Conoco Inc. and Phillips Petroleum Co. have approved what is being touted as a "merger of equals," creating a $35 billion global energy company.
They said the merged company-to be called ConocoPhillips-would be the third-largest integrated US energy company, based on market capitalization, oil and gas reserves, and production.
Worldwide, it will be the sixth-largest energy company, based on hydrocarbon reserves, and the fifth-largest global refiner.
Conoco and Phillips said the merged firm would have an acceptable debt ratio, improved capital efficiency, and an efficient cost structure.
In addition to the combined strength of the companies' downstream assets, the merger would unite two companies that were the first to develop gas fields in the southern sector of the North Sea and that led technical innovations when developing large oil fields in the more hostile waters of the northern sector.
Deal details
Phillips shareholders will receive one share of ConocoPhillips common for each share of Phillips. Conoco shareholders will receive 0.4677 shares of ConocoPhillips common for each share of Conoco.
Based on the closing market prices for the shares of both companies Nov. 16, and their debt levels as of Sept. 30, the new company would have an enterprise value of $53.5 billion ($34.9 billion of equity and $18.6 billion of debt and preferred securities).
Initially, Phillips shareholders will own 56.6% and Conoco shareholders 43.4% of the new company. The transaction is structured to be tax-free to the shareholders of each company.
The companies expect to complete the merger in second half 2002. They anticipate cost savings of $750 million/year by merging, with savings to begin within a year.
Archie Dunham, Conoco chairman and CEO, will delay until 2004 a planned retirement in order to serve as ConocoPhillips chairman. James Mulva, Phillips chairman and CEO, will be president and CEO of the combined company and will become chairman once Dunham retires.
The ConocoPhillips board will consist of 16 directors, eight from each of the companies, including Dunham and Mulva.
ConocoPhillips will be headquartered at Conoco's Houston offices with a continuing presence at Phillips's Bartlesville, Okla., headquarters.
Dunham said that the merger represented "an excellent strategic fit" for both firms.
"It will position ConocoPhillips as a stronger US-based, global energy producer by significantly enhancing its capability and growth prospects on five continents in both current and prospective ventures, while generating major synergies," he said. "With a very strong balance sheet, more capital for upstream investment, and greater operational efficiency downstream, ConocoPhillips will be a tough new competitor to the larger global majors."
Mulva said, "Our compatible cultures, similar values, and determined focus will facilitate a smooth integration and enable ConocoPhillips to get off to a fast and successful start."
ConocoPhillips is expected to have pro forma 2000 hydrocarbon reserves of 8.7 billion boe and production of 1.7 million boe/d, based on the companies' estimates for 2001 yearend production (see table).
The company will have operations in Alaska, the Lower 48, Canada, the North Sea, Venezuela, China, the Timor Sea, Indonesia, Viet Nam, the Middle East, Russia, and the Caspian Sea region.
In the refining and marketing segment, ConocoPhillips will operate or have equity interests in 19 refineries in the US, the UK, Ireland, Germany, the Czech Republic, and Malaysia, with a refining capacity of 2.6 million b/d. It also will have a strong marketing presence in the US.
ConocoPhillips will continue Phillips's equity participation in the Denver-based natural gas gathering and processing joint venture Duke Energy Field Services LP (30% stake) and in Houston-based chemicals and plastics joint venture Chevron Phillips Chemical Co. LP (50% stake).
Reactions
Financial analysts generally approved the companies' proposed merger, although one described it as a maneuver "to survive, not thrive" in the current downturn.
In a telephone conference call Nov. 19, analysts also noted the new ConocoPhillips's debt level of $18.6 billion and the lack of a premium payment to either company through the merger agreement.
Recalling Dunham's often-repeated claim that "bigger isn't necessarily better" and the fact that the two companies failed to complete a previous downstream joint venture, some analysts asked, "Why now?"
However, company officials claim the new company will have a strong balance sheet with an expected debt-to-capitalization ratio of 35%.
The two companies stocks "have traded close to each other" for the past 3 years, Mulva noted.
And this merger will be both bigger and better, replied Dunham. ConocoPhillips will be the largest refiner in North America and fifth largest worldwide, he said.
More important, the two companies are complementary in their holdings and share the same goals "top to bottom," said Mulva.
Dunham said 57% of ConocoPhillips's total capital employed is in its upstream operations, which will "grow to 60-70% in time." Although both Conoco and Phillips are weighted more toward oil reserves and production, he said, "Both want 50% gas. We're close to that now."
ConocoPhillips could cash in on the gas technology and expertise developed by each company, officials said.
Earlier this year, Conoco announced plans to build a $75 million demonstration plant in Ponca City, Okla., to commercialize its proprietary technology for converting natural gas to liquids (OGJ Online, May 14, 2001). Slated for completion next September, the de- monstration plant will convert gas into 400 b/d of sulfur-free diesel, jet fuel, and other products. After proving the low-cost GTL technology, the demonstration plant will test new gas-conversion and petrochemical technologies.
Conoco expects to begin construction of its first commercial GTL plant by 2004. That technology "will give us a leg up" in development of stranded gas reserves around the globe, said Dunham.
Moreover, Mulva said, the new company's strong position in Asia will open opportunities in the LNG business. Total Asia-Pacific LNG demand is expected to grow by 16 million tonnes/year in 2000-05 and by 30 million tonnes/ year during 2005-10 (OGJ, July 16, 2001, p. 68).
In addition, Dunham said ConocoPhillips will "be in the best position" to resume operations in Libya and Iran when the US government finally lifts its unilateral ban on business dealings with those countries.
Although the US recently extended for another 5 years economic sanctions against companies and countries that do business with Iran and Libya (OGJ Online, July 27, 2001), Dunham said he's confident that US investment in those two countries' oil sectors will be reopened.
Other reactions
Moody's Investor Service placed under review for possible upgrade the securities ratings of both firms; Phillips presently has an A3 rating for its senior unsecured debt, and Conoco has a Baa1 senior unsecured debt rating.
Also under review, Moody's noted, are the respective issuer ratings and long-term debt ratings of both Phillips and Old Greenwich, Conn.-based refiner Tosco Corp., which Phillips acquired earlier this year (OGJ, Feb. 12, 2001, p. 33). Conoco and Gulf Canada's Prime-2 commercial paper ratings are also under review.
Fitch Investor's Service placed Phil- lips's debt ratings on positive rating watch following the merger announcement. Fitch currently rates Phillips's unsecured debt at A-, its trust preferred at BBB+, and its commercial paper at F2.
Fitch said that it views the merger announcement, "as a positive from both an operational and financial standpoint.
"For example, Conoco's large North American natural gas position will help balance Phillips's leverage to crude oil prices, and Phillips's larger downstream operations will further balance the combined entity's exposure to upstream price volatility."
Others in the investment community viewed the merger as positive.
"With [their exploration and production] portfolio overlap in the US, North Sea, Venezuela, and Asia, the E&P cost saving assumptions look reasonable," said UBS Warburg in a research note. "In addition, given the exploration portfolio of the combined company, the 25% reduction in the combined exploration budget appears prudent compared to prior oil mergers that have assumed one of the two merging company's budgets is removed altogether."
Warburg, however, said that the merged company would have to concentrate on reducing some of its corporate costs: "Although clearly an emotive issue given the Phillips history, the continuation of a 'material' presence in Bartlesvilleellipsecould prevent the company from maximizing returns to shareholders."
Warburg recommended that, following this merger Phillips should take pause for the time being before making any further acquisitions. "Given the frenetic pace of deals at Phillips over the past 2 years culminating in [this merger], we believed that Phillips's management should assimilate the assets acquired and establish a track record of operating the enlarged company before moving on to the next acquisition."
Joint North Sea assets
In the North Sea, Conoco was the first company to use the tension-leg platform concept on its now-defunct Hutton field, and when Phillips developed Maureen field, it was the first company to use a platform designed to be reused. However, both platforms have yet to find new applications, and Maureen's will be scrapped.
Phillips is also the operator of the Ekofisk complex of fields-which straddles the Norwegian and UK sectors of the North Sea and has been producing 350,000 b/d of oil since 1971. The company has 35% of the project.
In the southern sector, the firms were among the first to see the potential of developing small accumulations through a joint-production system, and Conoco's Vanguard, Victor, and Viking fields have provided the model for most developments that have come since in the area.
Conoco is still active in the area and is seeking consent from the UK government for the fast-track development of its recent gas discovery on Block 49/16, 80 miles east of the Lincolnshire coast.
The discovery, on what is known as the Vanguard Extensions (VE) prospect, is another success for Conoco's policy of "snuggle" exploration and development, the pursuit of gas and oil pros- pects close to existing processing and transportation facilities, making them commercially attractive and capable of rapid development.
The VE discovery is Conoco's seventh successful snuggle exploration and appraisal well in the UK since the beginning of 1998. Conoco anticipates first gas production in third or fourth quarter 2002.
Conoco and Phillips also are focused on the larger oil and gas accumulations farther north. With Conoco's acquisition of Saga UK Ltd. in 2000, it became the 51% owner of the Britannia gas-condensate field, the largest producing gas field in the UK North Sea. That deal also led to it acquiring 23% of the producing Alba field to become the largest shareholder.
Conoco and ChevronTexaco UK Ltd. broke with industry tradition and established the first joint operating company in the UK North Sea, Britannia Operator Ltd. The partners also established innovative alliances with contractors and suppliers, setting out shared goals for everything from safety and environmental protection to costs and field performance. The coventurers in Britannia are Conoco 51.42%, Chev- ronTexaco 30.20%, BP PLC 9.42%, and Phillips 6.78%.
In addition, Conoco is expanding its European oil and gas production with discoveries in the North Sea, off the UK, and the Netherlands. The company will also participate in development of Clair field in the North Atlantic.
Wholly owned Conoco unit Clyde Petroleum Exploratie BV has a significant gas discovery in the Dutch North Sea. The Q4-10 discovery represents the seventh commercial discovery that the company has drilled off the Netherlands within the last 3 years. The well is 6 miles from the Clyde-operated pipeline and production facilities. The company is reviewing development options.
Conoco acquired Clyde Petroleum as a result of its recent acquisition of Calgary-based Gulf Canada Resources Ltd. (OGJ, June 4, 2001, p. 36).
These developments will enhance the portfolio Conoco and Phillips hold in the producing fields in the Norwegian North Sea. Ekofisk is Phillips's most profitable asset, and Conoco has 23.3% of Huldra, 18.2% of Heidrun, 12% of Stratfjord North, 10.3% of Stratfjord, 7.7% of Osberg, 9% of Visund, 6.5% of Sygna, 6.4% of Gran, 6% of Stratfjord East, 3.7% of Jotun, 2% of Murchison, and 1.6% of Troll.
Downstream in Europe, Conoco is a major player through its Jet brand, which is usually a price leader. The company is also a major supplier to the supermarket brands.
Conoco owns the 186,000 b/d Humber refinery at Humberside, UK, and minority interests in German and Czech Republic refining complexes. Phillips, on the other hand, has withdrawn from the UK downstream market.
