A number of major oil and gas companies, while amassing even greater size through recent mergers, continue to boast gains in both earnings and production volumes this year. In turn, some of these firms are using funds gained by sustained high energy prices to expand their upstream and downstream portfolios. Meanwhile, one major company earlier last week has decided to split its two units.
In the latest reports:
- ExxonMobil Corp. earlier this month forecast pretax savings from its merger will exceed $7 billion by 2002, compared with the company's initial estimate of merger savings of $2.8 billion by next year. ExxonMobil Chairman and CEO Lee Raymond talked with investors and the media in New York City along with participants via teleconference and the internet.
- Also earlier this month, shareholders of Phillips Petroleum Co. and Tosco Corp., Old Greenwich, Conn., voted separately to approve Phillips's pending $7.5 billion stock acquisition of Tosco. Subject to regulators' approval, the deal is expected to close by the end of the third quarter (OGJ, Feb. 12, 2001, p. 33).
- Woodside Petroleum Ltd., Perth, announced this month that a foreign investment law prohibits Shell Australia Investments Ltd. and Shell Australia Ltd. from acquiring additional shares in Woodside.
- USX Corp. said it plans to separate its energy business, USX-Marathon Group, and its steel business, USX-US Steel Group, a move that was "widely anticipated by the market," according to New York-based financial analyst UBS Warburg LLC.
ExxonMobil's earnings
For 2000, ExxonMobil reported record earnings of $17.7 billion, record cash flow of almost $29 billion, and a rate of return on capital of 20.6%.
"ExxonMobil's long-term focus on efficiency, capital productivity, and investment discipline has allowed us to generate a return on capital that exceeds our competitors by an average of 3%," Raymond said.
For first quarter 2001, ExxonMobil reported earnings, excluding merger effects, of $5 billion, or $1.44/diluted share, up from $3.35 billion, or 95¢/diluted share, for the same period last year.
"ExxonMobil will continue to focus on operating and financial discipline, a strategy that has allowed the company to increase annual dividend payments for 18 consecutive years and has helped ExxonMobil stock outperform the S&P 500 by an average of 3%/year over the past 30 years," Raymond said.
He expects ExxonMobil's capital investment to increase by 15-20% in 2001 and another 10% next year.
Most of ExxonMobil's increased investment is in the upstream segment. Spending on major development projects is accelerating, and Raymond said ExxonMobil's capital investments to increase production are likely to total $100 billion for the decade.
These investments involve projects in almost every key exploration and production area in the world, including the Gulf of Mexico, the North Sea, the Caspian region, and West Africa.
ExxonMobil has 39 major upstream projects under way to develop more than 5.1 billion net boe of resources. An additional 49 projects are in the early planning stage with the potential to develop up to an additional 9 billion net boe.
Phillips-Tosco marriage
In terms of capacity, the combined Phillips-Tosco would become the second largest refiner in the US, just behind ExxonMobil Corp., and the third largest US retail marketer, with 12,200 outlets in 46 states.
Jim Mulva, Phillips chairman and CEO, said, "This paves the way for Phillips to become a premier competitor in the domestic refining, marketing, and transportation business and to realize the competitive advantages of being fully integrated."
Under terms of the deal, Phillips will issue 0.8 common share for each Tosco share and assume nearly $2 billion of Tosco's debt. Tosco has grown through acquisitions from a single-refinery company in 1992 to become the largest US independent refiner and marketer.
Tosco has nine refineries with 1.3 million b/d of capacity, making it the third largest US refiner in terms of capacity, behind ExxonMobil and BP PLC. Phillips is ranked 17th among US refiners, with three plants totaling 355,000 b/d of capacity (OGJ, Dec. 18, 2000, p. 60).
Tosco's largest refinery, at 295,000 b/d, is at Roxanna, Ill. Other plants include one each at Linden, NJ, Trainer, Pa., and Belle Chasse, La.; two connected plants at Los Angeles; two connected plants at San Francisco; and one at Ferndale, Wash.
The companies' combined retail outlets include 6,300 from Tosco under the '76 and Circle K brands, and 5,900 under the Phillips 66 brand. Tosco is the largest operator of company-controlled convenience stores in the US.
Also at the recently held Phillips shareholders meeting, Mulva said he expects first-quarter net operating income will be up 75-85% from the same period last year.
Phillips expects total worldwide production to be about 820,000 boe/d for the quarter compared with 489,000 boe/d for the first quarter of 2000.
Shell-Woodside snags
Australia's federal treasury office said the Foreign Acquisition & Takeovers Act 1975 blocks Shell from implementing its $2.5 billion offer for 56% interest in Woodside Petroleum.
Shell and Woodside are joint venture partners in Australia's North West Shelf LNG export project. Woodside serves as operator. Analysts had said the Shell proposal was part of a larger strategy for parent Royal Dutch/Shell Group to gain a greater share of the world's LNG market.
Woodside plans to meet with Shell to discuss Woodside's options. Meanwhile, Woodside has been seeking alternative proposals just in case the Shell offer was not finalized, and other parties have said they would seriously consider submitting proposals.
Any future proposal probably will be in the form of an asset transfer or merger proposal rather than a takeover bid, Woodside said, adding that such an offer would require shareholder approval.
Australian Minister for Industry, Science, and Resources Sen. Nick Minchin said, "The treasurer's decision will protect Australia's national interest and ensure that Woodside remains committed to developing our oil and gas resources.
"It reflects the unique position of Woodside in Australia's petroleum industry and in particular, the company's key role as operator of Australia's largest-ever resource project, the North West Shelf Joint Venture.
Minchin said, "At the same time, I would like to send a clear message that the government continues to welcome foreign investment in Australia. In particular, the government recognizes the major role such investment, including that by Shell, has played in the development of Australia's resources sector."
USX spin-off
Thomas J. Usher, USX chairman and CEO, said the plan to split the company is expected to be implemented by Dec. 31, subject to shareholder and regulatory approval. Last November, USX hired legal and financial advisors to review the corporate structure with the goal of enhancing shareholder value.
The plan envisions a tax-free spin-off of the steel and steel-related businesses of USX into a freestanding, publicly traded company known as United States Steel Corp. (USSC)
Holders of USX-US Steel Group stock would become holders of USSC stock. Holders of USX-Marathon Group stock would become holders of Marathon Oil Co. stock. No cash distribution to shareholders is planned.
Marathon Oil will remain based in Houston; Marathon Ashland Petroleum LLC in Findlay, Ohio; and USSC in Pittsburgh.
Usher will become chairman and CEO of USSC. He also will become chairman of Marathon Oil and will remain chairman of Marathon Ashland. Clarence P. Cazalot will become president and CEO of Marathon Oil.
Usher said separating Marathon and USSC would give each company more flexibility in expanding its business through stock-based acquisitions, which is beneficial, given global consolidation in both the energy and steel industries.
The separation also would allow Marathon and USSC to each make acquisitions based solely on its own business considerations.
Employees of both USSC and Marathon should not be adversely affected by the reorganization plan. In addition, retirees will continue to receive pension benefits, and no changes in any retiree benefit will result, Usher said.
UBS Warburg termed the spin-off "the defining event" that the company's shareholders have been waiting for. "And while the plan would allow Marathon to pursue its own course free from the handcuffs of the targeted stock structure," UBS Warburg said, "we do not view the company as a target for further consolidation within the sector, at least in the medium term."
Also according to UBS Warburg, Marathon's "cost of freedom" will be $900 million, which is the amount of value to be transferred from Marathon to USSC in order for it to "strengthen the steel unit's financial position." The analyst went on to say that Marathon could, in fact, "withstand such a value transfer."