Phillips, Conoco merging in $35 billion deal

Posted: Monday, November 19, 2001

TULSA, Okla. -- Phillips Petroleum Co. said Sunday it will buy Conoco Inc. for about $15.4 billion, creating the nation's third-largest oil and gas company.

Phillips, which bought the refining company Tosco Corp. earlier this year, will gain extra strength as a producer of petroleum. The combined market value of the new company would be $35 billion.

Under the terms of the deal, which was described by the two rivals as a merger of equals, the combined company would have reserves of 8.7 billion barrels of oil equivalent, daily production of 1.7 million barrels and $18.6 billion in debt and preferred securities.

The merger is expected to close during the second half of 2002 pending regulatory and shareholder approval.

The deal, which also includes a $550 million breakup fee, would put ConocoPhillips behind Exxon Mobil Corp. and ChevronTexaco Corp. in size.

ConocoPhillips would be based in Houston, home to Conoco. It would keep a reduced presence in Bartlesville, Okla., where Phillips employs 2,400 at its headquarters and research facility.

''This is really a growth story for Conoco and Phillips,'' said Conoco chairman Archie W. Dunham, who is delaying a planned retirement to serve as chairman of the combined company.

Phillips chair James Mulva will be chief executive and president of the new company and become chairman when Dunham retires in 2004. ''What we saw was just an ideal time for us to put our growth plans together,'' Mulva said.

Conoco and Phillips have a combined global work force of 58,000 employees and expect to save at least $750 million annually by merging.

Mulva said most of the savings should come from realized operating efficiencies instead of job cuts, but said some jobs will be eliminated in Bartlesville. He didn't say how many cuts would be implemented there.

While making Phillips much larger, analysts also said the deal would give the company better strategic balance.

''They really needed to beef up their exploration portfolio around the world,'' said Gene Gillespie, senior energy analyst with Howard Weil in New Orleans. ''Conoco has a presence in some areas that Phillips interested in, including the Gulf of Mexico and the MacKenzie Delta in Western Canada.''

There have been several big energy mergers in recent years. In September, the Federal Trade Commission approved Chevron Corp.'s acquisition of Texaco Inc. That deal followed BP Amoco's takeover of Atlantic Richfield Corp. two years ago and Exxon Corp.'s acquisition of Mobil Corp. in 1999, as the world's largest oil companies look for size and breadth to gain a competitive edge.

Under the terms of the deal, Phillips shareholders will get one share of each of ConocoPhillips stock for each Phillips share they own. Conoco shareholders will get .4677 shares of the new stock. The merger is expected to be tax-free to shareholders. Phillips shareholders will end up with a 56.6-percent stake in the new company.

The new board will have 16 directors -- eight from each company -- including Dunham and Mulva.

The merger should result cost savings in refining, marketing and transportation and more capital to fund worldwide exploration and production, the two men said during a teleconference.

Merger talks began in earnest about six weeks ago, Dunham said. Both have been rumored merger candidates for years.

Phillips had tried to unload some of its refining and marketing operations in a deal with Conoco that fell through in 1996.

A familiar face to U.S. motorists with its Phillips 66 logo, Phillips has engaged in a flurry of growth acquisitions after being among the smaller integrated companies for decades.

In February, Phillips acquired Tosco of Greenwich, Conn. for $7 billion in stock, creating the nation's second-largest oil refiner and a gasoline retailer with more than 12,000 stations.

Last year, it merged its gas gathering and processing operations with Duke Energy and acquired production assets in Alaska jettisoned by BP Amoco to secure approval of its acquisition of Atlantic Richfield. Phillips also combined its chemicals division with ChevronTexaco.

In May, Conoco acquired Gulf Canada Resources and greatly increased its international oil reserves. Conoco operates nearly 6,000 miles of pipelines in the United States and has stakes in nine refineries in the United States, Europe and Asia. It operates more than 7,000 gas stations in Europe, Thailand the United States.

Howard Weil's Gillespie said the deal would strengthen Conoco's finances in the wake of its $4.3 billion purchase of Gulf Canada.

''Obviously Conoco leveraged up their balance sheet to buy Gulf Canada,'' Gillespie said.

ConocoPhillips would operate or have equity interests in 19 refineries in the United States, the United Kingdom, Ireland, Germany, the Czech Republic and Malaysia, with a refining capacity of 2.6 million barrels a day.

Mulva said about 57 percent of the combined company's portfolio is in exploration and production and executives hope to boost that eventually to 60 or 70 percent.

About 73 percent of exploration and production would be in North America and the North Sea, Dunham said, giving Conoco-Phillips a politically secure asset base.

In trading Friday on the New York Stock Exchange, shares of Conoco were down 10 cents to close at $24.30, while shares of Phillips were up 42 cents to close at $51.82.



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