Phillips Petroleum Co and Conoco Inc agreed to a US$15.4 billion merger that will create the third-biggest US oil company, allowing them to cut costs and gain size needed to compete with larger rivals.
Conoco investors will get 0.4677 share in the new company, ConocoPhillips, for each of their shares. Phillips holders will swap shares one-for-one. Phillips's market value is US$19.8 billion and the deal values Conoco at US$15.4 billion.
Oil companies are under pressure to combine because of competition from rivals bulked up by mergers, such as Exxon Mobil Corp and ChevronTexaco Corp, and the past year's 50 percent decline in oil prices. Phillips and Conoco say they will now have enough financing to pursue expensive projects in central and Southeast Asia, even if oil prices fall.
"Size matters," said Eugene Nowak, an ABN Amro analyst who rates both companies' shares "hold" and doesn't own any.
ConocoPhillips will be based in Houston, where Conoco has its headquarters. The companies expect to complete the merger in next year's second half, and say they will save about US$750 million a year by streamlining exploration and production and eliminating duplicate corporate jobs.
Phillips will cut some jobs in Bartlesville, Oklahoma, where it's based, Chairman and Chief Executive Officer James Mulva said in a press conference. Mulva, who will be ConocoPhillips's president and CEO, didn't give details. Phillips has 38,500 employees, 2,400 of them in Bartlesville, and Conoco has 20,000.
Another Houston-based oil company, USX-Marathon Group Inc may be one of the next to make a deal, Nowak said. USX Corp this year plans to split off Marathon, the current No. 3 US oil company. It has a market value of US$8 billion.
Efficient combination
Phillips and Conoco probably won't have to sell many assets to win approval from antitrust regulators, Nowak said. Chevron Corp was forced to sell Texaco Inc.'s stakes in US refining joint ventures to get its US$45.8 billion buyout approved.
"This is a combination that doesn't have too many overlaps," Nowak said.
Phillips became the second-biggest US refiner in September when it bought Tosco Corp for US$8.37 billion. The company owns refineries in Texas, Utah, California, New Jersey, Louisiana, Washington, Illinois and Pennsylvania, and runs the Circle K convenience-store chain. Conoco's refineries and gasoline stations are mostly in Rocky Mountain states.
Phillips shareholders will own 57 percent of ConocoPhillips; Conoco investors will hold 43 percent. Conoco shareholders won't get a premium, so management will have to sell the transaction by stressing the new company's opportunities for growth, Nowak said.
ConocoPhillips will have debt and preferred securities of US$18.6 billion. Conoco, the No. 4 US oil company, and No. 5 Phillips had combined sales of about US$53 billion last year, topping USX-Marathon's US$34.5 billion.
"We're doing this so we can compete with the biggest [oil] companies," Mulva said. Conoco Chairman Archie Dunham will be the new company's chairman, postponing his planned retirement until 2004, when Mulva will replace him. Each company will name eight directors to the ConocoPhillips board.
If either Conoco or Phillips backs out of the merger, it will have to pay a US$550 million breakup fee, Dunham said.
Phillips and Conoco have been discussing a merger for about six weeks, Dunham said during the press conference. A decline in their stocks, caused in part by falling oil prices, made the share swap possible, he said.
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