Phillips Builds Refining, Sales with $7B Tosco Deal
After a positive surprise with its fourth quarter earnings
performance, Phillips Petroleum continued to astonish observers
last week, buying Tosco Corp. in a $7 billion stock transaction
that will make Phillips the second-largest refining company in the
United States with a capacity of 1.7 MMbbl/d.
The deal transforms Phillips into a more balanced major
integrated oil company and contrasts with its recent efforts ---
and the recent industry trend --- to expand more profitable
exploration and production operations and shed low-margin refining.
Phillips' Alaska purchase last year from BP doubled its reserves
to 4.4 billion barrels of oil equivalent (boe) and left many
observers expecting more action on the upstream side this year. The
Tosco deal, which amounts to a significant bet that refining
margins won't collapse, apparently came as a shock to investors.
Shares of Phillips were down more than 10% to below $52/share the
day following the announcement but made a steady climb the rest of
the week to end the day Friday at $55.75.
The purchase will give Bartlesville, OK-based Phillips another
1.35 MMbbl/d of refining capacity and 6,400 more gasoline stations.
The merged company would have a strong position in Alaskan
production and in refining and marketing operations on the West
Coast, which has hindered regulatory approval of mergers in the
past. Some observers believe the deal could trigger regulatory
calls for divestitures. Phillips has daily production of 345,000
barrels of oil equivalent of crude from Alaska's North Slope. And
Tosco adds three West Coast refineries, two operations in
California and one in Washington with a total capacity of 324,000
Under the terms of the agreement, Phillips will issue 0.8
Phillips shares for each Tosco share and will also assume $2
billion of Tosco's debt. The transaction is expected to close by
the end of the third quarter. Phillips' board of directors also has
authorized a $1 billion share buyback program.
"This strategic acquisition completes our foundation for
accelerated and sustainable profitable growth. With our balanced
portfolio of assets, scale, and financial flexibility, we can
deliver the growth and value that our shareholders expect. We now
have positioned our business to fully compete in the domestic
RM&T marketplace, which, when combined with our strong E&P
operations, puts us among the leaders in the integrated oil
industry," said Jim Mulva, Phillips' chairman. "We are acquiring
the assets and expertise of the country's largest independent
refiner and marketer, and combining the complementary skills of the
two companies, including Tosco's refining capabilities and
convenience store expertise along with Phillips' branded wholesale
skills and expertise in refining and fuel technologies."
Phillips expects the transaction to be accretive to earnings per
share, taking into account anticipated annual pre-tax synergies of
$250 million and the stock buyback. It will also improve net cash
flow. The transaction will be accounted for under purchase
accounting. Based on current consensus investment community
estimates, year-end 2001 debt-to-capital ratio would be in the
range of 37%.
The combined company's RM&T headquarters will be located in
Tempe, AZ, with certain functions, including research and
development, being located in Bartlesville.
"This is a tremendous transaction. Tosco has an excellent track
record as both an operator of assets and a builder of value," said
Mulva. "The combination will enhance our supply chain flexibility,
balance our RM&T market portfolio, and enable us to benefit
from both scale and synergies.
Phillips has 12,400 employees and $20.6 billion of assets, and
had $21.2 billion of revenues in 2000. Greenwich, CT-based Tosco
markets gasoline under the 76 and Circle K brands. Tosco currently
has $28 billion in annualized revenues.