Phillips and Conoco Agree to Merger
The dramatic pace of consolidation in the oil and gas industry continued Sunday when Phillips Petroleum Co. and Conoco Inc. announced a $15.2-billion all-stock merger that would create the nation’s third-largest energy company.
ConocoPhillips, as it would be known if the deal is approved by shareholders and the federal government, would have combined sales of about $53 billion a year from production, refining and retailing. The company would vault into the top tier of energy exploration firms and refiners--with capacity for 2.6 million barrels a day--and would be among the biggest gasoline station operators in the U.S.
In a conference call Sunday, Archie Dunham and James Mulva, the chairmen and chief executives, respectively, of Conoco and Phillips, billed the merger as an “excellent strategic fit” between two strong companies. Mulva added that the companies combined would be better able to compete with much bigger rivals and would have the breadth and depth to finance new projects, operate more efficiently and withstand market fluctuations.
Analysts and economists seemed to agree that the two companies had little choice in a global energy environment ruled by three tough realities. One is the nearly 50% drop in the price of oil in the last year. Another is that oil and gas exploration has been forced into terrain that is hazardous from political and environmental standpoints. The third is that mergers and consolidations of other companies threatened to leave Conoco and Phillips outgunned.
“It’s been difficult for companies to avoid merging,” said Newport Beach-based economist Philip Verleger Jr., president of PKVerleger. “Without a merger partner, Phillips and Conoco risked being left behind.”
The latest round of strategic couplings began more than two years ago when British oil giant BP agreed to buy Amoco Inc. and then Los Angeles-based Atlantic Richfield Co. Since then, there has been a wave of mega-deals, including Chevron Corp.’s acquisition of Texaco Inc. in a $38.5-billion deal completed this fall and Exxon Corp.’s $80-billion takeover of Mobil Corp. Phillips itself has bulked up in recent years, more than doubling its size after acquiring Arco’s Alaskan production assets as part of its merger with BP. It also became the No. 2 U.S. refiner in September when its $8-billion purchase of independent refiner Tosco Corp. was finalized.
A desire to increase natural gas holdings has been a major component of some of these deals, a fact that was echoed Sunday by Dunham and Mulva. Currently, the two companies’ reserves consist of 38% gas and 62% oil. Dunham said he would like to see the natural gas share increased to 50%.
Bartlesville, Okla.-based Phillips and Houston-based Conoco probably wouldn’t have to sell many assets to win approval from antitrust regulators. Chevron was forced to sell Texaco’s stakes in U.S. refining joint ventures to get its buyout approved.
“This is a combination that doesn’t have too many overlaps,” ABN Amro analyst Eugene Nowak told Bloomberg News.
Phillips owns two refineries in California, one in Carson and one in Northern California. It also has refineries in Texas, Utah, New Jersey, Louisiana, Washington, Illinois and Pennsylvania.
Phillips sells gasoline through 12,400 stations under the Phillips 66 and 76 brands and the Circle K brand. Conoco operates 7,000 stations in the U.S. and overseas and has refineries in the Gulf Coast and Rockies regions.
Under the terms of the agreement, Phillips shareholders would receive one share of ConocoPhillips common stock for each share of Phillips they own, and Conoco shareholders would receive 0.4677 share of ConocoPhillips common stock for each share of Conoco they own.
Based on the closing prices Friday of the companies’ stocks, Conoco was valued at about $15.2 billion, offering virtually no premium for Conoco shareholders.
ConocoPhillips would have debt and preferred securities of $18.6billion and have a market capitalization of $35 billion.
Upon completion of the merger, Dunham would serve as chairman of ConocoPhillips and would delay his scheduled retirement to 2004. Mulva would be president and CEO of the combined company and also would take over as chairman when Dunham steps down. The new company would be headquartered in Houston.
Conoco Inc. has operations in more than 40 countries, 20,000 employees and $27.7 billion in assets. Phillips has 38,500 employees and $35.4 billion in assets.
Phillips and Conoco have been talking for years about a merger, Dunham said. A decline in their shares in recent weeks, in part because of falling oil prices, made the share swap possible, he said. In New York Stock Exchange trading Friday, Phillips closed at $51.82 and Conoco at $24.30.
Oil prices closed Friday at $18.03 a barrel on the New York Mercantile Exchange, down 47% from a year ago, as slowing economies and a drop in travel after the Sept.11 attacks reduced demand.
The companies said they expect the merger to achieve annual savings of at least $750 million in the first year after closing, expected in the second half of next year.
