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 development."

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 companies.

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 than yours."

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%.

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