Skies brightened significantly last week for the merger of BPAmoco and Atlantic Richfield Co. (ARCO), with the companiesannouncing moves to assuage the Federal Trade Commission (FTC), butfederal regulators still have yet to give their blessing to theunion. And high gasoline prices have at least one legislatorcalling for strict curbs on oil patch mega-mergers.
BP Amoco said it is near an agreement with the FTC at the sametime the companies said they would sell ARCO’s Alaskan businessesto Phillips Petroleum Co. for $7 billion. The move had beenexpected by industry watchers. BP Amoco also agreed to sell ARCO’sinterests in the Cushing storage terminal, together with variouspipeline interests, to Duke affiliate TEPPCO Partners of Houstonfor $355 million. In concert with the ARCO deal, BP Amoco said itwill buy the outstanding stock of ARCO-controlled Vastar Resources(17.6 million shares) for $71/share – giving it full ownership ofthe big-time Gulf of Mexico gas producer. ARCO already owns about82% of Vastar. BP Amoco said it expects an agreement with the FTC”within a matter of weeks.”
Banc of America cheered the news and said the sale of ARCO’sAlaskan assets “unlocks the door to FTC approval” of the merger…We still like the stock and the company and reiterate our buyrating and $60 price target. The merger should be approved by theFTC as early as [this] week and we expect some of the pressure onthe stock to lift as we move out of litigation territory into newuncharted BAP-ARCO ground.”
Although Phillips expects to receive about $2 billion from thespin-off of its chemical operations with Chevron and its gasgathering and processing assets in a venture with Duke Energy, someanalysts were pondering how the company could afford to pay so muchfor the ARCO assets. Speculation yesterday was that the companymight spin-off other assets to help pay for the deal.
“With these major disposals we believe we have addressed theanti-trust concerns of the FTC. We now hope we can move forward inthe coming weeks towards obtaining a consent order allowing us toclose the ARCO combination and deliver the significant synergies ofthe deal to the shareholders of the combined company,” said BPAmoco CEO Sir John Browne.
Not everyone is cheering the BP Amoco-ARCO merger. Also lastweek, Sen. Barbara Boxer (D-CA) blamed mergers in the oil industryfor currently strong gasoline prices. She called on the FTC toblock the BP Amoco-ARCO deal, saying the merger would further boostgasoline prices.
Provided it gets shareholder approval, BP Amoco plans a rollingprogram of share buy-backs in the US and UK financial marketsbeginning early May. Browne said he expects synergies from ARCO tobe better than originally estimated when the deal was announced inApril 1999. “At the time, we envisaged annualized pre-tax savingsand synergies of around $1 billion, of which $200 million would befrom Alaska. Even after disposing of ARCO’s Alaskan interests, webelieve we can still deliver $1 billion in savings. The make-up ofthe savings have shifted, but we are absolutely confident of thetotal because the work we’ve done since last April has shown thepotential from within the continuing ARCO businesses, includingVastar.”
The sale to Phillips includes a 21.9% interest in the PrudhoeBay oil rim and 42.6% of the bay’s gas cap, a 55% interest in thegreater Kuparuk area and a 78% stake in the Alpine field. Thepackage also includes 1.1 million net exploration acres, a 22.3%interest in the Trans-Alaska pipeline, and ARCO’s crude oilshipping fleet which includes six tankers in service and threeunder construction. The booked reserves being sold total 1.9billion Boe. The $7 billion price is made up of $6.5 billion forthe field, pipeline and shipping operations and assets, plus asupplemental payment of $500 million accruing as the WTI crudeprice exceeds $25 a barrel, retroactive to Jan. 1. There will alsobe a payment of some $150 million for crude oil inventories.
Based on an early April closing, Phillips expects thetransaction to be accretive to earnings and cash flow in 2000 by$1.28 and $2.94 per share, respectively. The deal will be financedwith debt, and Phillips is confident it will maintain an investmentgrade credit rating. Phillips anticipates the cash flow from theacquisition, after exploration and development capital spending, toaverage $500 million per year. The company will use this net cashflow, along with the $2 billion in proceeds from its previouslyannounced joint ventures, to reduce debt. Phillips expects itsyear-end net debt-to-capital ratio to be in the range of 60%.
“The acquisition of ARCO’s Alaskan assets represents asignificant step in our strategy of growing our exploration andproduction business,” said Jim Mulva, Phillips CEO. “We gain asubstantial position in the two largest fields in North America,immediately form a new production center and become a majormerchant supplier of crude oil to the West Coast. We look forwardto working with BP Amoco, our other partners and the State ofAlaska to responsibly and efficiently develop Alaska’s naturalresources.”
Phillips will book reserves of 1.9 billion Boe in 2000 from thetransaction, immediately increasing the company’s reserves basefrom 2.2 billion Boe to 4.1 billion Boe. Excluding the Trans AlaskaPipeline System (TAPS), tankers and other non-exploration andproduction assets, the acquisition cost is $3 per Boe. Averageproduction from these assets is expected to be 348,000 Boe/d in2000, increasing by about 8% to 377,000 Boe/d in 2001.
Phillips also intends to work with its partners to developprojects for the more than 25 Tcf of gas in the Prudhoe Bay gascap. In the National Petroleum Reserve Area (NPRA), Phillips willhold almost a half million net acres, increasing the company’sexposure to additional reserve potential.
Phillips’ current Alaskan operations include a 70% interest inthe Kenai LNG plant, which has exported LNG to Japan for 30 years;a 100% interest in the North Cook Inlet field; a less than 2%interest in the Prudhoe Bay Unit; a 10% interest in the PointThomson field; interests in several of the Prudhoe Bay satellites;a small interest in TAPS; and exploration acreage in NPRA andelsewhere.
TEPPCO’s acquisition of ARCO Pipe Line Co. includes ARCO’sinterests in crude and refined products transportation pipelinesfrom the Texas Gulf Coast to Cushing, OK, Midcontinent crudedistribution services and crude oil terminal facilities. TEPPCOwill acquire ARCO’s 50% interest in crude oil Seaway Pipeline Co.,a partnership with subsidiaries of Phillips Petroleum. TEPPCO alsowill acquire ARCO’s crude oil terminal facilities in Cushing andMidland, TX; as well as interests in other crude pipelines.
Joe Fisher, Houston
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