"Mixed Analyst Reaction to Oil Merger"
Monday February 5, 5:26 pm Eastern Time
By ALAN CLENDENNING
AP Business Writer
NEW YORK (AP) -- Phillips Petroleum Co.'s proposed $6.87 billion purchase of Tosco Corp. (NYSE:TOS - news) has some analysts worried the company is shifting away from profitable oil exploration and production opportunities in its bid to become the country's No. 2 refiner.
``You either like it or you don't,'' said Stephen Smith, an oil analyst with Dain Rauscher Wessels in Houston.
Smith, who was surprised but supportive of the move, said the Tosco acquisition would add balance to Phillips long-term revenue stream, and give it refineries across the nation. Phillips' refineries are primarily in the Midwest, while Tosco has operations on both coasts.
But the purchase cuts into Phillips' focus on production of crude oil, which is trading at nearly $30 a barrel on the wholesale market and giving oil companies huge profits from their drilling operations.
``I just don't see the justification for the deal,'' said Mark Gilman, an oil analyst at ING Barings in New York.
Phillips is offering 0.80 of one of its shares for each share of Tosco. Phillips also will assume approximately $2 billion in Tosco debt.
The transaction will also create the fifth-largest gasoline retailer in the nation with more than 12,000 stations. The deal was approved by the boards of both companies on Sunday and is expected to be completed by the third quarter of 2001.
In late trading in the New York Stock Exchange, shares of Phillips were down $4.78, or 8 percent, to $53.35, pushing the value of the deal lower from its original $7 billion. Shares of Tosco were up $5.58, or 16 percent, to $40.19, also on the NYSE.
Company officials and analysts do not expect resistance from federal regulators who must approve the deal. A Phillips spokeswoman said there are no plans to sell assets of either company, but that company officials would reconsider if required by the Federal Trade Commission.
Phillips, based in Bartlesville, Okla., is the top oil producer in Alaska. The acquisition would give it five refineries on the West Coast and 15 percent of the retail gas market in California, Oregon and Washington state.
Most analysts were caught off-guard by the announcement because they thought Phillips would try to reduce its refining and retailing operations while expanding its exploration business.
``We were under the impression that they wanted to get out of 'mom and pop' retail, and refining,'' said Phil Flynn, senior energy analyst at Alaron Trading Corp. in Chicago.
In a conference call Monday with analysts, Phillips chairman and chief executive Jim Mulva said he concluded the purchase was a good idea after failing to find a partner for a joint venture involving gas retail sales and refining.
``We're absolutely convinced that our acquisition of Tosco not only fits us, but puts us in a good position,'' Mulva said.
The acquisition is further evidence of consolidation in the oil industry, following mergers by Exxon Mobil Corp. [NYSE:XOM - news], Royal Dutch/Shell Group, BP Amoco PLC and the pending merger of Chevron Corp. (NYSE:CHV - news) and Texaco Inc. (NYSE:TX - news)
Mulva will continue to lead Phillips. The transition effort will be headed by Tosco's chairman and CEO, Tom O'Malley, who will lead company's refining, marketing and transportation business and serve on Phillips board.
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 the conference call, O'Malley said some jobs would be eliminated but did not specify how many workers would be affected or when the cuts would be announced.
On the Net:
phillips66.com
tosco.com
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