Phillips Petroleum To Buy Tosco

Monday, February 5th 2001, 12:00 am
By: News On 6

NEW YORK (AP) — With its $7 billion stock purchase of Tosco Corp., Phillips Petroleum Co. will add considerable heft to its refining operations at a time when the oil industry is focused on exploration and production.

Crude prices have remained high since summertime, trading at nearly $30 a barrel on the wholesale market, and because of that oil companies have profited mightily from their drilling operations.

The proposed acquisition of Tosco, announced Sunday, positions Phillips as the No. 2 refiner in the nation, adding balance to the Bartlesville, Okla.-based company's revenue stream on a long-term horizon.

``What the company has done is akin to an investor spreading himself out in the stock market,'' said Peter Beutel, president of Cameron Hanover, an energy risk management firm in New Canaan, Conn.

``Exploration is today's hot topic. But crude prices will be a lot lower in a couple of years and the action will be in refining,'' Beutel said. ``These companies are breaking the mold and looking ahead.''

The transaction, which also will create the fifth-largest gasoline retailer in the nation with more than 12,000 stations, was approved by the boards of both companies on Sunday and is expected to be completed by the third quarter of 2001.

Phillips is offering 0.80 of one of its shares for each share of Tosco, initially valuing Tosco shares at $46.50, a 34 percent premium. Phillips also will assume approximately $2 billion in Tosco debt.

In morning trading in the New York Stock Exchange, shares of Tosco were up $5.04, or 15 percent, to $39.65. Phillips was down $5.63, or nearly 10 percent, to $52.50.

The acquisition is further evidence of consolidation in the oil industry, following mergers by Exxon Mobil Corp., Royal Dutch/Shell Group, BP Amoco PLC and the pending merger of Chevron Corp. and Texaco Inc.

The purchase, subject to approval by federal regulators and shareholders, is expected to be accretive to earnings per share, Phillips said in a press release.

``We now have positioned our business to fully compete in the domestic (refining, marketing and transportation) marketplace, which, when combined with our strong (exploration and production) operations, puts us among the leaders in the integrated oil industry,'' Phillips chairman and chief executive Jim Mulva said.

The purchase surprised some analysts who thought Phillips would try to reduce its refining and retailing operations while expanding its exploration business.

``I think it's kind of a major change of philosophy for Phillips,'' said Phil Flynn, senior energy analyst at Alaron Trading Corp. in Chicago. ``We were under the impression that they wanted to get out of 'mom and pop' retail, and refining.''

The combined companies should benefit from having refineries in all areas of the country. Phillips' refineries are primarily in the Midwest, while Tosco has operations on both coasts.

Beutel said with regional disparities in demand growing, companies whose operations are spread out across the United States can be more responsive to shortages or spikes.

``Wherever the price spikes are, the company will be able to take advantage,'' Beutel said.

Mulva will continue to head Phillips. The transition effort will be led by Tosco's chairman and CEO, Tom O'Malley, who will be the CEO of the company's refining, marketing and transportation business and serve on Phillips board.

Also on Sunday, Phillips' board approved a $1 billion share buyback program.

Tosco, based in Greenwich, Conn., is the country's third-largest refiner with eight refineries in California, Illinois, New Jersey, Pennsylvania and Washington with capacity to process 1.35 million barrels of oil per day. Combined, the companies would process about 1.7 million barrels a day.

Tosco has 6,400 gas stations in 32 states, operating under the brands ''76'' and Circle K, the nation's No. 2 convenience store chain, and about 26,000 employees.

Phillips has about 5,900 gas stations, sold under the brand ``Phillips 66,'' across the U.S. The company has 12,400 employees and had net income of $1.86 billion in 2000.

The combined company's refining, marketing and transportation operations will be located in Tempe, Ariz. There are no immediate plans to change the names of any of the retail stations and convenience stores, Phillips spokeswoman Kristi DesJarlais said.

In a conference call with journalists, Mulva and O'Malley said some jobs would be eliminated but that no decision has been made on how many employees might be affected.

Mulva said the acquisition will also help put Phillips in a better position to expand its oil exploration and production operations in the future.

``Going forward, we have the platform to develop all of our business lines,'' he said.

Phillips had tried to unload some of its refining and marketing operations in a deal with Conoco Inc. that fell through in 1996.

A year ago, Phillips and Chevron Corp. agreed to a 50/50 joint venture of their chemical businesses, creating a company with assets of more than $6 billion, as well as a gas processing and marketing joint venture with Duke Energy.

Phillips also completed last year its $6.5 billion purchase of Atlantic Richfield properties in Alaska, and announced a venture to team with Chevron and Alberta Energy Co. Oil & Gas to explore and develop nearly 150,000 acres on the North Slope and the Beaufort Sea there.

Morgan Stanley Dean Witter and Co. is serving as Phillips' financial adviser, while Merrill Lynch and Co. is advising Tosco.


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