Wild speculation last week that Chevron was courting PhillipsPetroleum proved to be false as Phillips management told analyststhe company is not interested in merging with anybody. But theBartlesville, OK-based energy company is planning on selling GPMGas Corp., its natural-gas gathering, processing and marketingsubsidiary, and may form joint ventures with other companies onchemicals and refining and marketing so that it can concentratemainly on exploration and production.

Jim Mulva, who became Phillips CEO July 1, has vowed to cut thecompany’s costs. Last year, Phillips spent $12.50 for each barrelof oil found and produced, more than double the $4.91 average forother major oil companies, according to PaineWebber.

Rob Phillips, a Phillips spokesman, said there is no time framefor the GPM sale or any joint ventures. “To remain independent, butalso to remain competitive with companies of comparable size, ourmanagement decided that we couldn’t grow all these companies on ourown. Instead, we will keep some interest in the chemicals andrefining and marketing divisions and sell GPM. We will then use theproceeds to expand our E&P ability, which is what we will bepredominantly focused on.” Currently, the E&P division isPhillips’ largest, with assets of $6.2 billion as of year-end 1998and producing in seven different countries.

Phillips has not entirely shut the door on GPM, saying a jointventure is still possible. “The company will reduce its GPMinterest one way or the other,” Phillips said. GPM is one of thelargest domestic producers of natural gas liquids, producing170,000 gross b/d. It also has over 28,000 miles of gatheringpipeline mainly based in Texas, New Mexico and Oklahoma, processes2 Bcf/d and markets over 1 Bcf/d. Overall, GPM has 7 Tcf of supply.

Although acknowledging that no merger has taken place, Phillipswould not comment on another rumor that Chevron is lined up to bethe buyer of GPM and the partner in the chemical joint venture. “Iwould characterize that as market rumor and Phillips has a policynot to comment on that,” he said. A Chevron-Phillips chemicalsjoint venture would create a business with about $5.4 billion inannual sales and link plants on the U.S. Gulf Coast, and in Europeand Asia.

One reason Phillips may be taking such drastic measures is that ithad a major transaction fall through earlier this year, an $8 billionrefining and marketing deal with Ultramar Diamond Shamrock. It may belooking for a major move to continue the upward momentum triggered bycrude oil’s recent recovery. On the other hand, Chevron is stilltrying to find a partner since it was spurned by Texaco earlier thisyear (see Daily GPI, June 4).

When the rumors first erupted early last week, the companieswould neither confirm nor deny them. Given the heated mergeractivity taking place in the petroleum producing sector, with BPcombining with Amoco, and the pending BP Amoco-Arco, TotalFina-ElfAquitaine, and Exxon-Mobil transactions, Phillips was regarded as aviable candidate for Chevron.

“It’s clear that Chevron is talking to basically everybody andPhillips is the instigator in this in terms of looking for someoneto do joint ventures with,” said Edward Jones Analyst Katie Warne.”This doesn’t make as much sense to me as some of the other oneswe’ve talked about in this industry. There had been rumors outthere about Chevron and Occidental, which I think makes moresense… While Conoco may have a difficult time merging in thetwo-year waiting period after its spin-off [from DuPont], it hasmuch better assets than either one of these companies.”

As a result of the merger rumors, Phillips shares closed up$2.81 to $56.56/share Monday, well above its 52-week high. A 20%premium would put the purchase price near $17.2 billion. Chevronstock, meanwhile, took a slight 88-cent dip to $92.12/share thatday. Each stock price has declined sharply since, with Phillipsfalling to $49.50/share and Chevron dropping to $88/share.

Phillips has assets worth $15 billion and a marketcapitalization of $14.33 billion, while Chevron has $36.5 billionin assets and a market cap of $60.43 billion.

©Copyright 1999 Intelligence Press Inc. All rights reserved. Thepreceding news report may not be republished or redistributed, inwhole or in part, in any form, without prior written consent ofIntelligence Press, Inc.