The energy industry is on the cusp of a series of mega-mergersfollowing last week’s announcement of an historic combination ofExxon and Mobil, according to many observers. Driving theconsolidation, they say, is extremely low commodity prices. Thatreasoning was reinforced last week when gas prices plummeted tohistoric lows for December (see related story this issue).

Exxon and Mobil officials maintain the pairing of giants is nota short-term response to flagging oil prices, but rather apositioning for long-term growth in a truly global environmentwhere state-owned oil companies are significant competitors.Analysts and others watching the deal unfold placed more weight onoil prices that are at a 12-year low and predict seriousconsolidation among the biggest players. Indeed, the impetus tocombine must be strong for Exxon and Mobil to willingly face whatcould be blistering regulatory review and the significant challengeof melding their disparate cultures.

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

Exxon Mobil would have combined gas sales of about 14 Bcf/dworldwide and major LNG assets contributed by Mobil. Exxon produces6.3 Bcf/d of gas and had gas/oil exploration/production in 30countries at the end of 1997. Mobil produces 4.6 Bcf/d of gas andhad gas/oil exploration/production activities in 25 countries atthe 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. Raymondpredicted big things for the gas side of the combined company.”Longer term, the potential may even be greater for natural gaswith 175 Tcf of discovered gas resources in close proximity to theworld’s primary demand areas and our combined technologies. Mobil’sLNG experience and Exxon’s proprietary gas-to-liquids andhigh-strength steel technology should help position Exxon Mobil tobe an efficient low-cost supplier. Upstream unit costs willdecrease as we apply our respective best operating practices, andgiven the large asset base, we will have numerous opportunities tohigh grade and maximize the value of our capital investments. Ourcombined technologies will offer strategic advantages.”

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

In the event the Exxon-Mobil merger is approved by shareholdersand regulators, it will be by far the largest merger ever ofindustrial companies based on market capitalization. Exxon has amarket capitalization of about $170 billion, while Mobil’s marketcapitalization (prior to the run-up in its stock price) hoversaround $70 billion, making the combined market capitalization about$240 billion.

The Exxon-Mobil transaction, as well as the BP-Amoco deal, isseen mainly as a reaction to depressed crude oil prices, which arecausing energy companies to initiate drastic cost-saving andefficiency measures to remain competitive. Exxon and Mobil saidthey expect to see $2.8 billion in annual savings by combiningtheir operations, but analysts are wary.

Industry prognosticators see more mergers between major energycompanies on the horizon, primarily as defensive measures. “Mergersdevelop a certain momentum. If you see that two of your biggestcompetitors have gotten together, you may feel that will give themfurther competitive advantages, …so you start looking around forother available partners,” said Michael P. O’Brien, a partner inthe Boston-based law firm of Bingham Dana L.L.P. “You had BP-Amocoalready in August. Now if Exxon and Mobil [goes through], that willcertainly bring pressures to bear on the other oil and gascompanies…”

Allen Mesch, director of the Maguire Oil and Gas Institute atSouthern Methodist University in Dallas, agreed. “[Competitors]will say, ‘If everybody else is getting bigger, we need to getbigger.’ I think [it] will create some urgency on the part of someboards.” With this latest mega merger on the horizon, analysts arepositing candidates for the next big deal “Almost any permutationor combination” of the top 10 energy companies is possible, saidO’Brien. Key candidates would be Texaco, Chevron, and AtlanticRichfield. “The shoe is waiting to fall with those guys,” remarkedMesch.

“Chevron is certainly walking around looking for someone. I’mpretty confident that they were also in negotiations at one pointand time with Mobil. One thing that could possibly happen isChevron and Texaco could get together. I wouldn’t doubt that you’llsee something from Chevron pretty darn soon,” said a Washingtonenergy 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, saysDon Hosmer, president of Royale Energy, a West Coast producer andmarketer. In fact, he noted that “Texaco threw out [merger] feelersjust the other day. Their chairman said that if oil prices continueto stay low, something will have to happen.”

“I’d say there’s going to be a tremendous amount ofconsolidation in the industry. I don’t know if it’ll reacholigopoly stage…,” the Washington energy observer noted. Although”it’s properly referred to as a concentration,” the goal of energycompanies in combining their operations is to realize efficiencies.”These people aren’t getting together because it’s fun, they’regetting together because they see an economic opportunity.”

Nonetheless, Raymond said the deal still would have come aboutif oil were $20 a barrel. “This is not a short-term business. Thisis a very long-term business. Decisions that we’re talking abouttoday are not driven by the short-term price of oil. They’re drivenby our views of what the competitive situation is going to be asthis industry moves forward.”

In reaching a definitive agreement, Exxon and Mobil had totackle a number of tough issues, said O’Brien. Foremost, he pointedout, was the combining of contrasting corporate cultures.Specifically, was this to be a merger of equals or was it anacquisition of Mobil by Exxon? He doubted that it could beconsidered the former, given that Exxon’s market capitalization isabout three times that of Mobil’s.

A producer source said Exxon and Mobil have “very, verydifferent cultures,” and that merging them would be difficult, ifnot impossible. The majority of Exxon’s top and middle managementhail from Texas, while Mobil’s work force is “very eclectic,” hesaid. “If there’s any company that’s a melting pot, it’s Mobil.” Hethinks many of Mobil’s high- and middle-level executives are goingto be out of jobs if the merger goes through. “If I were a vicepresident or a senior vice president at Mobil, I’d either try toquash the deal for my own survival sake or I’d get my resume out onthe market real quick.” Another energy insider agreed that mixingthe two cultures would not be easy but, he added, “either you worktogether or you don’t have a job.”

It’s been speculated that up to 20,000 employees from bothcompanies, but probably more so from Mobil, could be displaced bythe deal. In a press briefing, the companies said job cuts wouldnumber around 9,000 from a worldwide work force of 123,000. RoyaleEnergy’s Hosmer noted the layoffs, especially those on thecompanies’ exploration and production staffs, could turn intoopportunities for smaller producers. “One of the benefits for thesmall producers is that there could be a lot of exploration talentout there,” post-merger, looking for jobs.

Other tough issues tackled in the definitive agreement includedcorporate headquarters, board representation; corporate name; andhow the different styles and personalities of Exxon ChairmanRaymond and Mobil Chairman Lucio A. Noto would fit into themanagement of the surviving company, said O’Brien. As the smallerof 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’sconference call. “I will tell you it is not. I’m personallyconvinced that it’s a good day for our shareholders, for themajority of our employees who will have opportunities to work inthis new company, for our customers, and really also for the UnitedStates.”

“The biggest risk [to an Exxon-Mobil merger] will be antitrustin that the antitrust regulators in the U.S. have been quiteaggressive over the past year and a half or so. If they find aproblem with BP-Amoco, they’ll certainly have a problem withExxon-Mobil,” O’Brien said. The producer source agreed, sayingExxon and Mobil are “too big a set of companies to be ignored bythe Justice Department and the Federal Trade Commission.” Attorneysgeneral in states where Exxon and Mobil have a huge presence in theretail market also are likely to closely review the merger.

Raymond seemed to concede last week that the companies arebraced for a tough antitrust review. “We would be absolutely amazed- although pleasantly surprised – if the FTC said we did not haveto rationalize some assets.”

Still, O’Brien believes both Exxon and Mobil could argue themerger would pose no anticompetitive concerns since oil is an”international commodity which is beyond the power of U.S. oilcompanies to manipulate.” He said he believes “very strongarguments can be made.”

For the deal to pass muster, “I think there will certainly haveto be divestiture of some assets, mostly service stations [in theNortheast] and possibly some refineries and stuff” in Texas andLouisiana, said John Sharp, vice president of federal and stateaffairs and counsel for the Natural Gas Supply Association (NGSA).”While I think the FTC will scrutinize very much the joint assetsof this proposed merger, I think ultimately it will certainly beapproved. I don’t see antitrust problems as any kind of killer ofthis 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 waspositive, while the initial market reaction to the Exxon-Mobilannouncement was negative. Although there are still outstandingissues to be addressed with the British Petroleum-Amoco merger, itis generally perceived that their corporate cultures will mesh moreeasily, and that there will be fewer regulatory issues than withExxon-Mobil. In addition, BP has more experience with mergers, andits motivation to grow bigger in order to prosper was moreunderstandable.”

Jofree Corp. analyst Carol Freedenthal said he believes anyantitrust issues would mainly relate to the oil side of thebusiness as Mobil turned over its gas marketing group to PanEnergy,since acquired by Duke Energy. Mobil retained a 40% interest in theunit. “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 undopart of what the U.S. Supreme Court did in 1911 when it busted upthe Standard Oil Trust. Mobil’s ancestor companies were StandardOil Co. of New York and Vacuum Oil, two of the companies making upStandard Oil before the break-up. Before it was Exxon, Exxon wasStandard Oil Co. of New Jersey, the largest of the companies formedby the trust break-up.

Exxon, headquartered in Irving, TX, had 1997 sales of $137.2billion and profit of $8.5 billion. Mobil, headquartered inFairfax, VA, had 1997 sales of $65.9 billion and profit of $3.3billion. Exxon has about 80,000 employees, and Mobil has about42,700.

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

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