DuPont Selling Conoco After Record Year

Following a record year for earnings and reserve additions for Conoco, its parent, DuPont, is selling the company to focus on other businesses.

Analysts were not surprised by the move. In fact, some wondered what took the company so long. "That's something they've [talked about] for a long time and they're finally acting on that," said Carol Freedenthal of Houston-based Jofree Corp. "I guess they've just got better places they can put their money than the oil and gas business."

Edward Jones chemical analyst Bill Fiala said the move seemed imminent about a month ago after restructuring within DuPont did not include Conoco. "I think the writing was on the wall at that point," he said. "I think it's good for Conoco and good for DuPont. I think if Conoco's ever going to thrive, it needs to be a little more independent and a little more agile."

DuPont said it will offer up to 20% of wholly owned Conoco's common stock to the public in an initial public offering (IPO). The IPO, which will be one of the largest in history, is the first step in DuPont's planned total divestiture of Conoco.

"Conoco has been a strong contributor to DuPont's earnings and cash flow for nearly 17 years," said DuPont CEO Charles O. Holliday Jr. "However, we believe that value and growth can be enhanced for DuPont's materials and life sciences businesses and for Conoco by separating the two operations. We are building on our 10-year strategic direction, and intensifying our focus on life sciences, making it imperative that we rapidly accelerate our investment to capture market opportunity and increase shareholder value."

Holliday said DuPont intends to divest its remaining interest in Conoco as soon as practical in the form of further stock offerings or a spin-off to shareholders.

Last year Conoco earned $1.074 billion - its best year ever - and set a record for reserve additions, adding more oil and gas proved reserves to worldwide inventories than during any other year in its 123-year history.

Domestic gas reserves increased to 2.9 Tcf, up 19%, primarily due to reserves added through the acquisition of gas properties and recent drilling in the Lobo Trend in South Texas near Laredo. The 1997 reserve additions, plus future additions from the six-year drilling program underway in the region, are expected to expand domestic gas reserves by 1.8 Tcf, which is 70% of the company's 1996 domestic proved gas reserves.

"An IPO gives us maximum flexibility. DuPont will have access to cash from the IPO and at the same time will benefit from Conoco's on-going financial contribution as we consider the options for divestiture," Holliday said. "Given this, as well as Conoco's plans for the future, the time is right for Conoco to be given the opportunity to operate as an independent entity."

Edward Jones energy analyst Kate Warne agreed. She noted oil prices have rebounded somewhat recently, and, even so, "most large oil companies, which Conoco will trade like, are affected by oil prices, but not as much as drillers or the oil service companies."

While the move was viewed favorably by analysts, Standard &amp Poor's CreditWire found some concerns for DuPont, at least in the near-term. "Conoco, over time, has been an important source of earnings and cash flow generation during economic downturns. Also, the decision to exit the energy business comes at a time when DuPont's financial profile has been stretched by a series of acquisitions intended to bolster its emergent agricultural biotechnology business and several of its more traditional chemical operations. S&ampP placed its ratings of DuPont on CreditWatch with negative implications.

Conoco CEO Archie W. Dunham said divestiture will give Conoco the opportunity to capitalize on opportunities resulting from privatization and deregulation in the energy sector around the world. "Conoco is a much stronger company today than it was just a few years ago," he said. "We significantly reduced our costs and upgraded our asset portfolio. We had record earnings in 1997 and enjoy experienced management, an extraordinary workforce, and an impressive solid set of core values that guide all of our activities."

Dunham, 59, will serve as president and chief executive officer of Conoco. DuPont, which will hold more than 80% of Conoco after the IPO, will retain majority membership on the board. After DuPont reduces its ownership to less than 50%, it is expected that Dunham will become chairman.

Conoco, with revenues of about $22 billion, is active in 40 countries and involved in exploration, production, transportation, marketing, refining and power. Conoco ranks 11th among U.S. companies in the production of gas.

Joe Fisher, Houston

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