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. Last Updated: 07/27/2016

Chevron Raises Its Unocal Offer

PHILADELPHIA -- U.S. oil producer Unocal endorsed a sweetened $17 billion takeover offer from Chevron, preferring it to a higher bid from China's state-run CNOOC.

Chevron, the second-largest U.S. oil company, raised its stock and cash bid to $63.01 per share from roughly $60, turning up the heat in an international battle for producing assets as strong demand and tight supply hold crude oil prices near record levels.

The improved offer for Unocal, which has assets stretching from Myanmar to the Gulf of Mexico, was forced on Chevron by an all-cash, $67 per share bid from CNOOC worth $18.5 billion.

"Our increased offer has been driven by competitive circumstances," said Chevron chairman and CEO David O'Reilly.

Unocal's board has favored Chevron's proposal partly because of concern that U.S. regulators might reject the CNOOC transaction or that the deal may be stuck in a long review process. It recommended shareholders to accept the sweetened offer at a shareholders' meeting scheduled for Aug. 10.

A CNOOC spokesman said the firm remained "comfortable" with its $18.5 billion bid and believed its offer had a "distinct advantage."

But a source familiar with the matter said CNOOC was reviewing its options at a meeting in Beijing.

Peter Schoenfeld, CEO of New York-based investment firm PSAM, which holds over 1 million Unocal shares, said CNOOC's bid remained superior provided it could be approved by the U.S. government within 90 days.

But "realistically, the Unocal board will likely still require an improvement above $67 by CNOOC to switch allegiance," he said. He believes Unocal could be worth $74 per share based on recent transactions.

Yang Liu, a fund manager at Atlantis Investment, which does not hold CNOOC shares, said CNOOC should not rush to raise its bid. "CNOOC should cool down a bit. They should wait for Unocal shareholders to vote on the Chevron deal," Liu said.

CNOOC shareholders are concerned a hike in the Chinese bid could undermine the interests of CNOOC's minority shareholders. At least one fund has sold its stake as a result.

"We expect CNOOC is now pondering whether it will raise the bid or not. It's a matter of whether it will justify shareholders' value," said fund manager Stella Mak at East Asia Asset Management, which holds CNOOC shares.

CNOOC's overture had sparked concern among U.S. politicians that a sale of Unocal to a Beijing-controlled firm would harm U.S. national energy security. The company's deal is backed by low- and zero-interest state loans.

The U.S. House of Representatives Energy and Commerce Committee will hold a hearing on CNOOC's bid on Friday. The review comes on the heels of a congressional hearing last week where the Chinese offer came under attack.

CNOOC has made some concessions in an attempt to woo Unocal. It agreed to set aside $2.5 billion in a U.S. escrow account that could be tapped by Unocal shareholders if CNOOC walked away from a deal. CNOOC also put $500 million in escrow to pay a breakup fee attached to the Chevron-Unocal deal.