Oil Merger: Phillips Buys Tosco for $7B

N E W  Y O R K, Feb. 5, 2001 -- With its $7 billion stock purchase of ToscoCorp., Phillips Petroleum Co. added considerable heft to itsrefining operations at a time when the oil industry is focused onexploration and production.

Crude prices have remained high since summertime, trading atnearly $30 a barrel on the wholesale market, and because of thatoil companies have profited mightily from their drillingoperations. The acquisition of Tosco on Sunday, however, positionsPhillips as the No. 2 refiner in the nation, adding balance to theBartlesville, Okla.-based company’s revenue stream on a long-termhorizon.

“What the company has done is akin to an investor spreadinghimself out in the stock market,” said Peter Beutel, president ofCameron Hanover, an energy risk management firm in New Canaan,Conn.

“Exploration is today’s hot topic. But crude prices will be alot lower in a couple of years and the action will be inrefining,” Beutel said. “These companies are breaking the moldand looking ahead.”

12,000 Gas Stations

The transaction, which also creates a gasoline retailer withmore than 12,000 stations, was approved by the boards of bothcompanies on Sunday and is expected to be completed by the thirdquarter of 2001.

Phillips is offering 0.80 of one of its shares for each share ofTosco, valuing Tosco shares at $46.50, a 34 percent premium. Sharesof Tosco closed Friday at $34.61 on the New York Stock Exchange.Phillips also will assume approximately $2 billion in Tosco debt.

Now a more fully integrated oil company, Phillips and Tosco jointhe ranks of other industry powerhouses formed by similar mergers:Exxon Mobil Corp., Chevron Texaco, Royal Dutch/Shell Group and BPAmoco Plc.

The merger, which is subject to approval by federal regulatorsand shareholders, is expected to be accretive to earnings pershare, Phillips said in a press release.

“We now have positioned our business to fully compete in thedomestic [refining, marketing and transportation] marketplace,which, when combined with our strong [exploration and productionoperations, puts us among the leaders in the integrated oilindustry,” Phillips Chairman and CEO Jim Mulva said in astatement.

Coast-to-Coast Refineries

The combined companies should also benefit from havingrefineries in all areas of the country. Phillips’ refineries areprimarily in the Midwest, while Tosco has operations on bothcoasts.

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

“Wherever the price spikes are, the company will be able totake advantage,” Beutel said.

Mulva will continue to head Phillips. The transition effort willbe led by Tosco’s chairman and CEO, Tom O’Malley, who will be theCEO of the company’s RM&T business and serve on Phillips board.

Also on Sunday, Phillips’ board approved a $1 billion sharebuyback program.

Tosco, based in Greenwich, Conn., is the country’s third-largestrefiner with eight refineries in California, Illinois, New Jersey,Pennsylvania and Washington with capacity to process 1.35 millionbarrels of oil per day. Combined, the companies would process about1.7 million barrels a day.

Tosco has 6,400 gas stations in 32 states, operating under thebrands “76” and Circle K, the nation’s No. 2 convenience storechain, 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 employeesand had net income of $1.86 billion in 2000.

The combined company’s refining, marketing and transportationoperations will be located in Tempe, Ariz.

Layoffs Loom

In a conference call with journalists, Mulva and O’Malley saidsome jobs would be eliminated but that no decision has been made onhow many employees might be affected.

“I don’t think we’ve come up with any fixed number ofindividuals,” O’Malley said.

Mulva said the acquisition will also help put Phillips in abetter position to expand its oil exploration and productionoperations in the future.

“Going forward, we have the platform to develop all of ourbusiness lines,” he said.

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

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

Phillips also completed last year its $6.5 billion purchase ofAtlantic Richfield properties in Alaska, and announced a venture toteam with Chevron and Alberta Energy Co. Oil & Gas to explore anddevelop nearly 150,000 acres on the North Slope and the BeaufortSea there.

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