U.S. Steel to Acquire Big Gas Producer : $3.7-Billion Deal for Texas Oil Will Boost Holdings in Energy
U.S. Steel said Wednesday that it has signed an agreement to acquire Texas Oil & Gas, one of the nation’s largest independent natural gas companies, for stock valued at nearly $3.7 billion.
The merger, if approved by shareholders of both companies, would further increase the No. 1 steelmaker’s dependence on energy as a source of revenue. As a result of its 1982 acquisition of Marathon Oil, energy now accounts for 52% of U.S. Steel’s revenue, a share that would increase to 56% after a merger with Texas Oil.
U.S. Steel Chairman David Roderick acknowledged the company’s transition into a major energy producer during a news conference Wednesday in Pittsburgh. He told reporters that, although there were no immediate plans to change the company’s name, his “mind is open and we will continue to review it.” He stressed, however, that U.S. Steel had in “no way lessened” its commitment to steel.
Texas Oil & Gas is known as a low-cost producer of natural gas with one of the most successful exploration records in the industry. It operates 56 intrastate gas gathering systems and concentrates on gas, unlike Marathon, which concentrates on oil.
Good Growth Record
“They are a real strong company with a good growth record,” said John W. Hughes, an analyst with Rotan Mosle, a Houston investment house. “Anyone would want to have them.”
The merger, if completed, would create one of the largest industrial companies, with assets of about $23 billion and annual revenue of about $21 billion. U.S. Steel said a merged Texas Oil & Gas would continue to operate as a separate company.
Under the merger, each share of Texas Oil common would be converted into 0.6333 of a share of U.S. Steel common. Based on Wednesday’s $27.50 closing price for U.S. Steel shares, the deal is worth $17.42 for each Texas Oil share. That price is very close to the $17 value assigned it last year by John S. Herold, a Greenwich, Conn., oil and gas appraisal firm.
The proposed deal includes several agreements designed to prevent competing bids. Texas Oil granted U.S. Steel an option to buy up to 38.9 million shares of unissued but authorized shares at $17.42 a share. In addition, Texas Oil granted U.S. Steel an option to buy for $1.3 billion all of the capital stock of Delhi Gas Pipeline, Tonkawa Gas Processing and Nueces Co., which compose nearly all of Texas Oil’s natural gas pipeline business.
Analysts said Wednesday that U.S. Steel does not appear to have abandoned the steel industry.
“They have moved from a high-cost steel company to a slimmer, lower-cost steel company,” said David Fleischer, an analyst with Prudential-Bache Securities in New York. “I don’t think they will do much to change that.”
However, with more than 80% of its profits already coming from energy, U.S. Steel’s reliance on steel is significantly diminished. It could “shut down the steel mills indefinitely” with little economic consequence, said Bruce Lazier, an analyst with Prescott, Ball & Turben in New York.
Texas Oil declined to explain why it agreed to the merger. Analysts familiar with the Dallas-based oil company said its management feared an unfriendly takeover. The company recently reported its first earnings decline in 27 years--a 20% drop to $277 million from the last fiscal year--and management foresaw further declines as a result of a slump in the natural gas market. With U.S. Steel, they are getting a familiar business partner, the analysts surmised. The company’s pension fund owns 6.9% of Texas Oil shares.
U.S. Steel said the deal would not significantly dilute earnings for U.S. Steel shareholders, but several analysts doubted that. Reflecting a widely held view, Lazier of Prescott Ball said the issuance of new shares to acquire Texas Oil would dilute earnings per share by 20% to 30% for U.S. Steel shareholders. He added that the price seemed high since oil companies normally sell at a discount to appraised value.
“I’d say it’s a lousy deal for U.S. Steel shareholders,” he said. “They are going to have a hard time selling Wall Street on this.”
Indeed, the stock prices of both companies dropped Wednesday. U.S. Steel was down 75 cents a share, closing at $26.75, and Texas Oil dropped $1.375 to $16.50. The two issues were, respectively, the most actively traded and second most actively traded of the day--2.88 million shares of U.S. Steel and 2.54 million of Texas Oil.
Fleischer of Prudential-Bache said the acquisition price appeared to be low. He said that with “gimmicks and mirrors,” U.S. Steel could avoid dilution of shareholder earnings. He said U.S. Steel plans to make several accounting changes that would add about $100 million a year to pretax earnings. He said the company plans to write down about $800 million worth of Texas Oil assets and change its method of accounting for oil and gas drilling expenses.
In addition, he said, U.S. Steel has about $1.1 billion in tax-loss carry forwards and another $400 million in investment tax credits that it can use to shelter a good portion of Texas Oil’s income.
“At first blush, it looks like the dilution will be significant, but the facts say it will not,” he said.
Fleischer said that he considered the price low--Texas Oil stock traded at more than $30 a share earlier this year--and that Texas Oil “will have to work to sell the deal” but in the end its shareholders “will grumble and take their money.”
UNITED STATES STEEL’S SWITCH TO ENERGY Sales by Business Segment 1980 (Before 1982 purchase of Marathon Oil) Steel and related resources 62% Transportation & Utilities 4.5% Manufacturing & Engineering 17.5% Resource Development 5% Chemicals 11% 1984 Steel and related resources 33% Transportation & Utilities 3% Manufacturing & Engineering 6% Chemicals 7% Oil and gas 51% Adding Texas Oil & Gas Steel and related resources 30% Transportation & Utilities 2% Manufacturing & Engineering 6% Chemicals 6% Oil and gas 56%* * With Texas Oil & Gas revenue for 1984 ($2.05 billion) added to oil and gas segment. U.S.STEEL PERFORMANCE Year ended Dec. 31
1984 1983 1982 1981 1980 Revenue 19.10 17.54 18.92 13.94 12.49 Billions of dollars Net income (loss) 414 (1,161) (361) 1,077 505 Millions of dollars
TEXAS OIL & GAS PERFORMANCE Year ended Aug. 31 Billions of dollars
Revenue Net Income 1980 1.06 .141 1981 1.43 .192 1982 1.66 .247 1983 1.84 .296 1984 2.05 .346