The oil industry learned earlier this month that Phillips Petroleum Co. had agreed to buy all of ARCO's Alaskan operations for about $7 billion in a move that will nearly double Phillips's total reserves and finally clear the way for ARCO's long-pending merger with BP Amoco PLC (OGJ, Mar. 20, 2000, Newsletter).
But financial analysts say the political policies that forced that sale fly in the face of new economic pressures from investors who are pushing both majors and independents to improve "capital efficiency" by concentrating on the operations they do best.
As originally planned, the BP Amo- co-ARCO merger would have gone a long way toward concentrating Alas- kan operations under one expert operator-a strategy that industry experts say is necessary for maximum exploitation of reserves in that high-cost area.
In separate conferences with financial analysts, both Sir John Browne, chief executive of BP Amoco, and J.J. Mulva, chairman and CEO of Phillips, agreed that a single operator could most-efficiently develop the giant Prudhoe Bay field. But the US Federal Trade Commission, backed by state governments in Washington, Oregon, and California, had earlier blocked the BP Amoco-ARCO merger that would have brought most of Alaska's production under the control of a single firm.
Government officials claimed BP Amoco would then dominate the US West Coast oil market and exert undue influence over gasoline prices in that area.
With announcement of the pending sale of ARCO Alaska to Phillips Petroleum, however, the FTC immediately postponed indefinitely any legal action to block the merger.
"I can't find a lot of logic in that regulatory solution," said W. Mark Meyer, vice-president of E&P research at Simmons & Co. International, Houston. Concentrating operations under a single company with the expertise to squeeze down costs would be the most-efficient approach, he said.
However, Meyer said, "The negotiated solution is still better than having the whole merger blow up."
Even without ARCO's Alaskan properties, the pending merger remains an excellent deal for BP Amoco, says Browne.
When the merger was proposed last April, BP Amoco officials estimated the resulting pretax savings and synergies would be about $1 billion, including $200 million from joint Alaskan operations.
"Even after disposing of ARCO's Alaskan interests, we believe we can still deliver $1 billion in savings," Browne said.
"The makeup of the savings has shifted, but we are absolutely confident of the total, because the work we've done since last April has shown the potential from within the continuing ARCO business, including Vastar [Resources Inc.]."
BP Amoco has already offered $71/share for the 18.1% of Vastar stock that is publicly traded, pending its acquisition of ARCO, which owns the balance of that stock.
Ironically, Vastar is one of the best examples of the 33% of operators that have responded to investors' pressures to improve capital efficiency, Meyer said.
Phillips's gain
Phillips expects to improve its rate of capital efficiency with its acquisition of all of ARCO's Alaskan operations. Based on the expected April closing, the deal will be immediately accretive to both earnings and cash flow, company officials said.
"It's one of the most attractive transactions that we've seen in a long time," said Mulva.
The acquisition will add 1.9 billion boe of booked reserves and increase Phillips's production by about 29,000 boe/d, he said.
However, some analysts questioned his claim that Phillips is acquiring ARCO's Alaskan reserves at an effective cost of $3/boe.
Phillips has no plans to dispose of any of the acquired assets or to institute major cost reduction programs that would impact either its own or ARCO Alaska employees in the wake of that merger.
And the company does not plan to issue equity to help pay acquisition costs, Mulva said.
Cash flow from the acquisition is expected to average $500 million/year, after exploration and development spending, he said. That, coupled with about $2 billion in proceeds from previously announced joint ventures, will help Phillips pay down debt. The company's debt-to-capital ratio is expected to be about 60% at yearend.
Moody's Investors Service downgraded all long-term debt ratings for Phillips and for Merey Sweeny LP and Sweeny Funding Inc., its joint ventures with Petroleos de Venezuela SA, following announcement of the acquisition. Duff & Phelps Credit Rating Co. also downgraded Phillips's debt ratings.
There will be no immediate increase in the E&P budgets that the two companies have already approved for this year, totaling $1.2 billion for Phillips (worldwide) and $515 million for ARCO Alaska. However, Phillips officials said they've identified at least 15 "real good exploration prospects" among the new properties.
At some point in the future, they also will be looking to develop about 25 tcf of added gas reserves via a new gas pipeline or through some LNG or gas-to-liquids projects.
Under the sales agreement, Phillips will pay $6.5 million cash to ARCO when the sale is closed. It will pay up to $500 million more over the next 5 years, based on oil price increases above $25/bbl.
Under that formula, each month that oil prices surpass $25/bbl, ARCO-and eventually BP Amoco-ARCO-will get the price difference on oil produced from its former Alaskan properties, with a $500 million cap. Since the sale of the Alaskan properties will have an effective date of Jan. 1, ARCO already is due $150 million for the first 3 months of this year, officials said.
