I have taken a look at the both the spin-off (E&P company) and
the consumer-oriented company created by the merger. I've attached
my notes and estimates below. With a post-merger dividend yield
above 5% and assuming the company meets its restructuring goals,
the consumer-oriented company looks very attractive to me. Assuming
energy prices recover somewhat, the E&P company is attractive.
Regards,
Stew
Merger:
-------
PZL merging with KSF, creating:
- E&P company (called EP below)
- Downstream company (called NEWCO below)
Each KSF shareholder gets 0.82 share of NEWCO.
Each PZL shareholder gets 1 share of NEWCO, 1 share of EP.
PZL has 47.8 million shares outstanding, KSF has
36.3 million.
1 share of PZL includes 1.22 shares of KSF.
0.82 share of PZL includes 1 share of KSF.
EP:
---
Stats of various E&P companies as of Aug-Sept:
MktCap Reserves Reserves Production Production Production Cost
$ mmboe content mmboe content $/boe
-EP- ? 400 44% gas 50+ 64% gas 4.49
UPR 2.9B 683
APA 2.4B 585 53% gas 3.69
EOG 2.5B 780 80% gas
VRI 4.2B 500 75% gas 3.70
BRR 0.6B 160 88% gas
ORX 1.2B 640 46% gas
(N.B.: ORX to merge with KMG at price of 1.6B + assumed debt ~1.3B)
Other EP Information:
$700 million in debt excluding exchangeable debt (S&P ratings note)
$70 million in interest payments (S&P ratings note)
$0.25 dividend
Normally, these companies trade at 2+ multiple to
sales. EP Sales expected to be about 50 mmboe * $14/boe =
$700 million or greater.
Income Statement Estimates EP:
Product Revenue 700 (oil price * mmboe production)
Chevron Dividend 43 (17.8 million shares * 2.44)
Production Costs 225 (production cost * mmboe production)
Exploration Exp 70
DD&A 225
Operating Income 223
Interest Expense 70
EBIT 153
Net Income 99
EPS $2.06
Capital Ex. 447
Target price based on $14/boe on EP = $20.5
NEWCO
-----
$3.2 billion sales (company)
$126 million operating income (company)
77 million shares (company)
$860 million debt (company)
$52 million interest expense (my estimate)
> $1 billion equity (company)
$0.75 dividend (company)
I see trailing EPS around $0.63. The companies say that the downstream
company will see cost saving of $90-$125 million in cost savings
that's an extra dollar of EPS, so then the downstream company begins
to look very interesting. Conservatively, say $1.50 in EPS. However,
on the growth side, the companies are also forecasting low revenue
growth (7%) - this seems low to me. Looking at the company, this isn't
too much different from KSF, so I reverse engineered some ratios to
determine a share price that the market was willing to pay, over the
past few years, for KSF:
Ratio KSF Target Price on NEWCO
P/S 0.5 $21
P/E 16 $24
Div % 3 $25
P/B 1.6 $16+
At time of merger announcement...
The $24 (KSF Price $19.60) is fully-valued in my opinion. The KSF
shares begin to look very attractive in today's market at $15.50
- a dividend yield of 4%. $12.40 is a dividend yield of 5% -
definitely too low a price.
S&P Ratings Note:
-----------------
biz.yahoo.com
DCR Credit Rating:
------------------
biz.yahoo.com
SOURCE: Duff & Phelps Credit Rating Co.
DCR Assigns Initial Ratings to Pennzoil Company
CHICAGO, Sept. 18 /PRNewswire/ -- Duff & Phelps Credit Rating
Co. (DCR) has assigned a rating of 'BBB-' (Triple-B-Minus) to the senior unsecured debt of
Pennzoil Company (NYSE: PZL - news) and assigned a rating of 'BB+' (Double-B-Plus) to the
company's preferred stock. DCR also has assigned a rating of 'D-2' (D-Two) to the company's
commercial paper. These assignments affect approximately $2.2 billion in securities. The ratings
assume that Pennzoil Products Group (Pennzoil's marketing, manufacturing and fast lube
businesses) is combined with Quaker State and that Pennzoil Company becomes a stand-alone
independent exploration and production company.
The ratings are supported by the company's position as a large independent exploration and
production company that will focus on growing reserves and production after the anticipated spin-off
of Pennzoil's downstream business segment. Pennzoil has a strong domestic production profile with
promising exploration prospects internationally. Additionally, approximately half of Pennzoil's pro
forma debt is exchangeable debt that is convertible into Chevron common stock. The company
presently owns more than 7.1 million shares of Chevron stock, which are held to backstop this
exchangeable debt. The downstream segment, which is anticipated to be spun-off and merged with
Quaker State Corporation [NYSE:KSF - news] in the fourth quarter, will manufacture, package and
market motor oil, lubricants, a broad range of automotive consumer products and other specialty
refined products.
Offsetting factors include continued volatile energy prices, fairly high leverage and the risks
associated with international reserve and production growth. The company will need to grow its
reserves and production from existing core domestic areas and new core domestic and international
areas, which will require fairly high levels of capital expenditures.
By issuing preferred stock and restructuring its exchangeable debt, Pennzoil has reduced long-term
debt by nearly $400 million over the last several months. After the spin-off and making adjustments
for the exchangeable debt, Pennzoil should have an EBITDA/interest of 3.0 to 5.0 times with total
debt/EBITDA ranging between 2.0 to 2.5 times. Total adjusted debt per barrel of reserves is
projected to be a modest $1.57 per barrel at the end of 1998.
The remaining Pennzoil Company had oil and gas reserves of 404 million barrels of oil equivalent at
the end of 1997 81 percent of which was located domestically onshore and offshore in the Gulf of
Mexico. Internationally, the company is currently producing oil in Venezuela, has fully carried
interest in the Azeri-Chirag-Gunashli (ACG) unit in Azerbaijan, which commenced production in
late 1997, and has exploration interests in Australia, Azerbaijan, Egypt and Qatar. 1997 production
of 155,000 barrels of oil equivalent per day was 65 percent gas and 35 percent oil.
Pennzoil's production costs in 1997 were $4.49 per barrel and, during the last five years, the
company has replaced 138 percent of its production at a cost of $4.47 per barrel. Both are in-line
with industry standards. In 1997, however, finding and development costs were $5.13 per barrel.
This was primarily due to higher exploration expenses partially related to increased drilling costs.
The company's target is finding and development costs of $4.50 per barrel and production costs of
$4.00 per barrel.
SOURCE: Duff & Phelps Credit Rating Co.
Merger Announcement
-------------------
Pennzoil and Quaker State to Form Premier Automotive
Products and Consumer Car Care Company
Pennzoil, in Major Restructuring, to Spin-off Products
Company
Transaction Creates $3 Billion Consumer Products Company
and a Leading E&P Company
HOUSTON (April 15, 1998) Pennzoil Company (NYSE: PZL) and
Quaker State Corporation (NYSE: KSF) announced today that they
have entered into a definitive agreement to create a new
publicly-traded company by combining the motor oil, refined
products and franchise operations of Pennzoil with all of Quaker
State. The merger will create a premier worldwide automotive
aftermarket products and consumer car care company, with annual
sales expected to exceed $3 billion.
The transaction is part of a comprehensive restructuring by
Pennzoil that will result in separating Pennzoil's motor oil, refined
products, and franchise operations from its exploration and
production operations. Pennzoil s motor oil, refined products and
franchise operations will then be combined with all of Quaker State
to form a new and yet to be named company.
James L. Pate, Pennzoil's chairman and chief executive officer, said,
"These are major strategic actions and a defining moment in
Pennzoil Company s long and illustrious history. They represent
significant steps in Pennzoil s efforts to maximize long-term
shareholder value. The spin-off of our automotive consumer
products and manufacturing businesses will unlock substantial, but
unrecognized value, create a large, focused independent
exploration and production company, and position both the
upstream and downstream companies for growth."
Herbert M. Baum, Quaker State's chairman and chief executive
officer added, "This merger will create a new and dynamic consumer
automotive aftermarket company, offering consumers a wide array of
branded automotive products and an excellent service
organization. By combining our company with Pennzoil's automotive
consumer products and manufacturing businesses and realizing
substantial synergies and efficiencies, the new company will be able
to achieve growth and returns well in excess of those we could
have generated independently."
The merger is expected to be tax free to Pennzoil, Quaker State and
their respective shareholders and will be accomplished in two
steps. First, Pennzoil's motor oil, refined products and franchise
operations will be spun off to Pennzoil's shareholders. Second,
those businesses and Quaker State will combine in a
stock-for-stock merger.
Pennzoil and Quaker State shareholders will own 61.5 percent and
38.5 percent, respectively, of the newly combined company, which
will have approximately 77.4 million shares outstanding. Pennzoil
shareholders will continue to hold their existing Pennzoil shares
plus they will receive one share of the new company for each
Pennzoil share held. Quaker State shareholders will receive .82
shares of the new company for each share of Quaker State.
Pro forma for 1997, Pennzoil's downstream businesses had
revenues and recurring operating income of approximately $2 billion
and $92 million, respectively. As part of the spin-off, it is expected
that the downstream businesses will have approximately $436
million of long-term debt and $64 million of capitalized lease
obligations immediately prior to the merger with Quaker State.
Quaker State's revenues and recurring operating income for 1997
were approximately $1.2 billion and $64 million, respectively, and its
long-term debt as of year-end 1997 was approximately $429
million.
The merged company will be a leader in automotive consumer
products in North America. It will have strong brand positions in key
product categories, such as motor oil with Pennzoil. and Quaker
State., fast oil changes with Jiffy Lube. and Q-Lube., and car
care products with Slick 50., Rain-X., Blue Coral., Medo.,
Gumout., Fix-a-Flat., Classic. Car Wax and others.
The companies anticipate that the merger will generate cost
savings of $90 million to $125 million annually from the elimination of
duplicate functions, combined purchasing efficiencies, synergies in
distribution and marketing, and streamlining of general and
administrative functions. The resulting company's unique business
mix and geographic strengths will also lead to accelerated
worldwide growth, increased financial and strategic flexibility and
strengthened merchandising. In connection with its program to
generate annual cost savings and record the effects of certain
expenses and other charges related to the spin-off and the merger,
the new company expects to take initial restructuring charges and
incur other one-time expenditures ranging from approximately $150
to $200 million in aggregate.
Mr. Pate will be chairman and chief executive officer of the newly
formed automotive consumer products company, and Mr. Baum will
become vice chairman. The board will consist of Mr. Pate, four other
members appointed by Pennzoil, Mr. Baum and two other members
appointed by Quaker State. A committee consisting of Mr. Pate, Mr.
Baum, one Pennzoil director and one Quaker State director will be
responsible for recruiting a world class marketing executive to be
president and chief operating officer and serve on the new
company's nine-member board.
Separately, Pennzoil Exploration and Production Company will
continue as one of the largest U.S. based independent oil and gas
companies. Pennzoil's oil and gas business concentrates on three
key geographic areas: domestic onshore, domestic offshore and
international. The company is highly focused on its substantial core
domestic asset base and high potential international concessions
that provide a solid foundation for growth. Pennzoil holds significant
exploration and development concessions in Azerbaijan, Egypt and
Venezuela. Over the past five years, operating costs have been
reduced over 25 percent and reserve additions have been nearly
140 percent of production.
Mr. Pate added, "Pennzoil Exploration and Production Company is
well positioned for growth. The company has strong management in
place, led by industry veterans Steve Chesebro' and Don Frederick.
Separating the automotive consumer products and manufacturing
assets from our E&P business will create two pure-play companies
and allow Pennzoil's shareholders to realize the full value of each
business. The combination of our downstream businesses with
Quaker State significantly enhances the benefits of the restructuring
to Pennzoil's shareholders. This transaction continues the program
Pennzoil has followed for the past several years to streamline our
businesses, improve earnings and cash flow, and maximize
shareholder value.
"Both the new consumer products company and Pennzoil
Exploration and Production Company will have their own securities
for use in financing growth through acquisitions, with the market
having the flexibility to value Pennzoil Exploration and Production
Company on a cash flow basis and the new consumer products
company on an earnings basis.
"Quaker State has made significant progress under Herb Baum in
repositioning the company, expanding its consumer products and
strengthening its flagship brand. I look forward to working with Herb
as this new car care company takes a leadership position in the
automotive after-market industry," Mr. Pate said.
Mr. Baum said, "This is an exciting opportunity for the shareholders
of Quaker State and Pennzoil to create a premier car care
consumer products company in the U.S. Together we will offer
consumers a full range of high quality automotive products and
services building on our strong national brands, solid franchisee
and distributor relationships and the growing consumer demand in
the automotive products market. The combined company will
achieve significant synergies and allow us to operate our overall
lubricants and lubricants services businesses more efficiently,
creating greater value for our shareholders and superior service
and products for our consumers. Additionally, our branded
consumer automotive products group will be the most complete
aftermarket branded products company in North America.
"Over the past four years, Quaker State has achieved a solid
turnaround through improved operating efficiencies, marketing and
brand management and targeted acquisitions. We are now well
positioned to take this next major step for growth and increased
profitability, which this transaction will make possible. Quaker State
employees, who have been the backbone of our success, will be
treated fairly and equitably," Mr. Baum continued.
The annual dividend of the newly combined company will be 75
cents per share, and the annual dividend of Pennzoil Exploration
and Production Company will be 25 cents per share. After
completion of this transaction, Pennzoil shareholders will continue
to receive a total combined annual dividend equal to Pennzoil's
current annual dividend of $1.00 per share. The annual dividend to
Quaker State's shareholders on their shares in the new automotive
aftermarket products and consumer car care company will
represent a 54 percent increase over Quaker State's current annual
dividend of 40 cents per share.
The merger is conditioned upon the approval of Quaker State
shareholders, receipt of certain tax rulings and a
Hart-Scott-Rodino review. The companies anticipate that the
transaction should close in the second half of 1998. The
transaction will be accounted for using the purchase method.
Lehman Brothers Inc. is acting as financial advisor to Pennzoil on
the combination of its products group with Quaker State, and
Lehman Brothers Inc., Evercore Group Inc. and J.P. Morgan
Securities Inc. are acting as financial advisors to Pennzoil on its
restructuring. Chase Securities Inc. and Goldman, Sachs & Co. are
acting as financial advisors to Quaker State.
Pennzoil Company explores for and produces crude oil and natural
gas, manufactures and markets premium quality lubricants,
including America's top selling motor oil for the past 12 years, and is
the parent company of Jiffy Lube International, the world's largest
franchisor of fast oil change centers.
Quaker State is principally a manufacturer and distributor of leading
consumer aftermarket products and services, including motor oil
and a full-range of high-quality automotive treatment, appearance,
accessory and air freshener products.
CONTACT:
Bob Harper, Pennzoil Company, (713) 546-8536
Steve Blum, Quaker State Corporation, (972) 868-0438
|
