Phillips Petroleum Agrees to Buy Tosco
Phillips Petroleum Co. said Sunday that it will acquire Tosco Corp. for $7 billion in stock, creating the nation’s second-largest oil refiner and a gasoline retailer with more than 12,000 stations nationwide.
The transaction, the latest in the wave of oil industry consolidation, would help Phillips become a bigger integrated oil company. But the deal also bucks the industry trend as well as Phillips’ stated strategy of seeking to shed refinery and marketing operations and bulking up on oil exploration and production, the more lucrative ends of the business.
Combining with Tosco, Phillips would have a refining capacity of 1.7 million barrels a day and become the fifth-biggest retailer.
Tosco, already the No. 3 refiner with eight facilities, has two gasoline refineries in California--one in Wilmington, the other east of San Francisco--that turn out an average of 240,000 barrels a day, or about 21% of the state’s output. Tosco is based in Stamford, Conn.
It also accounts for about 17% of gasoline sales in the state through its 2,100 stations under the “76” brand. Overall, it operates 6,400 gas stations in 32 states.
Phillips, based in Bartlesville, Okla., is offering 0.80 of a share of its stock for each share of Tosco, valuing Tosco shares at $46.50, a 34% premium over its closing price Friday. Shares of Tosco closed Friday at $34.61, up 62 cents, on the New York Stock Exchange. Also on the NYSE, Phillips shares rose 9 cents Friday to close at $58.13.
Under terms of the deal, Phillips would assume approximately $2 billion in Tosco debt.
James Mulva, Phillips chairman and chief executive, said Sunday the company needs to grow to raise cash for larger projects. Analysts questioned why Mulva chose to buy Tosco, the largest independent U.S. refiner and owner of the Circle K convenience store chain, rather than an exploration company.
“Refining is never going to be as profitable as exploration and production,” Fadel Gheit, an analyst with Fahnestock & Co. told Bloomberg News. “They would have been better off buying a pure natural gas explorer in the U.S.”
Combining the two refining operations will cut costs, Mulva said. The acquisition will bring $250 million in pretax savings, Mulva estimated. Tosco, with 26,000 employees nationwide, hasn’t decided how many jobs it will cut, he said.
In November, Phillips estimated its return on capital for refining was 6% from 1995 to 2000. Its oil exploration and production unit made an estimated 20% return in the same period.
Tosco Chairman and CEO Tom O’Malley, who would be a vice chairman at Phillips and would run its refining and marketing operations from Tempe, Ariz., said stricter environmental regulations will help improve refining profitability.
“It’s a supply-and-demand issue,” O’Malley said. “The supply of clean fuels is limited and demand will grow.”
Tosco has said it would invest $375 million during the next five years in its two California refineries and one in Bellingham, Wash., to produce more and cleaner fuels. The investment would allow Tosco to convert gasoline production at the refineries to MTBE-free fuel, as ordered by California Gov. Gray Davis. The overhaul also would allow the refineries to make ultra-low-sulfur diesel before the 2007 deadline that the Environmental Protection Agency is expected to mandate.
Peter Beutel, president of Cameron Hanover, an energy risk management firm in New Canaan, Conn., lauded the merger deal for its long-term implications.
“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. With exploration, it’s two or three years of feast and then six or seven years of famine.”
The combined company would join the ranks of other industry powerhouses formed by similar mergers: Exxon Mobil Corp., Royal Dutch/Shell Group, BP Amoco and the pending $35-billion deal between Chevron Corp. and Texaco Inc.
The transaction was approved by the boards of both companies Sunday and is expected to be completed by the third quarter of 2001. It is subject to approval by federal regulators and shareholders.
Also on Sunday, Phillips’ board approved a $1-billion share buyback program.
Mulva would continue to head Phillips, which operates three refineries, has about 5,900 gas stations, 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.
In addition to its California and Washington refineries, Tosco, based in Greenwich, Conn., has five in Illinois, New Jersey and Pennsylvania. Together they have the capacity to process 1.35 million barrels of oil per day. Tosco had net income of $$529.4 million on sales of $24.5 billion in fiscal year 2000.
Tosco acquired the refinery and retailing assets of El Segundo-based Unocal Corp. for about $2 billion in 1997. Unocal was among the first oil companies to slim down by pruning such assets to focus on oil exploration and production.
Indeed, Phillips had tried for the last several years to combine its refining and marketing assets with a partner. It came close to a potential deal with Conoco Inc. in 1996 and then again with Ultramar Diamond Shamrock Corp. in 1999.
Meanwhile, Phillips has formed a pipeline and natural gas joint venture with Duke Energy Corp., and a year ago, Phillips and Chevron agreed to a 50-50 joint venture of their chemical businesses, creating a company with assets of more than $6 billion.
Sunday’s announcement is the second major deal for Phillips in the last year.
In April, it purchased Atlantic Richfield Co.’s Alaska production assets for $6.7 billion. The deal increased Phillips’ oil and gas production by 70%. Los Angeles-based Arco was acquired by BP Amoco last year.
Mulva said the acquisition will also help put Phillips in a better position to expand its oil exploration and production operations.
“Going forward, we have the platform to develop all of our business lines,” he said.
