Phillips sees Tosco acquisition as 'final step'

Phillips sees Tosco acquisition as 'final step': Mulva
New York (Platts)--5Feb2001/
The $7-bil acquisition of refiner Tosco is the "final step" in an 18-month odyssey to transform Phillips Petroleum into a major, integrated oil company, Phillips chairman and CEO James Mulva said Feb 5. Mulva and Tosco chairman and CEO Thomas O'Malley met with analysts in New York, a day after announcing the stock swap deal that will give Phillips eight new refineries with a capacity of roughly 1.35-mil b/d, as well as 6,400 additional retail outlets in 32 US states. "This really is the final step as far as putting into place what Phillips will look like in the future," Mulva said. "If you're going to be a major integrated oil company, you need to have a strong upstream and you need to have a strong downstream."

Indeed, the past 18 months have seen Bartlesville, Oklahoma-based Phillips grow at a dizzying rate. In just the past year, Phillips has closed the $6.6-bil purchase of Arco Alaska, formed the gas gathering and processing venture with Duke Energy known as Duke Energy Field Services, and created the Chevron Phillips Chemical Co. alliance. The Tosco acquisition, said Mulva, will give Phillips the appropriate balance between upstream and downstream that is crucial for an integrated major. Phillips' portfolio will be split 60/40 between upstream and downstream, added Mulva, noting Phillips' refining, marketing and transportation business will be domestic-based, at least in the near-term. "We see a great opportunity in the RM&T business to really make a lot of money," he said.

O'Malley, Tosco's largest shareholder, will be CEO of Phillips' downstream operations, which will be headquartered in Tempe, Arizona. The acquisition, subject to the normal regulatory approvals, will also come with the usual post-deal streamlining. Mulva said Phillips is eyeing about $1-bil worth of asset "rationalizations," but was quick to add any sales will likely come mostly on the marketing side and not the refining end. With the addition of Tosco, Phillips will have 11 refineries and 1.7-mil b/d of capacity. O'Malley acknowledged layoffs will occur among the combined 37,000-person workforce, but neither he nor Mulva indicated how deep the cuts will be. "There are more employees than we need," O'Malley said. "We are going to look for the best and the brightest."

While linking Phillips' Alaskan North Slope crude production with Tosco's refining network on the US West Coast will provide the joined company with a formidable market presence, both Mulva and O'Malley suggested the relationship that has existed between the two companies in that region will largely remain intact. "We're going to place that crude where we get the best price for the crude," Mulva said. "There may be some synergies there, but I think the operation will run as it has in the past." Added O'Malley: "The refining company wants to buy the cheapest crude it can find." Both men said they believed crude prices will remain strong this year, with Mulva noting he sees a tight supply/strong demand imbalance that will provide healthy returns in the downstream.

Change seen in Phillips' approach to refining sector
New York (Platts)--4Feb2001
The most surprising aspect of the Tosco/Phillips deal is that it significantly alters what Phillips has indicated all along it wanted to do with its refining and marketing division. That is, find a buyer for it or at least a joint venture partner. An earlier alliance to put R&M in a joint venture with Chevron collapsed. Its chemical operations were put into a joint venture with Chevron and its most recent significant acquisition was in the upstream, acquiring part of Arco Alaska. A spokeswoman said that while it was understandable that some observers might find the deal surprising, "we had said that we wanted to put all of our businesses into an organization that would help with growth and to compete with large major integrated oil companies. We want to remain integrated. We are now putting together a strong refining group, looking at the advantage of integration and not entirely weighted toward the volatility of crude oil prices."

Phillips will pay for the acquisition with its stock, issuing 0.8 Phillips shares for each Tosco share, and also will assume approximately $2-mil of Tosco debt. Phillips also has authorized a $1-bil share buyback program. Phillips' stock has been a strong performer in recent months, rising from a range of $35-40 one year ago. In a prepared statement, Phillips said it expects the transaction to be immediately accretive to earnings per share, projecting pre-tax savings, described by Phillips as "synergies," of $250-mil, including the stock buyback. The company also said net cash flow will be improved. Debt-to capitalization of the combined company will be 37%, Phillips said in its statement, and capital expenditures of the combined company will not be affected in 2001, the company said.

Phillips/Tosco stock swap creates US refining giant
New York (Platts)--4Feb2001
The $7-bil stock swap announced Sunday afternoon will create the creation of the second largest refiner in the US, according to Phillips. The new giant will have nine refineries, with a presence in every major refining center in the US: the East Coast, the Gulf Coast, the Midcontinent, southern California, the San Francisco Bay area, the Puget Sound area, and even in the Rocky Mountains. Tom O'Malley, the Tosco CEO who built that company up from one San Francisco-area refinery to become the largest independent refiner in the US, will become the new vice-chairman of Phillips and CEO of its refining and marketing division. Phillips said the Tosco name will disappear in the transaction, but that the refining and marketing headquarters will be in Tempe, Arizona, where Tosco now is based.

The new refining giant will trail only Exxon Mobil in terms of refining capacity. It is projected to have refining throughput of 1.71-mil b/d, with 360,000 b/d coming from Phillips' three refineries -- Borger and Sweeny, Texas, and the small 25,000 b/d refinery in Woods Cross, Utah -- with the rest coming from the Tosco system. That system, on the US East Coast, has a 275,000 b/d refinery at Bayway in New Jersey, on the New York harbor, and the Trainer facility at Marcus Hook, with 180,000 b/d. On the US Gulf Coast, Tosco recently acquired BP's 250,000 b/d Alliance refinery, near New Orleans, its first Gulf Coast acquisition. It also owns the 295,000 b/d Wood River refinery, near St. Louis, which it acquired from Shell.

On the US West Coast, it owns a two-plant 150,000 b/d refinery system near Los Angeles, and a 110,000 b/d two-plant system near San Francisco, and a 90,000 b/d refinery at Ferndale, Washington, on the Puget sound. Tosco also has an agreement to acquire a 75,000 b/d refinery in County Cork, Ireland, along with a deepwater terminal. A spokeswoman for Phillips said that deal will proceed and will not be affected by the Phillips acquisition.

Phillips agrees to buy Tosco in $7-bil stock transaction
Singapore (Platts)--4Feb2001
US-based Phillips Petroleum Co has announced that it has agreed to purchase Tosco Corp in a $7-bil stock transaction, a company release said. Under the terms of the agreement, Phillips will issue 0.8 Phillips shares for each Tosco share and will also assume approximately $2-bil of Tosco's debt. The transaction is expected to close by the end of the third quarter of 2001. Phillips' board of directors has authorized a $1-bil share buyback program. Phillips expects the transaction to be accretive to earnings per share, taking into account anticipated annual pre-tax synergies of $250-mil and the stock buyback. It will also improve net cash flow. The transaction will be accounted for under purchase accounting.

Phillips posts $744-mil Q4 2000 profit vs $250-mil
London (Platts)--25Jan2001
Phillips Petroleum said Thursday profits nearly tripled to $744-mil, or $2.88/share, in the forth quarter 2000 compared to $250-mil ($0.98/share) in the year earlier period helped by higher oil and gas prices. Upstream net operating income was $695-mil, up from $214-mil in the same quarter of 1999, benefiting from higher production in Norway and Nigeria, the addition of crude production from the Alaskan acquisition, and the mid-November start-up of the Alpine field in Alaska, Phillips said. Worldwide crude oil production was up 136% from the same period of 1999, while natural gas production was up 4%. On a barrel-of-oil-equivalent basis, daily production was 837,200, compared with 478,800 from the same quarter last year.

Refining, marketing operating profit rose to $125-mil, up from $13-mil on higher motor fuel and distillates margins which were partly offset by higher prices for fuel and utilities. "In 2001, with a full year's production from our Alaskan assets, we expect our average daily worldwide BOE production to be up approximately 15% over 2000," Phillips CEO Jim Mulva said in a statement. He said cash flows of $1.3-bil during the quarter, along with proceeds from non-strategic asset dispositions, enabled Phillips to reduce debt by more than $1-bil during the quarter.

US' Tosco posts $164-mil Q4 2000 profit vs $215-mil
London (Platts)--25Jan2001
The US' Tosco Corporation said Thursday net income fell to $164-mil, or $1.07 per share, in the forth quarter from $215-mil in the year-earlier period despite nearly doubling sales revenues. One-time items for the 1999 fourth quarter consisted of a $240-mil inventories write-up. Sales rose to $7.4-bil compared to $4.2-bil helped mostly by higher refining margins and production. Average products output rose to 1-mil b/d from 325,900 b/d with crude throughputs rising to 942,900 b/d from 313,200 b/d in the quarter. "Tosco had an exceptional year," said Tosco CEO Thomas O'Malley, "During the year, we increased our refining capacity by approximately 46%, increased our marketing volumes by approximately 48%, closed four major transactions and began our international expansion."

Source: http://www.platts.com/oilmergers/phillipsrelated.shtml

 

 

 

 

 

 

 

 

 

Thursday, April 12 2001

Phillips, Tosco get shareholder approval for merger

Combined wire services

BARTLESVILLE, Okla. - Shareholders of Phillips Petroleum Co. and Tosco Corp. voted yesterday to approve Philips' pending $6.87 billion acquisition of Tosco.

The proposed purchase of Greenwich-based Tosco is expected to close by the end of the third quarter if regulators approve.

 

The shareholders of each company met separately to vote on the deal.

 

The acquisition would make Phillips the country's No. 2 refiner. The combined company's refining, marketing and transportation operations will be located in Tempe, Ariz.

 

"This approval from our shareholders is a significant milestone in transforming Phillips into a stronger major integrated oil company positioned for further growth," said Jim Mulva, chairman and chief executive officer.

 

Phillips has oil interests around the world and had $21.2 billion of revenues last year.

Tosco, which has over $28 billion in annualized revenues, is the largest independent refiner and marketer of petroleum products in the United States, and is the nation's largest operator of company-controlled convenience stores.

 

In their meeting, Phillips shareholders also approved a charter change to increase the number of authorized shares of common stock from 500 million to 1 billion.

Phillips, the sixth-largest U.S. oil company, said it missed profit estimates for the first quarter because lower oil prices may have thrown off analysts' projections.

Profit will be 75 percent to 85 percent higher than the year-earlier quarter's $1.06 a share, Phillips Chairman Jim Mulva said in a statement. That makes profit $1.86 to $1.96 a share, less than the $2.19 average estimate of analysts polled by First Call/Thomson Financial.

 

"We can't really answer why the street had us at a certain level," spokeswoman Kristi Desjarlais said. First-quarter earnings fell from the fourth quarter's $2.72 a share because the price of oil fell, Desjarlais said.

 

Phillips expects to meet or beat this year's forecasts, Mulva said. The First Call estimate is $6.92 a share.

 

Phillips acquired Atlantic Richfield Co.'s Alaskan oil fields last year as part of that company's acquisition by BP Amoco Plc, raising Phillips's exposure to oil prices. Oil averaged $28.67 a barrel in the first quarter, down 10 percent from the fourth-quarter average.

 

The company also included in its fourth-quarter profit from operations $66 million from the sale of inventory, though the profit was from a one-time sale, Desjarlais said.

 

"We're not going to have that again," she said.

 

The $66 million amounts to 25 cents a share, providing the bulk of the difference between the company's top estimate and the average call by analysts, said Fadel Gheit, an analyst with Fahnestock & Co.

 

The U.S. Federal Trade Commission requested additional information on Monday from Phillips about the Tosco purchase. The transaction, announced in February, still is expected to close by the end of the third quarter, Phillips said.

Shares of Bartlesville, Okla.-based Phillips fell $1.12 to $56.47. Tosco, based in Old Greenwich, fell 75 cents to $43.35.

 

Source: http://www.stamfordadvocate.com/news/stamford/2001-04-12/article26.shtml

 

 

 

 

 

 

 

 

 

Why Phillips Made a Shrewd Deal for Tosco

By Craig Schneider    CFO.com    Feb 07, 2001

Compared to other recent high-profile deals, Phillips paid a much lower multiple by at least six different measures.

Is Phillips Petroleum Co. paying a large premium to buy Tosco Corp. at the top of the market?

Yes, according to most experts quoted in the general press. “They’re almost not leaving any margin for error," Fadel Gheit, Fahnestock & Co.'s well-regarded analyst, tells CFO.com.

However, if you compare the price Phillips is paying to at least two other recent high-profile deals, you can easily conclude the company is actually getting a bargain if you use at least a half-dozen common industry measurements.

On Monday, Phillips said it would shell out 0.8 share for each of Tosco’s 161 million shares, a 34 percent premium to Tosco’s closing price on Friday, making it a $7.49 billion deal.

Once completed, Phillips will become the country's second-largest refiner. Given the unpredictability and volatility of the refining business, Gheit questions the wisdom of the deal.

“Fat [margin] years are the exception, not the rule,” he says. More likely, if the industry experiences a couple of good years, it then typically suffers through a few lean years.

And, right now he thinks the industry is headed for that inevitable down-cycle. “Refining margins in Europe are absolutely collapsing. That might affect margins in this country,” he warns. This suggests that Tosco snookered Phillips.

Not so fast.

For one thing, Tosco announced last week that its fourth-quarter earnings more than tripled to a record $1.07 per share on strong refining margins. And many analysts are confident that refining margins will continue to grow in the near future.

So, how do you value Phillips' deal? In general, several considerations come into play, such as the number of oil barrels produced per day, the location of the refineries, and the amount of premium, or lighter, grade product that the refinery produces per barrel.

Gheit believes that in the Phillips-Tosco deal, the advising investment bankers worked off valuations from smaller deals involving pure refining operations such as Valero Energy Corp.’s acquisition of the Benicia, Calif. refinery from Exxon for about $800 million. It produces 35,000 barrels a day.

Tosco owns eight U.S. refineries that can process 1.35 million barrels a day of crude oil.

In fact, according to CommScan LLC, a New York-based data provider, the Phillips Petroleum-Tosco deal stacks up as a bargain compared to two other recent deals—El Paso's recent purchase of Coastal Corp. for $22.5 billion in stock and debt and Chevron's pending $35 billion all-stock purchase of Texaco.

For example, under Phillips' proposed price tag, its enterprise value (which is the price tag of the deal plus assumed debt)-to-earnings before interest, taxes, depreciation and amortization (EBITDA) is 5.6 times, while its Enterprise value to EBIT (earnings before interest and taxes) is 7.1 times.

El Paso's deal worked out to an enterprise value-to-EBITDA ratio of 16.7 and an enterprise value-to-EBIT ratio of 25.4.

In the Chevron-Texaco deal, the multiples were 9.4 and 14.2, respectively.

The equity value of the Phillips deal (which is the price tag excluding assumed debt) compared to EBITDA is 4.7 times and 5.9 times EBIT.

This compares to 19.3 times and 18.6 times respectively in the El Paso deal and 7.3 times and 11.2 times in the Chevron deal.

The enterprise value of the Phillips deal compared to total assets is roughly equal while the equity value to total assets is 0.8 times.

On the other hand, El Paso's deal worked out to 1.6 times and 1.2 times respectively while the Chevron deal computed at 1.5 times and 1.2 times.

So, maybe Phillips knows what it is doing, after all.