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Exxon Mobil May Lead Mega-Merger Parade

Exxon Mobil May Lead Mega-Merger Parade

The energy industry is on the cusp of a series of mega-mergers following last week's announcement of an historic combination of Exxon and Mobil, according to many observers. Driving the consolidation, they say, is extremely low commodity prices. That reasoning was reinforced last week when gas prices plummeted to historic lows for December (see related story this issue).

Exxon and Mobil officials maintain the pairing of giants is not a short-term response to flagging oil prices, but rather a positioning for long-term growth in a truly global environment where state-owned oil companies are significant competitors. Analysts and others watching the deal unfold placed more weight on oil prices that are at a 12-year low and predict serious consolidation among the biggest players. Indeed, the impetus to combine must be strong for Exxon and Mobil to willingly face what could be blistering regulatory review and the significant challenge of melding their disparate cultures.

Exxon and Mobil intend to pair to create a company called Exxon Mobil, which would be a titan with worldwide oil and gas reserves of more than 20 billion barrels equivalent. Exxon is the largest U.S. oil and gas company and on a global scale is second in size only to Royal Dutch-Shell Group. Mobil is the second largest U.S. oil and gas company following Exxon and the fourth largest in the world. Exxon-Mobil would unseat Shell as the world's largest oil company and would eclipse General Motors Corp. as the largest U.S. company.

Exxon Mobil would have combined gas sales of about 14 Bcf/d worldwide and major LNG assets contributed by Mobil. Exxon produces 6.3 Bcf/d of gas and had gas/oil exploration/production in 30 countries at the end of 1997. Mobil produces 4.6 Bcf/d of gas and had gas/oil exploration/production activities in 25 countries at the end of 1997. In the U.S., Exxon produced 2,062 MMcf/d in 1997, while Mobil's 1997 domestic production averaged 1,160 MMcf/d.

In a conference call last week, Exxon Chairman Lee R. Raymond predicted big things for the gas side of the combined company. "Longer term, the potential may even be greater for natural gas with 175 Tcf of discovered gas resources in close proximity to the world's primary demand areas and our combined technologies. Mobil's LNG experience and Exxon's proprietary gas-to-liquids and high-strength steel technology should help position Exxon Mobil to be an efficient low-cost supplier. Upstream unit costs will decrease as we apply our respective best operating practices, and given the large asset base, we will have numerous opportunities to high grade and maximize the value of our capital investments. Our combined technologies will offer strategic advantages."

The Exxon Mobil announcement followed news in August that British Petroleum and Amoco would combine to create BP Amoco PLC., which will have a market capitalization of $110 billion, combined reserves of around 14.8 billion Boe and three million barrels of daily oil and gas production, including 3.2 Bcf/d in North American gas production and 31.5 Tcf of proven gas reserves worldwide. Last month, Seagull Energy and Ocean Energy announced their stock combination to create the 10th largest independent domestic producer based on a pro forma market equity capitalization of $1.8 billion (see NGI Nov. 30, 1998).

In the event the Exxon-Mobil merger is approved by shareholders and regulators, it will be by far the largest merger ever of industrial companies based on market capitalization. Exxon has a market capitalization of about $170 billion, while Mobil's market capitalization (prior to the run-up in its stock price) hovers around $70 billion, making the combined market capitalization about $240 billion.

The Exxon-Mobil transaction, as well as the BP-Amoco deal, is seen mainly as a reaction to depressed crude oil prices, which are causing energy companies to initiate drastic cost-saving and efficiency measures to remain competitive. Exxon and Mobil said they expect to see $2.8 billion in annual savings by combining their operations, but analysts are wary.

Industry prognosticators see more mergers between major energy companies on the horizon, primarily as defensive measures. "Mergers develop a certain momentum. If you see that two of your biggest competitors have gotten together, you may feel that will give them further competitive advantages, ...so you start looking around for other available partners," said Michael P. O'Brien, a partner in the Boston-based law firm of Bingham Dana L.L.P. "You had BP-Amoco already in August. Now if Exxon and Mobil [goes through], that will certainly bring pressures to bear on the other oil and gas companies..."

Allen Mesch, director of the Maguire Oil and Gas Institute at Southern Methodist University in Dallas, agreed. "[Competitors] will say, 'If everybody else is getting bigger, we need to get bigger.' I think [it] will create some urgency on the part of some boards." With this latest mega merger on the horizon, analysts are positing candidates for the next big deal "Almost any permutation or combination" of the top 10 energy companies is possible, said O'Brien. Key candidates would be Texaco, Chevron, and Atlantic Richfield. "The shoe is waiting to fall with those guys," remarked Mesch.

"Chevron is certainly walking around looking for someone. I'm pretty confident that they were also in negotiations at one point and time with Mobil. One thing that could possibly happen is Chevron and Texaco could get together. I wouldn't doubt that you'll see something from Chevron pretty darn soon," said a Washington energy observer. Arco, which owns about 80% of producer Vastar Gas, "is still a pretty attractive prospect for people," as well as Oxy, Pennzoil, Phillips Petroleum, Unocal and Marathon Oil.

Texaco is high atop the list of possible industry combos, says Don Hosmer, president of Royale Energy, a West Coast producer and marketer. In fact, he noted that "Texaco threw out [merger] feelers just the other day. Their chairman said that if oil prices continue to stay low, something will have to happen."

"I'd say there's going to be a tremendous amount of consolidation in the industry. I don't know if it'll reach oligopoly stage...," the Washington energy observer noted. Although "it's properly referred to as a concentration," the goal of energy companies in combining their operations is to realize efficiencies. "These people aren't getting together because it's fun, they're getting together because they see an economic opportunity."

Nonetheless, Raymond said the deal still would have come about if oil were $20 a barrel. "This is not a short-term business. This is a very long-term business. Decisions that we're talking about today are not driven by the short-term price of oil. They're driven by our views of what the competitive situation is going to be as this industry moves forward."

In reaching a definitive agreement, Exxon and Mobil had to tackle a number of tough issues, said O'Brien. Foremost, he pointed out, was the combining of contrasting corporate cultures. Specifically, was this to be a merger of equals or was it an acquisition of Mobil by Exxon? He doubted that it could be considered the former, given that Exxon's market capitalization is about three times that of Mobil's.

A producer source said Exxon and Mobil have "very, very different cultures," and that merging them would be difficult, if not impossible. The majority of Exxon's top and middle management hail from Texas, while Mobil's work force is "very eclectic," he said. "If there's any company that's a melting pot, it's Mobil." He thinks many of Mobil's high- and middle-level executives are going to be out of jobs if the merger goes through. "If I were a vice president or a senior vice president at Mobil, I'd either try to quash the deal for my own survival sake or I'd get my resume out on the market real quick." Another energy insider agreed that mixing the two cultures would not be easy but, he added, "either you work together or you don't have a job."

It's been speculated that up to 20,000 employees from both companies, but probably more so from Mobil, could be displaced by the deal. In a press briefing, the companies said job cuts would number around 9,000 from a worldwide work force of 123,000. Royale Energy's Hosmer noted the layoffs, especially those on the companies' exploration and production staffs, could turn into opportunities for smaller producers. "One of the benefits for the small producers is that there could be a lot of exploration talent out there," post-merger, looking for jobs.

Other tough issues tackled in the definitive agreement included corporate headquarters, board representation; corporate name; and how the different styles and personalities of Exxon Chairman Raymond and Mobil Chairman Lucio A. Noto would fit into the management of the surviving company, said O'Brien. As the smaller of the two, Mobil fought for as much "autonomy or representation" in the merged company as possible. "Someone asked me this morning, 'Is this a sad day for you,'" Noto recounted during last week's conference call. "I will tell you it is not. I'm personally convinced that it's a good day for our shareholders, for the majority of our employees who will have opportunities to work in this new company, for our customers, and really also for the United States."

"The biggest risk [to an Exxon-Mobil merger] will be antitrust in that the antitrust regulators in the U.S. have been quite aggressive over the past year and a half or so. If they find a problem with BP-Amoco, they'll certainly have a problem with Exxon-Mobil," O'Brien said. The producer source agreed, saying Exxon and Mobil are "too big a set of companies to be ignored by the Justice Department and the Federal Trade Commission." Attorneys general in states where Exxon and Mobil have a huge presence in the retail market also are likely to closely review the merger.

Raymond seemed to concede last week that the companies are braced for a tough antitrust review. "We would be absolutely amazed - although pleasantly surprised - if the FTC said we did not have to rationalize some assets."

Still, O'Brien believes both Exxon and Mobil could argue the merger would pose no anticompetitive concerns since oil is an "international commodity which is beyond the power of U.S. oil companies to manipulate." He said he believes "very strong arguments can be made."

For the deal to pass muster, "I think there will certainly have to be divestiture of some assets, mostly service stations [in the Northeast] and possibly some refineries and stuff" in Texas and Louisiana, said John Sharp, vice president of federal and state affairs and counsel for the Natural Gas Supply Association (NGSA). "While I think the FTC will scrutinize very much the joint assets of this proposed merger, I think ultimately it will certainly be approved. I don't see antitrust problems as any kind of killer of this deal."

A BT Alex. Brown report on the merger, titled "Fire and Ice," points out differences between the BP-Amoco deal and Exxon-Mobil. "The market reaction to the news of the BP-Amoco merger was positive, while the initial market reaction to the Exxon-Mobil announcement was negative. Although there are still outstanding issues to be addressed with the British Petroleum-Amoco merger, it is generally perceived that their corporate cultures will mesh more easily, and that there will be fewer regulatory issues than with Exxon-Mobil. In addition, BP has more experience with mergers, and its motivation to grow bigger in order to prosper was more understandable."

Jofree Corp. analyst Carol Freedenthal said he believes any antitrust issues would mainly relate to the oil side of the business as Mobil turned over its gas marketing group to PanEnergy, since acquired by Duke Energy. Mobil retained a 40% interest in the unit. "Exxon has done very little to develop their [gas] group. It's really a gas sales group and not what I would call marketing."

In the event the Exxon-Mobil deal is sanctioned, it would undo part of what the U.S. Supreme Court did in 1911 when it busted up the Standard Oil Trust. Mobil's ancestor companies were Standard Oil Co. of New York and Vacuum Oil, two of the companies making up Standard Oil before the break-up. Before it was Exxon, Exxon was Standard Oil Co. of New Jersey, the largest of the companies formed by the trust break-up.

Exxon, headquartered in Irving, TX, had 1997 sales of $137.2 billion and profit of $8.5 billion. Mobil, headquartered in Fairfax, VA, had 1997 sales of $65.9 billion and profit of $3.3 billion. Exxon has about 80,000 employees, and Mobil has about 42,700.

Joe Fisher, Houston; Susan Parker, Washington, D.C.

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ISSN © 2577-9877 | ISSN © 1532-1266
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