BP Amoco Adding Arco to Its Arsenal
BP Amoco might want to change its name to BP, Etc. now that it
has announced plans to acquire Los Angeles-based Atlantic Richfield
Co. (Arco) in a $26.8 billion deal. The news comes only months
after the closing late last year of the marriage of BP and Amoco.
Acquiring Arco would make BP Amoco the biggest non-state owned
oil producer with a combined market capitalization of about $190
billion. BP Amoco CEO John Browne said the merger is the outcome of
negotiations begun in January after Arco management approached the
company to consider options for closer co-operation.
Onshore in the United States and the Gulf of Mexico, Arco will
add 360,000 Boe to BP Amoco's daily output - half of it gas,
chiefly from Arco's 82% interest in Vastar, one of the most
profitable operators in the Lower 48. Arco's proven gas reserves
total 9.8 Tcf, mainly in the Gulf of Mexico, the UK North Sea and
the South China Sea, but it holds un-booked gas volumes of a
further 15 Tcf, mainly in Indonesia, Thailand, Malaysia and Qatar.
In 1998 it produced 2.1 Bcf of gas, mainly from the Gulf of Mexico,
the UK North Sea and Indonesia.
In Alaska, Browne said the deal could help unlock the potential
for large volumes of gas "which are currently uneconomic to develop
but could make an enormous contribution to the energy needs of the
U.S. in the next century. BP Amoco and Arco are two of the three
owners of North Slope gas. Exxon is the third.
"We have proprietary BP Amoco technology which we believe may
allow us to convert some of that gas into liquids that can be
transported through the existing oil pipeline. We have plans to
build a $70 million pilot plant on the North Slope to test that
technology and if it is successful, we will consider full-scale
The addition of Arco strengthens BP Amoco's gas holdings
domestically in the San Juan, Arkoma, and Hugoton basins and in the
Gulf of Mexico, said BP Amoco spokesman John Lloyd. "It's going to
give us a more abundant set of distinctive assets. I'd say that BP
Amoco would continue over time to optimize its portfolio, so we're
not going to rule out divestments, but at this time we don't have a
real good understanding of where those might be."
The merger announcement will mean bad news for about 2,000
employees who are expected to lose their jobs, mainly in the Lower
48 states. In the months following the completion of the BP Amoco
merger, 10,000 employees of the combined company got their walking
papers. "It's an asset play. They don't want any of the people,"
said Carol Freedenthal, principal with Houston-based Jofree Corp.
"I think they'll have to sell some things and do some adjustments
in order to get it to go through [the Federal Trade Commission]."
Freedenthal said he doesn't expect many Arco people to remain with
the combined organization.
"There's no question that BP wants to be big."
With this latest deal and the Exxon-Mobil pairing, the ranks of
the majors are thinning. Freedenthal said he thinks down the road
industry players will either be very large majors or small
independents, with the smaller majors and larger independents
having been gobbled up along the way. Freedenthal noted rumors that
Texaco is going to buy Burlington Resources and that Chevron and
Texaco are rumored to be considering a combination of their
As for the majors as they stand now, the big three are the
combining Mobil-Exxon, BP Amoco/Arco, and Shell, in that order,
according to Freedenthal. "That says that Shell is going to wake up
and do something, too. Don't think they're out of the game. When
you get into that group of society the mentality is mine's bigger
BP Amoco said the $1 billion in expected synergies - which are
on top of $500 million in cost-savings already targeted by Arco -
would be achieved from a mix of organizational efficiencies, more
focused exploration, improved business processes including IT, and
rationalization of operations. The company said that it expected to
take a restructuring charge of $1 billion on the transaction.
Some $710 million of the synergy savings are expected from
exploration and production, including $200 million from
streamlining Alaskan operations. Some $110 million are targeted
from refining and marketing and $180 million from corporate costs.
The all-share transaction, approved by the boards of both
companies, will involve exchange of 0.82 BP Amoco American
Depositary Shares (ADS) for each Arco share. At BP Amoco's closing
price of $100.44 per ADS on March 26, this valued Arco at $26.8
billion, representing a premium of 26%. Based on the closing prices
of the two companies Wednesday the premium was 13%.