of exploration and production experience with major oil
companies in central Asia.
* JANUARY 10, 1997 - PAUL KEYES JOINS MERCURY AS SENIOR VICE
PRESIDENT - EXPLORATION AND PRODUCTION - Paul Keyes most
recently served as senior advisor to Pepso and is a former
senior manager at Exxon Corporation. Mr. Keyes has been active
in the exploration and production business for over 35 years.
Mr. Keyes replaces David Henderson in this position.
MERCURY'S CAPITAL BUDGET IS HEAVILY WEIGHTED TOWARDS OIL AND GAS OPERATIONS.
THOMAS HAMILTON LEAVES FOR ENSERCH EXPLORATION.
[SMITH BARNEY LOGO]
HIGHLY CONFIDENTIAL
<PAGE> 10
PROJECT MERCURY
- --------------------------------------------------------------------------------
MERCURY PRICE PERFORMANCE
MERCURY HAS SIGNIFICANTLY OUTPERFORMED BOTH THE SMALL INTERGRATEDS AND THE
LARGE CAP INDEPENDENT EXPLORATION AND PRODUCTION COMPANIES DURING 1996.
MERCURY'S STRONG PERFORMANCE IN 1996 MARKS A TURNAROUND FROM THE COMPANY'S
HISTORY OF LAGGING THE MARKET.
SINCE OUR LAST MEETING AT THE END OF JANUARY, THE E&P COMP INDEX HAS DECLINED
IN VALUE BY 13%.
[LINE CHART]
[LINE CHART]
[SMITH BARNEY LOGO]
HIGHLY CONFIDENTIAL
<PAGE> 11
PROJECT MERCURY
- --------------------------------------------------------------------------------
LAST TWELVE MONTH'S EXCHANGE RATIO
[LINE GRAPH]
OVER THE LAST TWELVE
MONTHS MERCURY'S
VALUE HAS APPRECIATED
CONSIDERABLY
COMPARED TO
UNICORN'S.
OVER THE LAST MONTH,
UNICORN'S COMPARATIVE
VALUE HAS INCREASED
OVER 20%.
HIGHLY CONFIDENTIAL [SMITH BARNEY LOGO]
<PAGE> 12
PROJECT MERCURY
- --------------------------------------------------------------------------------
RISK FACTORS OF INITIATING A HOSTILE TAKEOVER PROPOSAL
[LINE GRAPH]
[SMITH BARNEY LOGO]
HIGHLY CONFIDENTIAL
<PAGE> 13
PROJECT MERCURY
- -------------------------------------------------------------------------------
RISK FACTORS OF INITIATING A HOSTILE TAKEOVER
o Forces an auction at the highest price
o Many defenses exist
- Poison pill
- Staggered Board
- Change of control arrangements
- Preemptive spin-off of retail/products business
o Many White Knights exist
o Adverse impact on social issues
- "Anyone but Unicorn"
o Breakup fee - $100mm
o Impact on Unicorn's reputation and ability to do future friendly
acquisitions
- "Oscar Wyatt" syndrome
o Potential impact on Unicorn's market value
- May imply an inability to do deals on a friendly basis
A HOSTILE BID MAY PRODUCE UNFAVORABLE CONSEQUENCES.
HIGHLY CONFIDENTIAL [SMITH BARNEY LOGO]
<PAGE> 14
PROJECT MERCURY
- --------------------------------------------------------------------------------
RISK FACTORS OF INITIATING A HOSTILE TAKEOVER (CONT'D)
OVERVIEW OF DEFENSE POSITION
<TABLE>
<CAPTION>
- ------------------------ -------------- --------- ------------------------------------------------------------
EFFECT ON
STRUCTURAL DEFENSE MERCURY STATUS MERCURY COMMENTS
- ------------------------ -------------- --------- ------------------------------------------------------------
<S> <C> <C> <C>
Rights Plan Yes Pos. Forces acquiror to deal directly with the Board. Buys time
to evaluate strategic alternatives. Installed 10/94. 15%
threshold - $140 exercise price.
Staggered Board Yes Pos. Prevents a hostile raider from quickly executing a strategy
to obtain control of Board. 3 Classes.
Calling a Special Meeting No Pos. May only be called by 4 Directors, the Board, Chairman,
Executive Committee, Chairman of the Executive Committee
or President.
Action by Written Consent No Pos. Any action to be taken by shareholders must be effected at a
duly called annual or special meeting.
Board Removal Limitations Yes Neutral Any director or the entire Board may be removed for cause by
the affirmative vote of the simple majority of voting power.
Supermajority Provisions Yes Pos. Supermajority requirements (80%) for alteration of certain
parts of the by-laws, mergers or consoidations and for
liquidation.
Board Flexibility Yes Neg. Number of Directors is to be set at 11, but this can be
amended by affirmative vote of a simple majority of the
voting power or by simple majority of the Board.
Amendments to Articles of Yes Neg. The Bylaws and Articles of Incorporation may be amended
Incorporation and By-laws or rescinded by the affirmative vote of at least 50.1% of
the voting power (with the exception of article six). The
Board is authorized to amend, supplement or repeal the
by-laws.
Change of Control Yes Pos. Effective mechanism to promote the retention of important
Arrangements executives during the period of uncertainty created by a
potential change in control transaction.
State of Incorporation Del Pos. Restrictions on business combination, fair price provisions;
strong case law.
Insider Holdings Low Neg. Small percentage of insider holdings (1.6%).
</TABLE>
MERCURY HAS A
RELATIVELY STRONG
DEFENSE POSITION.
HIGHLY CONFIDENTIAL [SMITH BARNEY LOGO]
<PAGE> 15
PROJECT MERCURY
- -------------------------------------------------------------------------------
RISK FACTORS OF INITIATING A HOSTILE TAKEOVER (Cont'd)
EXAMPLE OF PREEMPTIVE SPIN-OFF DEFENSE: UNITED DOMINION INDUSTRIES,
LTD./COMMERCIAL INTERTECH, INC.
o On June 27, 1996, United sends a "bear hug" letter to
Commercial Intertech CEO Paul Powers offering $27 per share.
o United simultaneously files legal challenge to Ohio takeover
law and prepares to solicit Commercial Intertech shareholders
for a special meeting.
o Commercial Intertech initiates plan to buy back 2.5 million
shares.
o Commercial Intertech votes to accelerate its planned spin-off
of Cuno inc., a fluid filtration business
o Since a United takeover would violate the IRS "continuity of
interest" requirement, the spin-off would be taxable to both
Commercial Intertech's shareholders and United, as the new
parent.
o The taxable gain would be significant because the value of
the stock distributed exceeded the basis of the assets.
o United would have to pay the full tax burden of the spin-off
while purchasing none of the assets of Cuno.
o United raises its bid to $30 per share, a 57% premium over the
pre-bid price.
o Ohio courts rule in favor of Commercial Intertech
o Upholds Ohio law excluding shareholders who paid more than
$250,000 for Commercial Intertech shares after the offer was
announced from voting for the transaction, thereby blocking
the arbitrageurs.
o Ruled against United's petition to block the spin-off until a
special meeting could be held.
o United withdraws its offer after only 39 days.
COMMERCIAL INTERTECH SUCCESSFULLY DEFENDED ITSELF FROM UNITED'S BEAR HUG LETTER
BY SPINNING OFF CUNO INC.
HIGHLY CONFIDENTIAL [SMITH BARNEY LOGO]
<PAGE> 16
PROJECT MERCURY
- -------------------------------------------------------------------------------
TAKEOVER STRATEGY REVIEW
HIGHLY CONFIDENTIAL [SMITH BARNEY LOGO]
<PAGE> 17
PROJECT MERCURY
- --------------------------------------------------------------------------------
REVIEW OF TAKEOVER STRATEGIES
FRIENDLY
Friendly Approach
Friendly Approach - with Threat of Unilateral Action
"Bear Hug" - with Friendly Only and Confidentiality Clause
"Bear Hug" - with Confidentiality Clause
"Bear Hug" - With Public Disclosure, Intention to consider Proxy
Contest
"Bear Hug" - with Public Disclosure, Short Fuse, & Cash
Tender/Exchange Offer
Unilateral Cash Tender or Exchange Offer, combined with a Proxy
Offer
HOSTILE
HIGHLY CONFIDENTIAL [SMITH BARNEY LOGO]
<PAGE> 18
PROJECT MERCURY
- -------------------------------------------------------------------------------
Review of Takeover Strategies (Cont'd)
I. FRIENDLY APPROACH
* Verbal expression of interest, but more specific about a
proposed merger:
o Friendly, negotiated merger
o Offer price at a significant premium to current market
price levels
* Request due diligence review of non-public information
* Agree to be bound by confidentiality and standstill agreements
* Patient, deliberate approach - no deadlines or need for hasty
decisions
HIGHLY CONFIDENTIAL [SMITH BARNEY LOGO]
<PAGE> 19
PROJECT MERCURY
- -------------------------------------------------------------------------------
Review of Takeover Strategies (Cont'd)
II. FRIENDLY APPROACH WITH THREAT OF UNILATERAL ACTION
* Verbal expression of interest, but more specific about a
proposed merger:
o Friendly, negotiated merger
o Offer price at a significant premium to current market
price levels
* May suggest a range of offer values
o To pressure Mercury on fiduciary duty
o To demonstrate to Mercury seriousness of Unicorn's
interest
o To convince Mercury that Unicorn is not going away
* Request due diligence review of non-public information
* Agree to be bound by confidentiality and standstill agreements
* Patient, deliberate approach - to a point...
* After allowing Mercury a reasonable time period to consider the
Unicorn expression of interest, verbally indicate that Unicorn
remains:
o Strategically motivated,
o Prepared to offer a full and fair price, and
o Determined to proceed with the combination [even if
Unicorn is forced to initiate the deal on its own]
o Indicate Unicorn's Board fully and unanimously supports
this view
HIGHLY CONFIDENTIAL [SMITH BARNEY LOGO]
<PAGE> 20
PROJECT MERCURY
- -------------------------------------------------------------------------------
Review of Takeover Strategies (Cont'd)
III. BEAR HUG WITH FRIENDLY ONLY AND CONFIDENTIALITY CLAUSES
* Formal, specific written merger proposal
o Confirmation of Unicorn Board approval
o Specific offer price per share and/or fixed exchange
ratio, at a significant premium to current market price
o Specific form of consideration, based on best structure
for Unicorn and for successful consummation of a
Transaction
* Highly conditional proposal: Unicorn's merger proposal is
subject to:
o Mercury's Board approval ("Friendly Only") - a major
weakness
o Mercury maintaining "Confidentiality", with no press
release by Mercury
- not enforceable
- Mercury may reach its own conclusion regarding legal
obligation to disclose
- the decision to disclose is Mercury's decision and
action, not Unicorn's
o Satisfactory completion of due diligence review
* Other variations
o Short and terse, versus long and "friendly"
- the latter setting the foundation for proxy contest
arguments, and highlighting fiduciary duty themes
o Offer price is subject to upward revision, if Mercury
can demonstrate the basis for higher value
* Request a timely and prompt response
HIGHLY CONFIDENTIAL [SMITH BARNEY LOGO]
<PAGE> 21
PROJECT MERCURY
- -------------------------------------------------------------------------------
REVIEW OF TAKEOVER STRATEGIES (CONT'D)
IV. BEAR HUG WITH CONFIDENTIALITY CLAUSE
* Formal, specific written merger proposal
o Confirmation of Unicorn Board approval
o Specific offer price per share and/or a fixed exchange
ratio, at a significant premium to current market price
o Specific form of consideration, based on best structure
for Unicorn and for successful consummation of a
Transaction
* Less conditional proposal: Unicorn's merger proposal is subject
to:
o Absence of the "Friendly Only" conditions presents
threat of unilateral action if Mercury rejects proposal
o Mercury maintaining "Confidentiality", with no press
release by Mercury - not enforceable, Mercury's decision
o Satisfactory completion of due diligence review
* Other variations
o Short and terse, versus long and "friendly", the latter
setting the foundation for proxy contest arguments, and
highlighting fiduciary duty themes
o Offer price is subject to upward revision, if Mercury
can demonstrate the basis for higher value
* Request a timely and prompt response
* After appropriate time period, Unicorn determines whether to "go
public" with a new bear hug letter and press release
HIGHLY CONFIDENTIAL [SMITH BARNEY LOGO]
<PAGE> 22
REVIEW OF TAKEOVER STRATEGIES (Cont'd) PROJECT MERCURY
- -------------------------------------------------------------------------------
V. BEAR HUG WITH PUBLIC DISCLOSURE, INTENTION TO CONSIDER A PROXY
CONTEST
o Submission of a written, legally disclosable merger proposal
containing all offer terms and conditions set forth above
o Still intended to be a negotiated transaction with a "bump" in
offer price to agree to a merger
o Frequently preceded by a program of stock accumulation to
defray costs
o Sometimes accompanied by a public statement of intentions to
consider potential tender offer and/or proxy contest, although
such statement of intentions usually follows initial bear hug,
refection and increased pressure on Mercury
o Public disclosure causes events to occur outside of Unicorn's
control
o May trigger Mercury decision to explore auction feasibility to
maximize value
o White knights start work, analysis, dialogue with Mercury and
its financial advisors
o Regulatory attention begins and some form of intervention is
likely
o Unicorn's common stock price will likely be depressed due to
uncertainty
o If Mercury rejects proposal due to determination that (i) the
offer is inadequate, (ii) now is not the time to sell, or (iii)
Mercury is not for sale, Mercury attempts to call Unicorn's
bluff, forcing Unicorn to make the next move: retreat or bid
HIGHLY CONFIDENTIAL [SMITH BARNEY LOGO]
<PAGE> 23
REVIEW OF TAKEOVER STRATEGIES (Contd) PROJECT MERCURY
- -------------------------------------------------------------------------------
o Proxy contest
o Weak threat in face of a staggered board of directors
- Two successful proxy contests needed to "control" the Board
- Even in victory, agenda of Unicorn's slate of directors is
tricky; can backfire
- Truly, a pressure tactic, rather than a real change of
control mechanic
o Threat of proxy contest will force Mercury to consider Unicorn
proposal more seriously
o Mercury will be advised that Mercury shareholder criticism of
management Board entrenchment will lose against the Unicorn
platform: sell Mercury to maximize value for all Mercury
shareholders
o Mercury is vulnerable
o Unicorn posture
- Unicorn as a prospective buyer
- Unicorn opposed to capital gains tax leakage
- Sale of Mercury, in whole or in part
- High bid wins
o Proxy contest is expensive and time consuming
o Mercury will seek to sell, rather than fight
HIGHLY CONFIDENTIAL [SMITH BARNEY LOGO]
<PAGE> 24
REVIEW OF TAKEOVER STRATEGIES (Contd) PROJECT MERCURY
- -------------------------------------------------------------------------------
VI. BEAR HUG WITH PUBLIC DISCLOSURE, SHORT FUSE, FOLLOWED BY A CASH
TENDER OR EXCHANGE OFFER
o Bear hug letter initiates transaction on a more "friendly" basis,
compared to a surprise tender offer
o Preserves possibility of friendly negotiated transaction
before unilateral tender or exchange offer
o Bear hug letter has same specific terms and as set forth above,
but:
o Letter is importantly more aggressive, because the letter
states explicitly that Unicorn is prepared to commence a
unilateral tender or exchange offer, if the proposal is
rejected by Mercury, in order to afford Mercury shareholders
the right to decide for themselves, rather than allowing the
Mercury Board to make the decision
o Purpose is to force friendly negotiations, hopefully including
some due diligence on values, to achieve a negotiated merger
price and structure
o Mercury is now "in play", and Unicorn no longer controls events
and is effectively "committed" to launching unilateral tender or
exchange offer
HIGHLY CONFIDENTIAL [SMITH BARNEY LOGO]
<PAGE> 25
REVIEW OF TAKEOVER STRATEGIES (Contd) PROJECT MERCURY
- -------------------------------------------------------------------------------
VII. UNSOLICITED TENDER OFFER OR EXCHANGE OFFER, COMBINED WITH PROXY
CONTEST
o If Mercury has rejected all friendly overtures, last recourse
available to Unicorn is the unilateral tender or exchange offer
o Cash tender offer is easier than exchange offer since exchange
offer requires an effective registration statement, approved by
the SEC, before exchange offer can be commenced
o Public disclosure will be required when exchange offer is
filed with the SEC, and SEC review period will give Mercury
significant timing advantage in exploring all alternatives
to Unicorn stock merger proposal
o If bid is an exchange offer, Unicorn common stock price will
likely be depressed by filing, uncertain timing of SEC clearance,
offer commencement, arbitrage pressure, as well as research
analyst comments on E.P.S. dilution
o All cash tender offer may raise credit rating issues
o Timing of offer could be important, but poison pill gives Mercury
control over timing
o Combination of offer with proxy contest insures that shareholders
can "vote" on the offer, challenging right of Mercury's Board of
Directors to reject a "fair" offer
HIGHLY CONFIDENTIAL [SMITH BARNEY LOGO]
<PAGE> 26
PROJECT MERCURY
- -------------------------------------------------------------------------------
DECISION TREE ANALYSIS
I. Friendly/Hostile
II. Strategy and Tactics
HIGHLY CONFIDENTIAL [SMITH BARNEY LOGO]
<PAGE> 27
PROJECT MERCURY
- -------------------------------------------------------------------------------
DECISION TREE
[CHART]
HIGHLY CONFIDENTIAL [SMITH BARNEY LOGO]
<PAGE> 28
PROJECT MERCURY
- -------------------------------------------------------------------------
DECISION TREE
Strategy and Tactics
[CHART]
HIGHLY CONFIDENTIAL
[SMITH BARNEY LOGO]
<PAGE> 29
PROJECT MERCURY
- -------------------------------------------------------------------------------
PROPOSED MERCURY MEETING AGENDA
HIGHLY CONFIDENTIAL [SMITH BARNEY LOGO]
<PAGE> 30
PROJECT MERCURY
- -------------------------------------------------------------------------------
AGENDA FOR MERCURY MEETING
STRATEGIC OBJECTIVES
* Show off Unicorn
o Operations Review
o Advanced Technology Review
o Premises and Infrastructure Tour
o Financial Review
* Introduce Key Executives
o CEO-Host and Master of Ceremonies
o EVP, Strategic Planning
o EVP, E&P Operations
o CFO
* Review Unicorn Public Data Projections and Equity Research
Forecast
o Huge Cash Flow
o Great Financial Resources
o Destined to Become the Greatest Independent E&P Company
* Impress Guest
o "Blow Him Away"
o Effectively Recruit Him to Join Our Team
o Convince Him That He Should Be a Part of the Future
o Enlighten Him of Inevitability of Combination
HIGHLY CONFIDENTIAL [SMITH BARNEY LOGO]
<PAGE> 31
PROJECT MERCURY
- -------------------------------------------------------------------------------
AGENDA FOR MERCURY MEETING
TACTICAL DECISIONS
* How far to go, how soon, how fast?
A. Total High Road
1. "Sell Only Mode": Sell Unicorn
2. Resist temptation to talk transaction specifics
3. Impress Guest, allowing him time to
a) Return to Houston
b) Reflect on Unicorn opportunity for
Mercury
c) Possibly confer with others: key
directors or key management personnel
B. Sell Hard, and then Pop the Question
1. After the roadshow, lunch or dinner to suggest
advancing serious pursuit of merger
HIGHLY CONFIDENTIAL [SMITH BARNEY LOGO]
<PAGE> 32
PROJECT MERCURY
- -------------------------------------------------------------------------------
AGENDA FOR MERCURY MEETING (Cont'd)
o Preliminary Pitch Themes:
A. Perfect business combination
B. Execute confidentiality agreements
C. Exchange data
D. Off-site due diligence review (small teams, confidential)
E. Preliminary discussion of terms and conditions
F. Unicorn commitment to propose full and fair value, at a
substantial premium to current market price
G. Unicorn commitment to care for and protect all Mercury
management and employees
1. Together, select the best executives from each company
for the most serious positions
2. No massive layoffs
3. Honor any and all existing contracts
4. Name of new Company (?)
H. Describe Unicorn's plans for Guest
1. Director of Unicorn
2. Vice Chairman of Unicorn
3. President [and CEO] of Mercury Products Subsidiary
HIGHLY CONFIDENTIAL [SMITH BARNEY LOGO]
<PAGE> 33
AGENDA FOR MERCURY MEETING (Cont'd) PROJECT MERCURY
- -------------------------------------------------------------------------------
4. New employment contract
a) Increased Base Pay
b) Bonus plan with achievable performance
bogeys
c) Old stock options rolled over
d) New stock options granted
5. Option to live in Houston, if desired
o Best Dynamics
A. Start with intention to follow "Total High Road"
B. Guest is intrigued, and takes the bait:
1. Guest asks Unicorn specific questions regarding:
a) The deal
b) His deal
c) Protection for his people
d) Maybe even Unicorn's preliminary price range
HIGHLY CONFIDENTIAL [SMITH BARNEY LOGO]
<PAGE> 34
PROJECT MERCURY
- -------------------------------------------------------------------------------
EXHIBITS - UPDATED VALUATION
HIGHLY CONFIDENTIAL [SMITH BARNEY LOGO]
<PAGE> 1
EXHIBIT 67
===============================================================================
PROJECT MERCURY
Strategic Presentation
June 4, 1997
SMITH MARNEY INC.
===============================================================================
<PAGE> 2
HIGHLY CONFIDENTIAL
CONFIDENTIAL PROJECT MERCURY
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
SECTION TAB
- ------- ---
<S> <C>
Mercury Valuation ..................................................... 1
Analysis of Historic Stock Price Performance .......................... 2
Merger Analysis and Sensitivities ..................................... 3
Equity Valuation and Trading Analysis ................................. 4
Financing and Pro Forma Capitalization Analysis ....................... 5
White Knight Review ................................................... 6
Analysis of Unilateral Takeover Transactions .......................... 7
Risks Factors of Initiating a Unilateral Takeover Proposal ............ 8
EXHIBITS
- --------
Asset Sale Alternatives ............................................... 9
Estimate of Transaction Expenses ...................................... 10
Macro Level Timeline .................................................. 11
Precedent Transaction Analysis......................................... 12
Equity Research Commentary ............................................ 13
</TABLE>
[SMITH BARNEY LOGO]
<PAGE> 3
CONFIDENTIAL PROJECT MERCURY
- --------------------------------------------------------------------------------
IMPLIED VALUATION SUMMARY
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
MERCURY
STOCK PRICE PREMIUMS 05/23/97 PURCHASE PRICE PER SHARE
- -------------------- -------- ----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PRICE PER SHARE $54.00 $75.00 $77.50 $80.00 $82.50 $85.00 $87.50 $90.00 $92.50 $95.00
Premium to:
Current -- 38.9% 43.5% 48.1% 52.8% 57.4% 62.0% 66.7% 71.3% 75.9%
Last 30 days Avg ($51.53) 45.5% 50.4% 55.2% 60.1% 65.0% 69.8% 74.7% 79.5% 84.4%
LTM Avg.($52.94) 41.7% 46.4% 51.1% 55.8% 60.6% 65.3% 70.0% 74.7% 79.4%
LTM High ($63.50) 18.1% 22.0% 26.0% 29.9% 33.9% 37.8% 41.7% 45.7% 49.6%
LTM Low ($42.50) 76.5% 82.4% 88.2% 94.1% 100.0% 105.9% 111.8% 117.6% 123.5%
Last 3 yrs. Avg ($48.04) 56.1% 61.3% 66.5% 71.7% 76.9% 82.1% 87.4% 92.6% 97.8%
Last 3 yrs. High ($63.50) 18.1% 22.0% 26.0% 29.9% 33.9% 37.8% 41.7% 45.7% 49.6%
Consensus Street Est.(PV$62.45) 20.1% 24.1% 28.1% 32.1% 36.1% 40.1% 44.1% 48.1% 52.1%
</TABLE>
<TABLE>
<CAPTION>
MERCURY
EQUITY & ENTERPRISE VALUES 05/23/97 PURCHASE PRICE PER SHARE
- -------------------------- -------- -------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PRICE PER SHARE $54.00 $75.00 $77.50 $80.00 $82.50
Mercury Equity Value $2,535.4 $3,521.3 $3,638.7 $3,756.1 3,873.5
Plus: Debt, Preferred & MI 2,196.8 2,196.8 2,196.8 2,196.8 2,196.8
Less: Cash & Securities (986.6) (986.6) (986.6) (986.6) (986.6)
-------- -------- -------- -------- --------
Mercury Enterprise Value $3,745.6 $4,731.6 $4,849.0 $4,966.3 $5,083.7
======== ======== ======== ======== ========
Less: Value of Downstream Seg. (1,400.0) (1,400.0) (1,400.0) (1,400.0) (1,400.0)
Plus: Other Liabilities/(Assets) (408.6) (408.6) (408.6) (408.6) (408.6)
IMVR $1,937.0 $2,923.0 $3,040.4 $3,157.7 $3,275.1
======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
EQUITY & ENTERPRISE VALUES PURCHASE PRICE PER SHARE
- -------------------------- ---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PRICE PER SHARE $85.00 $87.50 $90.00 $92.50 $95.00
Mercury Equity Value 3,990.8 4,108.2 4,225.6 4,343.0 4,460.4
Plus: Debt, Preferred & MI 2,196.8 2,196.8 2,196.8 2,196.8 2,196.8
Less: Cash & Securities (986.6) (986.6) (986.6) (986.6) (986.6)
-------- -------- -------- -------- --------
Mercury Enterprise Value $5,201.1 $5,318.5 $5,435.8 $5,553.2 $5,670.6
======== ======== ======== ======== ========
Less: Value of Downstream Seg (1,400.0) (1,400.0) (1,400.0) (1,400.0) (1,400.0)
Plus: Other Liabilities/(Assets) (408.6) (408.6) (408.6) (408.6) (408.6)
IMVR $3,392.5 $3,509.9 $3,627.2 $3,744.6 $3,862.0
======== ======== ======== ======== ========
</TABLE>
[SMITH BARNEY LOGO]
<PAGE> 4
CONFIDENTIAL PROJECT MERCURY
- --------------------------------------------------------------------------------
RESEARCH FORECASTS FOR MERCURY
(As of 5/23/97)
<TABLE>
<CAPTION>
LAST EPS ATCF
DATE ------------------ ----------------------
CONFIRMED 1997 1998 1997 1998
--------- ------------------ ----------------------
<S> <C> <C> <C> <C> <C>
A. G. Edwards 5/1/97 $ 3.00 $ 3.50 NA NA
Bear, Stearns 5/13/97 2.70 2.70 $ 9.15 $ 9.10
Brown Brothers 5/13/97 3.40 3.55 10.25 11.05
Deutsche Morgan Grenfell 4/23/97 3.90 4.40 11.38 12.33
Goldis-Pittsburg 4/16/97 3.24 3.75 NA NA
JP Morgan 4/28/97 3.40 3.60 11.25 11.25
Lehman Brothers 5/5/97 3.27 3.69 12.35 NA
Merrill Lynch 5/1/97 3.40 3.75 11.09 12.03
Prudential Securities 4/23/97 3.75 2.75 11.59 10.78
Williams Mackay 5/1/97 3.25 4.00 NA NA
-------- ------- --------- --------
Mean $ 3.33 $ 3.57 $ 11.01 $ 11.09
Meridian $ 3.34 $ 3.65 $ 11.25 $ 11.15
Unicorn Estimates:
Marketing Pricing 4.20 3.53 12.88 12.22
<CAPTION>
DISCOUNTED
PRICE AT 12 MO. PV OF
REPORT REPORT PRICE PRICE
DATE DATE TARGET TARGET(1)
--------- ---------- --------- -------------
<S> <C> <C> <C> <C>
A. G. Edwards NA NA NA NA
Bear, Stearns NA NA NA NA
Brown Brothers NA NA NA NA
Deutsche Morgan Grenfell 4/23/97 $ 48.13 $ 76.00 $ 68.50
Goldis-Pittsburg 6/7/96 43.88 70.00 69.75
JP Morgan 4/23/97 48.13 62.00 55.88
Lehman Brothers 4/23/97 48.13 66.00 59.50
Merrill Lynch 4/29/97 NA NA NA
Prudential Securities 4/23/97 48.13 65.00 58.63
Williams Mackay NA NA NA NA
-------- --------
Mean $ 67.80 $ 62.45
Meridian $ 66.00 $ 59.50
</TABLE>
(1) Discounted back one year at 12.00% equity rate of return.
[SMITH BARNEY LOGO]
<PAGE> 5
CONFIDENTIAL PROJECT MERCURY
- -------------------------------------------------------------------------------
COMPARISON OF STREET FORECASTS TO UNICORN ESTIMATES
(In Millions of Dollars Except per Share Values)
<TABLE>
<CAPTION>
ATCF
EPS PER SHARE EBITDAX(1)
------------------- ------------------- -------------------
1997 1998 1997 1998 1997 1998
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
STREET CONSENSUS (10 FIRMS) $ 3.33 $ 3.57 $ 11.01 $ 11.09 NA NA
STREET CCONSENSUS EXCLUDING DMG, MERRILL LYNCH 3.18 3.54 10.75 10.47 NA NA
& PRUDENTIAL (7 FIRMS)
DMG, MERRILL LYNCH & PRUDENTIAL 3.68 3.63 11.35 11.71 $ 739 $ 758
UNICORN ESTIMATES:
MARKET PRICING 4.20 3.53 12.88 12.22 792 732
</TABLE>
(1) Excludes dividend income on Chevron stock
[SMITH BARNEY LOGO]
<PAGE> 6
CONFIDENTIAL PROJECT MERCURY
- ------------------------------------------------------------------------------
VALUATION MATRIX - STREET
(Dollars in Millions, Except Per Share Data)
<TABLE>
<CAPTION>
FINANCIAL
STATISTIC MULTIPLES OF ENTERPRISE VALUE
---------------------------------------------------------------------------------------------------------
SHARE PRICE EDITDAX $54.00 $75.00 $77.50 $80.00 $82.50 $85.00 $87.50 $90.00 $92.50 $95.00
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
EBITDAX(1)
Actual 1996 $627 6.0x 7.5x 7.7x 7.9x 8.1x 8.3x 8.5x 8.7x 8.9x 9.0x
Actual LTM $680 5.5x 7.0x 7.1x 7.3x 7.5x 7.6x 7.8x 8.0x x 8.2x 8.3x
Street 1997E $740 5.1 6.4 6.6 6.7 6.9 7.0 7.2 7.3 7.5 7.7
Street 1998E $758 4.9 6.2 6.4 6.6 6.7 6.9 7.0 7.2 7.3 7.5
Street High 1997E $772 4.9 6.1 6.3 6.4 6.6 6.7 6.9 7.0 7.2 7.3
Street High 1998E $818 4.6 5.8 5.9 6.1 6.2 6.4 6.5 6.6 6.8 6.9
<CAPTION>
MULTIPLES OF EQUITY VALUE
---------------------------------------------------------------------------------------------------------
SHARE PRICE ATCF $54.00 $75.00 $77.50 $80.00 $82.50 $85.00 $87.50 $90.00 $92.50 $95.00
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ATCF(1)
Actual 1996 $460 5.5x 7.7x 7.9x 8.2x 8.4X 8.7X 8.9X 9.2X 9.4X 9.7X
Actual LTM $512 5.0 6.9 7.1 7.3 7.6 7.8 8.0 8.3 8.5 8.7
Street 1997E $540 4.7 6.5 6.7 7.0 7.2 7.4 7.6 7.8 8.0 8.3
Street 1998E $557 4.6 6.3 6.5 6.7 7.0 7.2 7.4 7.6 7.8 8.0
Street High 1997E $551 4.6 6.4 6.6 6.8 7.0 7.2 7.5 7.7 7.9 8.1
Street High 1998E $586 4.3 6.0 6.2 6.4 6.6 6.8 7.0 7.2 7.4 7.6
<CAPTION>
MULTIPLES OF IMVR
---------------------------------------------------------------------------------------------------------
SHARE PRICE $54.00 $75.00 $77.50 $80.00 $82.50 $85.00 $87.50 $90.00 $92.50 $95.00
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Adjusted SEC-10 Value $2,815 69% 104% 108% 112% 116% 121% 125% 129% 133% 137%
Proved Reserves (Befe) 2,399 $0.81 $1.22 $1.27 $1.32 $1.37 $1.41 $1.46 $1.51 $1.56 $1.61
w/Dev. Costs (Befe) 2,399 0.98 1.39 1.44 1.49 1.53 1.58 1.63 1.68 1.73 1.78
</TABLE>
<TABLE>
<CAPTION>
COMPARABLE
--------------------------
COMPANIES TRANSACTIONS
------------ ------------
MEDIUM MEAN MEDIUM MEAN
------ ---- ------ ----
SHARE PRICE
-----------
<S> <C> <C> <C> <C>
EBITDAX(1)
Actual 1996 7.0x 7.4x
Actual LTM 6.9 7.0 6.3x 7.2x
Street 1997E 6.5 7.0
Street 1998E 5.8 6.3
Street High 1997E 6.5 7.0
Street High 1998E 5.8 6.3
SHARE PRICE
ATCF(1)
Actual 1996 6.4X 7.2X
Actual LTM 5.8 6.7 6.3x 7.2x
Street 1997E 6.5 7.0
Street 1998E 5.6 6.3
Street High 1997E 6.5 7.0
Street High 1998E 5.6 6.3
SHARE PRICE
Adjusted SEC-10 Value 153% 164% 90% 101%
Proved Reserves (Befe) $1.21 $1.26 $0.91 $0.99
w/Dev. Costs (Befe) $1.46 $1.37 $1.09 $1.12
</TABLE>
- ---------------
(1) Excludes dividend income on Chevron stock and interest on exchangeable
debentures.
[SMITH BARNEY LOGO]
<PAGE> 7
CONFIDENTIAL PROJECT MERCURY
- --------------------------------------------------------------------------------
MERCURY OPERATING EBITDAX BUILD-UP
(Dollars in Millions)
<TABLE>
<CAPTION>
1998 1999 2000
------------------------ ------------------------ -------------------------
Scenario (1) Factor Contribution EBITDAX Contribution EBITDAX Contribution EBITDAX
- ------------------- ------------------ ------------------------ ------------------------ -------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Mercury Stand-Alone $731 $732 $758
------- ------- -------
Change of Control, - Synergies and
No Ramp-Up Shared Economics $50 $90 $95
------------ ------------ ------------
$781 $822 $853
------- ------- -------
Change of Control, - Incremental E&P
No Ramp-Up Contribution $12 $43 $89
------------ ------------ ------------
$793 $865 $943
------- ------- -------
</TABLE>
- ---------------------------------
(1) All scenarios run at company price deck.
[SMITH BARNEY LOGO]
<PAGE> 8
CONFIDENTIAL PROJECT MERCURY
- --------------------------------------------------------------------------------
MERCURY EBITDAX BUILD-UP
[BAR GRAPH]
<TABLE>
<CAPTION>
YEAR (Millions of Dollars)
- ----
<S> <C>
1998 $ 793
1999 $ 865
2000 $ 943
2001 $ 1,003
2002 $ 1,016
</TABLE>
[SMITH BARNEY LOGO]
<PAGE> 9
================================================================================
CONFIDENTIAL PROJECT MERCURY
================================================================================
MERCURY VALUATION - UNICORN PERSPECTIVE
(Dollars in Millions, Except Per Share Data)
<TABLE>
<CAPTION>
FINANCIAL
STATISTIC MULTIPLES OF ENTERPRISE VALUE
-------------------------------------------------------------------------------------------
SHARE PRICE EBITDAX $ 54.00 $ 75.00 $ 77.50 $ 80.00 $ 82.50 $ 85.00
-------------------------------------------------------------------------------------------
EBITDAX(1)
- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Actual 1996 $627 6.0x 7.5x 7.7x 7.9x 8.1x 8.3x
Actual LTM $680 5.5 7.0 7.1 7.3 7.5 7.6
Street 1997E $740 5.1 6.4 6.6 6.7 6.9 7.0
Street 1998E $758 4.9 6.2 6.4 6.6 6.7 6.9
Street High 1997E $772 4.9 6.1 6.3 6.4 6.6 6.7
Street High 1998E $818 4.6 5.8 5.9 6.1 6.2 6.4
Ramp-Up 1998E $793 4.7 6.0 6.1 6.3 6.4 6.6
Ramp-Up 1999E $865 4.3 5.5 5.6 5.7 5.9 6.0
-------------------------------------------------------------------------------------------
SHARE PRICE ATCF $ 54.00 $ 75.00 $ 77.50 $ 80.00 $ 82.50 $ 85.00
-------------------------------------------------------------------------------------------
<CAPTION>
ATCF(1)
- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Actual 1996 $460 5.5x 7.7x 7.9x 8.2x 8.4x 8.7x
Actual LTM $512 5.0 6.9 7.1 7.3 7.6 7.8
Street 1997E $540 4.7 6.5 6.7 7.0 7.2 7.4
Street 1998E $557 4.6 6.3 6.5 6.7 7.0 7.2
Street High 1997E $551 4.6 6.4 6.6 6.8 7.0 7.2
Street High 1998E $586 4.3 6.0 6.2 6.4 6.6 6.8
Ramp-Up 1998E $629 4.0 5.6 5.8 6.0 6.2 6.3
Ramp-Up 1999E $685 3.7 5.1 5.3 5.5 5.7 5.8
</TABLE>
<TABLE>
<CAPTION>
FINANCIAL
STATISTIC MULTIPLES OF ENTERPRISE VALUE
------------------------------------------------------------------------------------------------------------------
Comparable
Companies Transactions
SHARE PRICE EBITDAX $ 87.50 $ 90.00 $ 92.50 $95.00 Median Mean Median Mean
----------------------------------------------------------------------- ------ ---- ------ ----
EBITDAX(1)
- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Actual 1996 $627 8.7x 8.7x 8.9x 9.0x 7.0x 7.4x
Actual LTM $680 8.0 8.0 8.2 8.3 6.9 7.0 6.3x 7.2x
Street 1997E $740 7.3 7.3 7.5 7.7 6.5 7.0
Street 1998E $758 7.2 7.2 7.3 7.5 5.8 6.3
Street High 1997E $772 7.0 7.0 7.2 7.3 6.5 7.0
Street High 1998E $818 6.6 6.6 6.8 6.9 5.8 6.3
Ramp-Up 1998E $793 6.7 6.9 7.0 7.2
Ramp-Up 1999E $865 6.1 6.3 6.4 6.6
<CAPTION>
-----------------------------------------------------------------------
SHARE PRICE ATCF $ 87.50 $ 90.00 $ 92.50 $ 95.00
-----------------------------------------------------------------------
ATCF(1)
- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Actual 1996 $460 8.9x 9.2x 9.4x 9.7x 6.4x 7.2x
Actual LTM $512 8.0 8.3 8.5 8.7 5.8 6.7 6.3x 7.2x
Street 1997E $540 7.6 7.8 8.0 8.3 6.5 7.0
Street 1998E $557 7.4 7.6 7.8 8.0 5.6 6.3
Street High 1997E $551 7.5 7.7 7.9 8.1 6.5 7.0
Street High 1998E $586 7.0 7.2 7.4 7.6 5.6 6.3
Ramp-Up 1998E $629 6.5 6.7 6.9 7.1
Ramp-Up 1999E $685 6.0 6.2 6.3 6.5
</TABLE>
- -----------------
(1) Excludes dividend income on Chevron stock and interest on exchangeable
debentures.
[SMITH BARNEY LOGO]
<PAGE> 10
CONFIDENTIAL PROJECT MERCURY
- --------------------------------------------------------------------------------
1997E EBITDAX MULTIPLE PAID AT VARIOUS PURCHASE PRICES
[LINE GRAPH]
HIGHLY CONFIDENTIAL [SMITH BARNEY LOGO]
<PAGE> 11
CONFIDENTIAL PROJECT MERCURY
- -------------------------------------------------------------------------------
MERCURY BREAK-UP VALUATION PRICE DECK: MARKET CASE
<TABLE>
<CAPTION>
IMPLIED
ENTERPRISE SELECTED
MULTIPLE RANGE VALUE MULTIPLES EST. ENTERPRISE VALUE
--------------- ------------- ---------------- -------------------
RESULT LOW HIGH LOW HIGH LOW HIGH LOW HIGH
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. E&P OPERATIONS
EBITDAX 1997 $612 5.2x 7.7x $3,182 $4,712 5.8x 6.4x $3,547 $3,920
1998 546 4.9 7.3 2,675 3,986 5.6 6.2 3,060 3,382
-------------------------
AVERAGE $3,303 $3,651
- --------------------------------------------------------------------------------------------------------------
INTERNATIONAL E&P OPERATIONS
Net Asset Value $400 $400
-------------------------
AVERAGE $400 $400
- --------------------------------------------------------------------------------------------------------------
PENN UNION GAS MARKETING
$0 $0
-------------------------
AVERAGE $0 $0
- --------------------------------------------------------------------------------------------------------------
PRODUCTS COMPANY
EBITDA 1997 $134 5.0 11.0 $ 670 $1,473 7.5x 8.3x $1,005 $1,111
1998 138 6.3 9.6 869 1,325 6.7 7.5 931 1,029
-------------------------
AVERAGE $ 968 $1,070
- --------------------------------------------------------------------------------------------------------------
JIFFY LUBE INTERNATIONAL
EBITDA 1996A $ 41 6.7x 9.6x $ 276 $ 396 7.7x 8.5x $ 317 $ 350
1997 46 4.5 9.6 205 437 6.9 7.7 316 349
-------------------------
AVERAGE $ 316 $ 350
- --------------------------------------------------------------------------------------------------------------
CHEVRON STOCK, MARKETABLE SECURITIES
Market Value (1) $1,417 1.0x 1.0x $1.417 $1,417 1.0x 1.0x $1,417 $1,417
----------------------------------
TOTAL ENT. VALUE $6,405 $6,888
- --------------------------------------------------------------------------------------------------------------
</TABLE>
Notes:
- -----------
(1) 18.1 million shares of Chevron at $71.00 as of 5/23/97, $33.9.4 million of
cash, as of 3/31/97 and $48.9 million of notes receivable and $51.5 million of
marketable securities as of 12/31/96.
[SMITH BARNEY LOGO]
<PAGE> 12
CONFIDENTIAL PROJECT MERCURY
MERCURY BREAK-UP VALUATION PRICE DECK: MARKET CASE
<TABLE>
<CAPTION>
MARKET
ESTIMATED SEGMENT VALUE PER
ENTERPRISE DEBT OR MARKET FULLY-DILUTED
VALUE VALUE OF VALUE SHARE (4)
----------------- SHARES ESTIMATED ------------------ ------------------
LOW HIGH SURRENDERED TAXES LOW HIGH LOW HIGH
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. E&P OPERATIONS $ 3,303 $ 3,651 ($1,287) -- $ 2,016 $ 2,364 $ 42.94 $ 50.35
INTERNATIONAL E&P OPERATIONS (1) 400 400 -- (70) 330 330 7.03 7.03
PENN UNION GAS MARKETING -- -- -- -- -- -- -- --
PRODUCTS COMPANY 968 1,070 -- -- 968 1,070 20.61 22.78
JIFFY LUBE INTERNATIONAL 316 350 (7) -- 309 342 6.58 7.29
CHEVRON STOCK (2) 1,283 1,283 (1,283) (159) (159) (159) (3.39) (3.39)
CASH, MARKETABLE SECURITIES, 134 134 -- -- 134 134 2.86 2.86
AND NOTES RECEIVABLE (3)
- ----------------------------------------- ------- ------- ------ ------ ------- ------- ------- -------
TOTAL $ 6,405 $ 6,888 ($2,577) ($ 229) $ 3,599 $ 4,081 $ 76.64 $ 86.93
</TABLE>
- -------------------------------
(1) Assumes $400 million mean value less $200 million basis, taxed at 35%.
(2) 18.1 million shares of Chevron at $71.00 as of 5/23/97, conversion in six
years discounted at 10%.
(3) Includes $33.9 million of cash as of 3/31/97, and $48.9 million of notes
receivable and $51.5 million of marketable securities as of 12/31/96.
(4) 46,951,151 fully-diluted shares outstanding as of 4/30/97.
<PAGE> 13
CONFIDENTIAL PROJECT MERCURY
- --------------------------------------------------------------------------------
MERCURY 15 YEAR TRADING HISTORY
[LINE GRAPH]
HIGHLY CONFIDENTIAL [SMITH BARNEY LOGO]
<PAGE> 14
CONFIDENTIAL PROJECT MERCURY
- ------------------------------------------------------------------------------
MERCURY COMPARATIVE TRADING HISTORY - LAST FIVE YEARS
[LINE GRAPH]
Notes:
- ----------
E&P peers is a market weighed average of the large capitalization exploration
and production companies.
HIGHLY CONFIDENTIAL [SMITH BARNEY LOGO]
<PAGE> 15
CONFIDENTIAL PROJECT MERCURY
- --------------------------------------------------------------------------------
MERCURY TRADING HISTORY - SINCE UNICORN INITIAL PUBLIC OFFERING
[LINE GRAPH]
[SMITH BARNEY LOGO]
HIGHLY CONFIDENTIAL
<PAGE> 16
CONFIDENTIAL PROJECT MERCURY
- ------------------------------------------------------------------------------
UNICORN TRADING HISTORY - SINCE UNICORN INITIAL PUBLIC OFFERING
[LINE GRAPH]
Notes:
- ----------
E&P peers is a market weighed average of the large capitalization exploration
and production companies.
HIGHLY CONFIDENTIAL [SMITH BARNEY LOGO]
<PAGE> 17
CONFIDENTIAL PROJECT MERCURY
- --------------------------------------------------------------------------------
MERCURY HISTORICAL TRADING LEVELS
5 YEAR HISTORICAL
- --------------------------------------------------------------------------------
[BAR GRAPH]
[LINE GRAPH]
LAST TWELVE MONTHS
- --------------------------------------------------------------------------------
[BAR GRAPH]
<TABLE>
<CAPTION>
MERCURY PRICE
- ----------------------------------------
<S> <C>
Current 5/28/97 $54.63
One Month Average 52.83
Two Month Average 50.51
Three Month Average 51.43
Year to Date 55.14
LTM Average 53.15
Two Year Historical 47.91
Three Year Historical 48.06
Five Year Historical 51.08
</TABLE>
YTD 1997
- --------------------------------------------------------------------------------
[BAR GRAPH]
[SMITH BARNEY LOGO]
<PAGE> 18
CONFIDENTIAL PROJECT MERCURY
- ------------------------------------------------------------------------------
MERGER MODEL SCENARIOS ANALYZED
<TABLE>
<CAPTION>
50% CASH/50% STOCK 100% CASH TENDER
------------------ --------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Purchase Price Per Share $80.00 $ 80.00 $ 80.00 $ 80.00 $80.00 $ 80.00
Asset Sales $ 0.0 $560 million $ 0.0 $560 million $ 0.0 $ 0.0
Equity Issuance $ 0.0 $1.0 billion $1.0 billion $ 0.0 $ 0.0 $ 0.0
Commodity Prices Market Market Market Market Market S&P Stress
</TABLE>
HIGHLY CONFIDENTIAL [SMITH BARNEY LOGO]
<PAGE> 19
CONFIDENTIAL PROJECT MERCURY
- --------------------------------------------------------------------------------
KEY MODEL ASSUMPTIONS
(Dollars in Millions, Except Per Share Data)
<TABLE>
<CAPTION>
TRANSACTION CONSIDERATION
- -------------------------
<S> <C>
Purhcase Price $80.00 Per Share
Structure 50% Cash/50% Stock
</TABLE>
<TABLE>
<CAPTION>
COMMODITY PRICES
- ----------------
<S> <C>
Price Deck
WTI Market Case
Henry Hub Market Case
</TABLE>
<TABLE>
<CAPTION>
ANNUAL COST SAVINGS
- -------------------
<S> <C>
1998 $50 million
1999 $90 million
2000 and Beyond $95 million
</TABLE>
<TABLE>
<CAPTION>
POST-TRANSACTION CAPITAL RAISED
- -------------------------------
<S> <C>
Asset Sales None
Equity Issuance None
</TABLE>
<TABLE>
<CAPTION>
UNICORN STAND-ALONE
- -------------------
<S> <C>
Ramp-Up Capital reinvested at 8.0% after tax
</TABLE>
[SMITH BARNEY LOGO]
HIGHLY CONFIDENTIAL
<PAGE> 20
CONFIDENTIAL PROJECT MERCURY
- --------------------------------------------------------------------------------
SUMMARY TRANSACTION ANALYSIS
(Dollars in Millions, Except Per Share Data)
50% Cash / 50% Stock
No Equity Offering
Price Deck: Market Case
<TABLE>
<CAPTION>
<S> <C>
Purchase Price Per Share $80.00
Asset Sales (After Tax) $ 0.0
Excludes Chevron Debt
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA PROJECTED
------------ ---------------------------------------------
1997 1998 1999 2000
---- ---- ---- ----
<S> <C> <C> <C> <C>
FINANCIAL STATISTICS
EBITDAX Unicorn Ramp @ 8.0% $ 1,299 $ 1,354 $ 1,474 $ 1,596
EBITDAX Unicorn / Mercury $ 2,141 $ 2,133 $ 2,283 $ 2,404
Absolute Accretion/(Dilution) $ 841.5 $ 778.9 $ 809.2 $ 808.0
Percent Accretion/(Dilution) 64.8% 57.5% 54.9% 50.6%
ATCF / Share Unicorn Ramp @ 8.0% $ 4.68 $ 4.79 $ 5.03 $ 5.32
ATCF / Share Unicorn / Mercury $ 5.57 $ 5.45 $ 5.74 $ 6.12
Absolute Accretion/(Dilution) $ 0.89 $ 0.66 $ 0.71 $ 0.80
Percent Accretion/(Dilution) 18.9% 13.7% 14.2% 15.0%
EPS Unicorn Ramp @ 8.0% $ 1.26 $ 1.35 $ 1.63 $ 1.93
EPS Unicorn / Mercury $ 0.79 $ 0.62 $ 0.94 $ 1.38
Absolute Accretion/(Dilution) -$0.47 -$0.72 -$0.69 -$0.54
Percent Accretion/(Dilution) (37.3%) (53.9%) (42.2%) (28.2%)
CREDIT DATA (EXCLUDING CHEVRON DEBT)
Total Debt at Year End $ 3,862.9 $ 3,677.5 $3,387.7 $ 2,860.5
EBITDAX / Interest Coverage 7.38x 7.36x 8.03x 9.18x
Total Debt / EBITDAX 1.80x 1.72x 1.48x 1.19x
Total Debt / Total Book Capitalization 51.3% 49.2% 45.6% 39.3%
Total Debt / Market Capitalization 29.3% 28.3% 26.6% 23.4%
EQUITY VALUATION (IMPLIED SHARE PRICE)
Forward EBITDAX Multiple
@ 6.0x $ 28.42 $ 31.84 $ 35.02 $ 37.96
@ 6.5x $ 31.76 $ 35.42 $ 38.78 $ 41.83
@ 7.0x $ 35.10 $ 38.99 $ 42.55 $ 45.71
Forward ATCF Multiple
@ 6.0x $ 32.70 $ 34.42 $ 36.71 $ 37.74
@ 6.5x $ 35.43 $ 37.29 $ 39.77 $ 40.88
@ 7.0x $ 38.15 $ 40.16 $ 42.83 $ 44.03
</TABLE>
HIGHLY CONFIDENTIAL [SMITH BARNEY LOGO]
<PAGE> 21
CONFIDENTIAL PROJECT MERCURY
- -------------------------------------------------------------------------------
KEY MODEL ASSUMPTIONS
(Dollars in Millions, Except Per Share Data)
<TABLE>
<S> <C>
TRANSACTION CONSIDERATION
-------------------------
Purchase Price $80.00
Structure 100% Cash
COMMODITY PRICES
----------------
Price Deck
WTI Market Case
Henry Hub Market Case
ANNUAL COST SAVINGS
-------------------
1998 $50 million
1999 $90 million
2000 and Beyond $95 million
POST-TRANSACTION CAPITAL RAISED
-------------------------------
Asset Sales-1998 $560 million market value
$409 million after tax proceeds
Equity Issuance-1998 $1.0 billion
$29.25 issuance price
UNICORN STAND-ALONE
-------------------
Ramp-Up Capital reinvested at 8.0% after tax
</TABLE>
HIGHLY CONFIDENTIAL [SMITH BARNEY LOGO]
<PAGE> 22
CONFIDENTIAL PROJECT MERCURY
- ------------------------------------------------------------------------------
SUMMARY TRANSACTION ANALYSIS
(Dollars in Millions, Except Per Share Data)
100% Cash / 0% Stock
$1,000 Equity Offering @ $29.25/share
Price Deck: Market Case
<TABLE>
<S> <C>
Purchase Price Per Share $ 80.00
Asset Sales (After Tax) $409.2
Excludes Chevron Debt
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA PROJECTED
------------ -------------------------------------------
1997 1998 1999 2000
---- ---- ---- ----
<S> <C> <C> <C> <C>
FINANCIAL STATISTICS
EBITDAX Unicorn Ramp @ 8.0% $1,299 $1,354 $1,474 $1,596
EBITDAX Unicorn/Mercury $2,061 $2,053 $2,213 $2,344
Absolute Accretion/(Dilution) $761.5 $698.9 $739.2 $748.0
Percent Accretion/(Dilution) 58.6% 51.6% 50.1% 46.9%
ATCF/Share Unicorn Ramp @ 8.0% $4.68 $4.79 $5.03 $5.32
ATCF/Share Unicorn/Mercury $5.86 $5.85 $6.17 $6.58
Absolute Accretion/(Dilution) $1.18 $1.06 $1.15 $1.26
Percent Accretion/(Dilution) 25.2% 22.2% 22.8% 23.8%
EPS Unicorn Ramp @ 8.0% $1.26 $1.35 $1.63 $1.93
EPS Unicorn/Mercury $0.57 $0.50 $0.85 $1.33
Absolute Accretion/(Dilution) -$0.69 -$0.85 -$0.78 -$0.60
Percent Accretion/(Dilution) (54.6%) (63.0%) (47.8%) (31.1%)
CREDIT DATA (EXCLUDING CHEVRON DEBT)
Total Debt at Year End $4,399.0 $4,302.1 $4,095.5 $3,649.6
EBITDAX/Interest Coverage 6.21x 6.18x 6.67x 7.36x
Total Debt/EBITDAX 2.13x 2.10x 1.85x 1.56x
Total Debt/Total Book Capitalization 60.5% 59.3% 56.6% 51.3%
Total Debt/Market Capitalization 34.2% 33.7% 32.6% 30.1%
EQUITY VALUATION (IMPLIED SHARE PRICE)
Forward EBITDAX Multiple
@ 6.0x $27.86 $31.53 $34.96 $38.14
@ 6.5x $31.41 $35.36 $39.01 $42.32
@ 7.0x $34.96 $39.19 $43.07 $46.51
Forward ATCF Multiple
@ 6.0x $35.13 $37.04 $39.49 $40.60
@ 6.5x $38.06 $40.12 $42.78 $43.98
@ 7.0x $40.98 $43.21 $46.07 $47.37
</TABLE>
HIGHLY CONFIDENTIAL [SMITH BARNEY LOGO]
<PAGE> 23
CONFIDENTIAL PROJECT MERCURY
KEY MODEL ASSUMPTIONS
(Dollars in Millions, Except Per Share Data)
<TABLE>
<S> <C>
TRANSACTION CONSIDERATION
Purchase Price $80.00
Structure 100% Cash
COMMODITY PRICES
Price Deck
WTI Market Case
Henry Hub Market Case
ANNUAL COST SAVINGS
1998 $50 million
1999 $90 million
2000 and Beyond $95 million
POST-TRANSACTION CAPITAL RAISED
Asset Sales None
Equity Issuance - 1998 $1.0 billion
$29.25 issuance price
UNICORN STAND-ALONE
Ramp-Up Capital reinvested at
8.0% after tax
</TABLE>
HIGHLY CONFIDENTIAL [SMITH BARNEY LOGO]
<PAGE> 24
CONFIDENTIAL PROJECT MERCURY
- ------------------------------------------------------------------------------
SUMMARY TRANSACTION ANALYSIS
(Dollars in Millions, Except Per Share Data)
100% Cash / 0% Stock
$1,000 Equity Offering @ $29.25/Share
Price Deck: Market Case
<TABLE>
<S> <C>
Purchase Price Per Share $80.00
Asset Sales (After Tax) $ 0.0
Excludes Chevron Debt
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA PROJECTED
------------ ---------------------------------------------
1997 1998 1999 2000
---- ---- ---- ----
<S> <C> <C> <C> <C>
FINANCIAL STATISTICS
EBITDAX Unicorn Ramp @ 8.0% $ 1,299 $ 1,354 $ 1,474 $ 1,596
EBITDAX Unicorn / Mercury $ 2,141 $ 2,133 $ 2,283 $ 2,404
Absolute Accretion/(Dilution) $ 841.5 $ 778.9 $ 809.2 $ 808.0
Percent Accretion/(Dilution) 64.8% 57.5% 54.9% 50.6%
ATCF / Share Unicorn Ramp @ 8.0% $ 4.68 $ 4.79 $ 5.03 $ 5.32
ATCF / Share Unicorn / Mercury $ 5.97 $ 5.85 $ 6.16 $ 6.56
Absolute Accretion/(Dilution) $ 1.29 $ 1.05 $ 1.13 $ 1.25
Percent Accretion/(Dilution) 27.5% 22.0% 22.5% 23.4%
EPS Unicorn Ramp @ 8.0% $ 1.26 $ 1.35 $ 1.63 $ 1.93
EPS Unicorn / Mercury $ 0.69 $ 0.50 $ 0.85 $ 1.32
Absolute Accretion/(Dilution) -$0.58 -$0.85 -$0.79 -$0.61
Percent Accretion/(Dilution) (45.8%) (63.1%) (48.2%) (31.5%)
CREDIT DATA (EXCLUDING CHEVRON DEBT)
Total Debt at Year End $ 4,808.1 $ 4,665.7 $ 4,420.8 $ 3,941.9
EBITDAX / Interest Coverage 5.87x 5.85x 6.31x 6.98x
Total Debt / EBITDAX 2.25x 2.19x 1.94x 1.64x
Total Debt / Total Book Capitalization 63.5% 62.1% 59.3% 54.0%
Total Debt / Market Capitalization 36.2% 35.5% 34.3% 31.8%
EQUITY VALUATION (IMPLIED SHARE PRICE)
Forward EBITDAX Multiple
@ 6.0x $ 28.11 $ 31.73 $ 35.08 $ 38.16
@ 6.5x $ 31.79 $ 35.68 $ 39.24 $ 42.44
@ 7.0x $ 35.48 $ 39.62 $ 43.39 $ 46.71
Forward ATCF Multiple
@ 6.0x $ 35.08 $ 36.94 $ 39.39 $ 40.47
@ 6.5x $ 38.00 $ 40.02 $ 42.67 $ 43.84
@ 7.0x $ 40.92 $ 43.10 $ 45.95 $ 47.22
</TABLE>
HIGHLY CONFIDENTIAL [SMITH BARNEY LOGO]
<PAGE> 25
CONFIDENTIAL PROJECT MERCURY
- -------------------------------------------------------------------------------
KEY MODEL ASSUMPTIONS
(Dollars in Millions, Except Per Share Data)
<TABLE>
<S> <C>
TRANSACTION CONSIDERATION
-------------------------
Purchase Price $80.00
Structure 100% Cash
COMMODITY PRICES
----------------
Price Deck
WTI Market Case
Henry Hub Market Case
ANNUAL COST SAVINGS
-------------------
1998 $50 million
1999 $90 million
2000 and Beyond $95 million
POST-TRANSACTION CAPITAL RAISED
-------------------------------
Asset Sales-1998 $560 million market value
$409 million after tax proceeds
Equity Issuance None
UNICORN STAND-ALONE
-------------------
Ramp-Up Capital reinvested at 8.0% after tax
</TABLE>
HIGHLY CONFIDENTIAL [SMITH BARNEY LOGO]
<PAGE> 26
CONFIDENTIAL PROJECT MERCURY
- ------------------------------------------------------------------------------
SUMMARY TRANSACTION ANALYSIS
(Dollars in Millions, Except Per Share Data)
100% Cash / 0% Stock
No Equity Offering
Price Deck: Market Case
<TABLE>
<S> <C>
Purchase Price Per Share $80.00
Asset Sales (After Tax) $409.2
Excludes Chevron Debt
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA PROJECTED
------------ ---------------------------------------------
1997 1998 1999 2000
---- ---- ---- ----
<S> <C> <C> <C> <C>
FINANCIAL STATISTICS
EBITDAX Unicorn Ramp @ 8.0% $ 1,299 $ 1,354 $ 1,474 $ 1,596
EBITDAX Unicorn / Mercury $ 2,061 $ 2,053 $ 2,213 $ 2,344
Absolute Accretion/(Dilution) $ 761.5 $ 698.9 $ 739.2 $ 748.0
Percent Accretion/(Dilution) 58.6% 51.6% 50.1% 46.9%
ATCF / Share Unicorn Ramp @ 8.0% $ 4.68 $ 4.79 $ 5.03 $ 5.32
ATCF / Share Unicorn / Mercury $ 6.44 $ 6.43 $ 6.79 $ 7.25
Absolute Accretion/(Dilution) $ 1.76 $ 1.64 $ 1.76 $ 1.93
Percent Accretion/(Dilution) 37.5% 34.2% 35.0% 36.3%
EPS Unicorn Ramp @ 8.0% $ 1.26 $ 1.35 $ 1.63 $ 1.93
EPS Unicorn / Mercury $ 0.44 $ 0.36 $ 0.75 $ 1.29
Absolute Accretion/(Dilution) -$0.82 -$0.99 -$0.88 -$0.64
Percent Accretion/(Dilution) (64.9%) (73.5%) (53.9%) (33.0%)
CREDIT DATA (EXCLUDING CHEVRON DEBT)
Total Debt at Year End $ 5,371.8 $5,321.0 $5,162.3 $4,764.6
EBITDAX / Interest Coverage 5.03x 5.01x 5.37x 5.87x
Total Debt / EBITDAX 2.61x 2.59x 2.33x 2.03x
Total Debt / Total Book Capitalization 73.9% 73.3% 71.3% 66.9%
Total Debt / Market Capitalization 41.9% 41.6% 40.9% 39.0%
EQUITY VALUATION (IMPLIED SHARE PRICE)
Forward EBITDAX Multiple
@ 6.0x $ 27.78 $ 31.77 $ 35.46 $ 38.88
@ 6.5x $ 31.81 $ 36.11 $ 40.06 $ 43.63
@ 7.0x $ 35.83 $ 40.44 $ 44.65 $ 48.38
Forward ATCF Multiple
@ 6.0x $ 38.59 $ 40.71 $ 43.49 $ 44.62
@ 6.5x $ 41.81 $ 44.11 $ 47.12 $ 48.33
@ 7.0x $ 45.03 $ 47.50 $ 50.74 $ 52.05
</TABLE>
HIGHLY CONFIDENTIAL [SMITH BARNEY LOGO]
<PAGE> 27
CONFIDENTIAL PROJECT MERCURY
- --------------------------------------------------------------------------------
KEY MODEL ASSUMPTIONS
(Dollars in Millions, Except Per Share Data)
<TABLE>
<S> <C>
TRANSACTION CONSIDERATION
-------------------------
Purchase Price $80.00 Per Share
Structure 100% Cash
COMMODITY PRICES
----------------
Price Deck
WTI Market Case
Henry Hub Market Case
ANNUAL COST SAVINGS
-------------------
1998 $50 million
1999 $90 million
2000 and Beyond $95 million
POST-TRANSACTION CAPITAL RAISED
-------------------------------
Asset Sales None
Equity Issuance None
UNICORN STAND-ALONE
-------------------
Ramp-Up Capital reinvested at 8.0% after tax
</TABLE>
HIGHLY CONFIDENTIAL [SMITH BARNEY LOGO]
<PAGE> 28
CONFIDENTIAL PROJECT MERCURY
- ------------------------------------------------------------------------------
SUMMARY TRANSACTION ANALYSIS
(Dollars in Millions, Except Per Share Data)
100% Cash / 0% Stock
No Equity Offering
Price Deck: Market Case
<TABLE>
<S> <C>
Purchase Price Per Share $80.00
Asset Sales (After Tax) $ 0.0
Excludes Chevron Debt
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA PROJECTED
------------ ---------------------------------------------
1997 1998 1999 2000
---- ---- ---- ----
<S> <C> <C> <C> <C>
FINANCIAL STATISTICS
EBITDAX Unicorn Ramp @ 8.0% $ 1,299 $ 1,354 $ 1,474 $ 1,596
EBITDAX Unicorn / Mercury $ 2,141 $ 2,133 $ 2,283 $ 2,404
Absolute Accretion/(Dilution) $ 841.5 $ 778.9 $ 809.2 $ 808.0
Percent Accretion/(Dilution) 64.8% 57.5% 54.9% 50.6%
ATCF / Share Unicorn Ramp @ 8.0% $ 4.68 $ 4.79 $ 5.03 $ 5.32
ATCF / Share Unicorn / Mercury $ 6.57 $ 6.42 $ 6.77 $ 7.22
Absolute Accretion/(Dilution) $ 1.88 $ 1.63 $ 1.74 $ 1.90
Percent Accretion/(Dilution) 40.2% 34.0% 34.7% 35.7%
EPS Unicorn Ramp @ 8.0% $ 1.26 $ 1.35 $ 1.63 $ 1.93
EPS Unicorn / Mercury $ 0.57 $ 0.35 $ 0.74 $ 1.27
Absolute Accretion/(Dilution) -$0.69 -$0.99 -$0.89 -$0.66
Percent Accretion/(Dilution) (54.9%) (73.6%) (54.4%) (34.2%)
CREDIT DATA (EXCLUDING CHEVRON DEBT)
Total Debt at Year End $5,780.9 $5,684.6 $5,487.7 $5,060.0
EBITDAX / Interest Coverage 4.84x 4.82x 5.16x 5.59x
Total Debt / EBITDAX 2.70x 2.67x 2.40x 2.10x
Total Debt / Total Book Capitalization 76.4% 75.7% 73.6% 69.3%
Total Debt / Market Capitalization 43.7% 43.2% 42.4% 40.4%
EQUITY VALUATION (IMPLIED SHARE PRICE)
Forward EBITDAX Multiple
@ 6.0x $ 28.06 $ 31.99 $ 35.60 $ 38.89
@ 6.5x $ 32.24 $ 36.46 $ 40.31 $ 43.74
@ 7.0x $ 36.42 $ 40.94 $ 45.03 $ 48.59
Forward ATCF Multiple
@ 6.0x $ 38.53 $ 40.60 $ 43.30 $ 44.47
@ 6.5x $ 41.75 $ 43.99 $ 46.91 $ 48.17
@ 7.0x $ 44.96 $ 47.37 $ 50.52 $ 51.88
</TABLE>
HIGHLY CONFIDENTIAL [SMITH BARNEY LOGO]
<PAGE> 29
CONFIDENTIAL PROJECT MERCURY
- --------------------------------------------------------------------------------
KEY MODEL ASSUMPTIONS
(Dollars in Millions, Except Per Share Data)
<TABLE>
<CAPTION>
TRANSACTION CONSIDERATION
-------------------------
<S> <C>
Purchase Price $80.00 Per Share
Structure 100% Cash
COMMODITY PRICES
----------------
Price Deck
WTI S&P Stress Case
Henry Hub S&P Stress Case
ANNUAL COST SAVINGS
-------------------
1998 $50 million
1999 $90 million
2000 and Beyond $95 million
POST-TRANSACTION CAPITAL RAISED
-------------------------------
Asset Sales None
Equity Issuance None
UNICORN STAND-ALONE
-------------------
Ramp-Up Capital reinvested at 8.0% after tax
</TABLE>
HIGHLY CONFIDENTIAL [SMITH BARNEY LOGO]
<PAGE> 30
CONFIDENTIAL PROJECT MERCURY
- -------------------------------------------------------------------------------
SUMMARY TRANSACTION ANALYSIS
(Dollars in Millions, Except Per Share Data)
100% CASH/0% STOCK
NO EQUITY OFFERING
PRICE DECK: S&P STRESS CASE
PURCHASE PRICE PER SHARE $80.00
ASSET SALES (AFTER TAX) $0.00
EXCLUDES CHEVRON DEBT
<TABLE>
<CAPTION>
PRO FORMA PROJECTED
--------- -----------------------------------------
FINANCIAL STATISTICS 1997 1998 1999 2000
- -------------------- --------- ---- ---- ----
<S> <C> <C> <C> <C>
EBITDAX Unicorn Ramp @ 8.0% $ 1,175 $ 1,062 $ 1,128 $ 1,158
EBITDAX Unicorn/Mercury $ 1,935 $ 1.683 $ 1,811 $ 1,864
- ---------------------------------------------------------------------------------------------------------------
Absolute Accretion/(Dilution) $ 759.9 $ 620.6 $ 682.7 $ 705.6
Percent Accretion/(Dilution) 64.6% 58.4% 60.5% 60.9%
- ---------------------------------------------------------------------------------------------------------------
ATCF/Share Unicorn Ramp @ 8.0% $ 4.35 $ 4.00 $ 4.09 $ 4.13
ATCF/Share Unicorn/Mercury $ 6.01 $ 5.20 $ 5.45 $ 5.74
- ---------------------------------------------------------------------------------------------------------------
Absolute Accretion/(Dilution) 1.66 $ 1.20 $ 1.36 $ 1.61
Percent Accretion/(Dilution) 38.2% 30.1% 33.4% 38.9%
- ---------------------------------------------------------------------------------------------------------------
EPS Unicorn Ramp @ 8.0% $ 0.93 $ 0.59 $ 0.82 $ 0.97
EPS Unicorn/Mercury $ 0.00 - $ 1.15 - $ 0.73 - $ 0.19
- ---------------------------------------------------------------------------------------------------------------
Absolute Accretion/(Dilution) - $ 0.93 - $ 1.74 - $ 1.55 - $ 1.16
Percent Accretion/(Dilution) (99.6)% (296.4)% (188.5)% (119.5)%
- ---------------------------------------------------------------------------------------------------------------
CREDIT DATE (EXCLUDING CHEVRON DEBT)
- ------------------------------------
Total Debt at Year End $ 5,842.8 $ 6,037.4 $ 6,174.90 $ 6,118.9
EBITDAX/Interest Coverage 4.30x 3.74x 3.90x 4.20x
Total Debt/EBITDAX 3.02x 3.59x 3.41x 3.28x
Total Debt/Total Book Capitalization 77.4% 81.6% 84.6% 85.7%
Total Debt/ Market Capitalization 43.9% 44.7% 45.3% 45.1%
EQUITY VALUATION (IMPLIED SHARE PRICE)
- -------------------------------------
Forward EBITDAX Multiple
@6.0x $ 17.01 $ 19.26 $ 19.97 $ 20.64
@6.5x $ 20.31 $ 22.81 $ 23.63 $ 24.33
@7.0x $ 23.60 $ 26.36 $ 27.28 $ 28.02
Forward ATCF Multiple
@6.0x $ 31.22 $ 32.69 $ 34.44 $ 34.26
@6.5x $ 33.83 $ 35.42 $ 37.31 $ 37.12
@7.0x $ 36.43 $ 38.14 $ 40.18 $ 39.98
</TABLE>
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