Business Week- Chevron

NOVEMBER 26, 2001

THE CORPORATION

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The Other Instant Powerhouse in Energy
Trading

It's not easy being No. 4. Despite a $35 billion merger
completed in October, ChevronTexaco Corp. (CVX )
is still not one of the oil superpowers. Nor, at more
than $90 billion a year in revenues, is it a scrappy little
guy. So Chairman David J. O'Reilly has been
searching for a strategy beyond just drilling for more
oil and gas.

Now, he may have something: a big stake in the No. 1
energy-trading company. Chevron Corp. has owned
26% of Dynegy Inc. (DYN ) since 1996, and with
Dynegy's planned acquisition of Enron Corp. (ENE ),
the top energy trader, ChevronTexaco is making the
oil industry's most aggressive push yet into this
fast-growing business. It plans to eventually pump
$2.5 billion into the combined Dynegy and Enron to
maintain its 26% stake, and it might raise that share.
So, while ChevronTexaco's much bigger rivals run small in-house trading
operations, energy trading may soon account for more than 10% of
ChevronTexaco's earnings. "Chevron is now positioned to be a leader in the
business," says analyst Arjun Murti at Goldman, Sachs & Co.

The deal would certainly dovetail with ChevronTexaco's strategy of becoming a
more integrated energy company, with a hand in everything from pumping oil at
the wellhead to trading natural-gas futures. By acquiring Texaco, Chevron
picked up, for instance, a big refining-and-marketing business --which should
balance out the bad times in oil and gas production, says Eugene Nowak, an
analyst at ABN Amro. "When crude-oil prices are down, they'll have margin
improvements on refining and marketing," he says. O'Reilly and other
ChevronTexaco executives declined to comment.

Until now, Dynegy wasn't a big deal for Chevron. Chevron purchased the stake
for $700 million when Dynegy was still called NGC Corp., and it filled three of
the 14 board seats--positions it will keep. Since then, Chevron has sold nearly all
its domestic natural-gas production to Dynegy. The stake has been a good
investment: it is now worth $3 billion, ChevronTexaco says.

Sitting on $2.9 billion in cash as of the end of the second quarter, ChevronTexaco
can well afford the Dynegy deal, analysts say. And they expect O'Reilly to use
some of that to make more buys; the most likely target is a natural-gas company.
Maybe it's not so bad being No. 4.