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Stars Aligning For BP Amoco-FTC Agreement

Stars Aligning For BP Amoco-FTC Agreement

Skies brightened significantly last week for the merger of BP Amoco and Atlantic Richfield Co. (ARCO), with the companies announcing moves to assuage the Federal Trade Commission (FTC), but federal regulators still have yet to give their blessing to the union. And high gasoline prices have at least one legislator calling for strict curbs on oil patch mega-mergers.

BP Amoco said it is near an agreement with the FTC at the same time the companies said they would sell ARCO's Alaskan businesses to Phillips Petroleum Co. for $7 billion. The move had been expected by industry watchers. BP Amoco also agreed to sell ARCO's interests in the Cushing storage terminal, together with various pipeline interests, to Duke affiliate TEPPCO Partners of Houston for $355 million. In concert with the ARCO deal, BP Amoco said it will buy the outstanding stock of ARCO-controlled Vastar Resources (17.6 million shares) for $71/share - giving it full ownership of the big-time Gulf of Mexico gas producer. ARCO already owns about 82% of Vastar. BP Amoco said it expects an agreement with the FTC "within a matter of weeks."

Banc of America cheered the news and said the sale of ARCO's Alaskan assets "unlocks the door to FTC approval" of the merger... We still like the stock and the company and reiterate our buy rating and $60 price target. The merger should be approved by the FTC as early as [this] week and we expect some of the pressure on the stock to lift as we move out of litigation territory into new uncharted BAP-ARCO ground."

Although Phillips expects to receive about $2 billion from the spin-off of its chemical operations with Chevron and its gas gathering and processing assets in a venture with Duke Energy, some analysts were pondering how the company could afford to pay so much for the ARCO assets. Speculation yesterday was that the company might spin-off other assets to help pay for the deal.

"With these major disposals we believe we have addressed the anti-trust concerns of the FTC. We now hope we can move forward in the coming weeks towards obtaining a consent order allowing us to close the ARCO combination and deliver the significant synergies of the deal to the shareholders of the combined company," said BP Amoco CEO Sir John Browne.

Not everyone is cheering the BP Amoco-ARCO merger. Also last week, Sen. Barbara Boxer (D-CA) blamed mergers in the oil industry for currently strong gasoline prices. She called on the FTC to block the BP Amoco-ARCO deal, saying the merger would further boost gasoline prices.

Provided it gets shareholder approval, BP Amoco plans a rolling program of share buy-backs in the US and UK financial markets beginning early May. Browne said he expects synergies from ARCO to be better than originally estimated when the deal was announced in April 1999. "At the time, we envisaged annualized pre-tax savings and synergies of around $1 billion, of which $200 million would be from Alaska. Even after disposing of ARCO's Alaskan interests, we believe we can still deliver $1 billion in savings. The make-up of the savings have shifted, but we are absolutely confident of the total because the work we've done since last April has shown the potential from within the continuing ARCO businesses, including Vastar."

The sale to Phillips includes a 21.9% interest in the Prudhoe Bay oil rim and 42.6% of the bay's gas cap, a 55% interest in the greater Kuparuk area and a 78% stake in the Alpine field. The package also includes 1.1 million net exploration acres, a 22.3% interest in the Trans-Alaska pipeline, and ARCO's crude oil shipping fleet which includes six tankers in service and three under construction. The booked reserves being sold total 1.9 billion Boe. The $7 billion price is made up of $6.5 billion for the field, pipeline and shipping operations and assets, plus a supplemental payment of $500 million accruing as the WTI crude price exceeds $25 a barrel, retroactive to Jan. 1. There will also be a payment of some $150 million for crude oil inventories.

Based on an early April closing, Phillips expects the transaction to be accretive to earnings and cash flow in 2000 by $1.28 and $2.94 per share, respectively. The deal will be financed with debt, and Phillips is confident it will maintain an investment grade credit rating. Phillips anticipates the cash flow from the acquisition, after exploration and development capital spending, to average $500 million per year. The company will use this net cash flow, along with the $2 billion in proceeds from its previously announced joint ventures, to reduce debt. Phillips expects its year-end net debt-to-capital ratio to be in the range of 60%.

"The acquisition of ARCO's Alaskan assets represents a significant step in our strategy of growing our exploration and production business," said Jim Mulva, Phillips CEO. "We gain a substantial position in the two largest fields in North America, immediately form a new production center and become a major merchant supplier of crude oil to the West Coast. We look forward to working with BP Amoco, our other partners and the State of Alaska to responsibly and efficiently develop Alaska's natural resources."

Phillips will book reserves of 1.9 billion Boe in 2000 from the transaction, immediately increasing the company's reserves base from 2.2 billion Boe to 4.1 billion Boe. Excluding the Trans Alaska Pipeline System (TAPS), tankers and other non-exploration and production assets, the acquisition cost is $3 per Boe. Average production from these assets is expected to be 348,000 Boe/d in 2000, increasing by about 8% to 377,000 Boe/d in 2001.

Phillips also intends to work with its partners to develop projects for the more than 25 Tcf of gas in the Prudhoe Bay gas cap. In the National Petroleum Reserve Area (NPRA), Phillips will hold almost a half million net acres, increasing the company's exposure to additional reserve potential.

Phillips' current Alaskan operations include a 70% interest in the Kenai LNG plant, which has exported LNG to Japan for 30 years; a 100% interest in the North Cook Inlet field; a less than 2% interest in the Prudhoe Bay Unit; a 10% interest in the Point Thomson field; interests in several of the Prudhoe Bay satellites; a small interest in TAPS; and exploration acreage in NPRA and elsewhere.

TEPPCO's acquisition of ARCO Pipe Line Co. includes ARCO's interests in crude and refined products transportation pipelines from the Texas Gulf Coast to Cushing, OK, Midcontinent crude distribution services and crude oil terminal facilities. TEPPCO will acquire ARCO's 50% interest in crude oil Seaway Pipeline Co., a partnership with subsidiaries of Phillips Petroleum. TEPPCO also will acquire ARCO's crude oil terminal facilities in Cushing and Midland, TX; as well as interests in other crude pipelines.

Joe Fisher, Houston

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