Exxon-Mobil, Total-Petrofina mergers slated

The landscape of the global petroleum industry has changed dramatically again, with the announcements that two pairs of major companies will merge in separate deals-one of which is the biggest industral merger in history.

U.S. majors Exxon Corp. and Mobil Corp. announced their plans for the largest-ever industrial merger, stealing that honor from the planned merger of British Petroleum Co. plc and Amoco Corp. (OGJ, Aug. 17, 1998, p. 34). If the deal is approved by shareholders and regulators, the Exxon-Mobil combine will surpass Royal Dutch/Shell to become the largest oil company and the world's largest corporation.

France's Total and Belgium's Petrofina SA also announced plans to merge last week. This deal will create Europe's third largest oil firm and the world's sixth largest, say the companies.

Such megamergers, especially the creation of a third "supermajor," are reshaping the fabric of the universe of petroleum companies.

And a consensus is growing that more such deals are inevitable, coming in response to a spreading global economic downturn and a related collapse in oil prices, both of which, say analysts, may be longer-lasting and more fundamental than first thought.

The latest proposed deals have served only to heighten speculation over which companies-notably among majors-will be involved in the next big merger.

Exxon-Mobil

Exxon and Mobil officially announced their merger plan on Nov. 2, following widespread media reports of advanced negotiations between the companies.

The new firm, called Exxon Mobil Corp. and based in Irving, Tex., will be owned about 70% by Exxon and 30% by Mobil. It would have combined revenues of more than $203 billion, based on 1997 results.

Under terms of the agreement, each share of Mobil stock will be converted to 1.32015 shares of Exxon stock. Reports of the value of the deal have ranged from about $70 billion to as high as $77 billion. The transaction will be accounted for on a pooling of interests basis and is expected to be tax-free in the U.S. Exxon and Mobil will present details of the plan to stockholders at their respective annual meetings in April and May.

Exxon Mobil's worldwide downstream headquarters will be in Fairfax, Va. The upstream business will be based in Houston. Exxon Chairman Lee R. Raymond will be chairman, CEO, and president of Exxon Mobil. Mobil Chairman, CEO, and Pres. Lucio A. Noto will be vice-chairman. Noto's future role was one potential problem for the deal cited by analysts (see Watching the World, p. 42).

In their joint statement, Raymond and Noto said the merged firm will produce a higher return on capital employed than either partner would be able to achieve alone: "The merging of these two companies will deliver significant near-term, pretax synergies of about $2.8 billion/year. The $2 billion cost of implementing the merger will be spread over 2 years. In the first year, the firms expect the transaction to be neutral to earnings. It will be accretive in Year 2, they say, and by Year 3, the full synergies should be realized.

The firms will reportedly eliminate about 9,000 jobs as a result of the merger. Exxon Mobil will retain both partners' brand names.

Synergies

In a joint statement, Raymond and Noto said their companies have compatible strategies and will fit together well.

"In the exploration and production area, for example," said Raymond, "Mobil's and Exxon's respective strengths in West Africa, the Caspian region, Russia, South America, and North America line up well, with minimal overlap. Our respective deepwater assets and deepwater technology also complement each other well."

The firms also have a huge presence in natural gas, with combined sales of about 14 bcfd. And Mobil will contribute major liquefied natural gas (LNG) assets and experience to the venture.

Downstream, the combine's U.S. operations will approach the size and scale of the recently formed downstream consortium of Shell Oil Co., Texaco Inc., and Saudi Arabian Oil Co. (OGJ, Dec. 29, 1997, p. 24). Their refining and marketing assets in other regions are also complementary, say the companies.

"In the lubricant area," said Noto, "Exxon is an important producer of lube base stocks, which fits well with Mobil's leadership in lubes marketing."

"Chemicals is another area where there is a good strategic fit," added Raymond. "Exxon's chemical product line aligns well with Mobil'sellipseExxon Mobil should realize immediate benefits (in this sector) through sharing the proprietary technology and best practices of each company."

Upstream, Exxon and Mobil own proprietary technologies in the areas of: Deepwater and arctic operations, heavy oil, gas-to-liquids processing, LNG, and high-strength steel. Downstream, their proprietary technology focus includes refining and chemical catalysts, including metallocene compounds; short-contact-time fluid catalytic cracking; hydroprocessing; catalytic dewaxing; xylene isomerization; toluene disproportionation; synthetic lubes and specialty esters; and pyrolysis.

Philip Verleger, of PKVerleger LLC and Brattle Group, Boston, said, "From an economics point of view, I don't see many problems (getting the merger approved). There may be some issues associated with lubricants or Mobil's refining deal with BP in Europe, which will require some dancing to clear up. If Exxon buys Mobil, I don't think the Europeans will allow BP and Mobil to continue operating their refining and marketing operations together."

Verleger said that the U.S. Federal Trade Commission is on the verge of approving the BP-Amoco merger after only a few months' consideration, but he contends that the Exxon-Mobil deal is likely to be under scrutiny longer.

Exxon-Mobil fallout

The Exxon-Mobil deal is being viewed as a move by the dominant partner to increase its asset base by 30% while raising capital productivity.

Press reports say that Noto confirmed that each of the U.S. majors had reached the limit of what they could achieve to boost performance through restructuring: "The BP-Mobil deal in Europe showed we had run up against those limits."

Rob Arnott, senior oil analyst at Morgan Stanley's London office, said that the first effect of the Exxon-Mobil merger is likely to be felt on the BP-Mobil downstream venture (OGJ, Mar. 25, 1996, p. 21). This combine retained the BP brand name for fuels and the Mobil brand for lubricants.

In Japan, too, where consolidation of refining and marketing is gathering momentum, the Exxon-Mobil marriage is expected to give the venture a 16.8% market share, surpassed only by the 24% held by a joint venture of Nippon Oil Co. and Mitsubishi Oil Co. (OGJ, Nov. 2, 1998, p. 42).

Tokyo's Nikkei Weekly newspaper reported that a Nippon Oil official said that Exxon-Mobil combine "would pose a considerable threat." Analysts said Exxon Mobil could hit Japanese rivals hard, forcing them to speed up their rationalization programs.

Total Fina

Total surprised many when it announced its merger with Petrofina. In previous months, persistent rumors had indicated that France's other major oil firm, Elf Aquitaine, was a suitor for the Belgian firm.

The boards of Electrafina, Cie. Nationale a Portefeuille, Tractebel, and Electrabel have already voted in favor of converting their Petrofina shares-totaling 41% of its stock-to new Total shares, at a ratio of 4.5:1. Following this exchange, which is subject to regulatory approvals, Total will file a request with Belgian banking authorities to convert all remaining Petrofina stock to Total shares using the same exchange ratio. The transaction is expected to close in second quarter 1999.

Based on 1997 results, the combine, to be called Total Fina, would have annual sales of about 310 billion French francs. Its combined market capitalization would be about 230 billion francs ($39 billion).

Total Fina's upstream division will be based in Paris, and its refining, marketing, and petrochemicals divisions in Brussels. Total Chairman Thierry Desmarest will be Chairman of Total Fina. Petrofina CEO Fran?ois Corn?lis will be vice-chairman of Total Fina's executive committee, over which Desmarest will preside.

Upstream, the combination will give Total Fina an asset portfolio with a good balance between developed and emerging countries, said Petrofina. The combined company's key production areas will include the North Sea and the deep water off Angola and the U.S. Gulf Coast, where both partners have interests.

As for the downstream side, Petrofina said, "Joint management of the refineries and marketing networks will yield substantial productivity gains. In northwest Europe, combining Total's refineries with (Petofina's) refining and petrochemical operations in Antwerp and Feluy (Belgium) will allow the combined entity to more efficiently meet the constraints imposed by the new European fuel product specifications."

The firms expect their merger to increase operating income by about 2 billion francs in the first 3 years. The transaction should be nondilutive to earnings beginning in 2000.

Desmarest's plan

Desmarest told journalists in Paris that the merger "was not a change of strategy for Total but a change in size within a difficult environment."

Total in the past has relied on faster growth than competitors, pursuing it through internal expansion, while at the same time trying to balance its oil production and refinery runs.

With the addition of Petrofina's assets, Total Fina will have processing capacity that exceeds crude production by more than 500,000 b/d. But Desmarest is confident that Total Fina will restore the upstream/downstream balance by 2005.

Total's upstream goal had been to hike output to 1 million boed by 2000 from the 840,000 boed it produced in first half 1998. But the addition of Petrofina's assets and planned growth are expected to boost production to 1.2 million b/d by then, moving closer to the 1.6 million b/d of combined refining capacity Total Fina will have. Desmarest also said there would be no refinery closures as a result of the merger.

Total also had pulled out of petrochemicals and appeared happy with its specialty chemicals division, which helped it counter oil industry cycles. But Desmarest is also positive about the outlook for chemicals for Total Fina. He pointed out that Fina had never lost money in petrochemicals, even in difficult times. And he believes there will be synergies between Fina's chemical assets and Total's specialty chemicals division.

The specialty chemicals will be operated out of Total Fina's Paris headquarters.

Elf's role

Analysts had speculated that Total's French rival Elf was a potential suitor for Petrofina, and an Elf official confirmed to OGJ that the company had been in discussions with the Belgian firm.

The official said Elf decided against any bid for Petrofina because to do so would have contradicted the company's strategy of the past several years.

"We don't want to develop downstream outside Europe, including the U.S.," said the official. "In this light, taking over Fina would have been a big mistake for us, because of its refining and U.S. portfolios."

The official added that Fina's strength in base petrochemicals would have conflicted with Elf's strategy there as well: "Downstream, there would have been good things in Europe, but Fina has no jewels upstream."

Now that the approach to Petrofina is over, Elf is not thought to be in negotiations with other companies regarding mergers or acquisitions. The official said any takeover "just to create size" was against Elf's strategy.

U.S.-Europe divide

Such big mergers have been anticipated by analysts for some time, and they highlight a difference between the U.S. and European petroleum industries.

Morgan Stanley International, Houston, has been an advocate of the creation of supermajors for some time. Its analysts believe that U.S. integrated companies have completed restructuring and are now looking for growth.

Because the U.S. majors have little to gain by further attempts at restructuring, mergers and acquisitions appear to be the best way to achieve the growth they now need to cut unit costs even further.

Morgan Stanley contrasted this situation in the U.S. with that in Europe, where integrated oil companies-except for BP's absorption of Amoco-are still at the restructuring phase needed before further growth can be sought.

Arnott told OGJ that his firm anticipates the current merger and acquisitions frenzy will lead to dominance of the market by four supermajors. The "big four" anticipated by Morgan Stanley will be Exxon Mobil, Royal Dutch/Shell, BP Amoco, and one other, the composition of which is not yet apparent.

Future mergers

Larry Goldstein, president of Petroleum Industry Research Foundation Inc., New York, said, "These kinds of mergers are inevitable. They're a function of the global economic environment. This trend will be around for some time."

He noted that, by 1995, large oil companies had reduced their workforces. They then began cutting working capital requirements, after which they started to move into global strategic alliances, which allowed them to recapture the losses of staff and working capital cuts.

Goldstein said that oil companies face the prospect of continued low prices, but a merged Exxon-Mobil will be able "to go back and recapture those same gains again.

"They can't affect price or global demand, but they can affect costs, and that's what this is all about."

Goldstein said the pending BP-Amoco merger "probably forced Exxon into the merger game. They probably would have preferred to stay on the sidelines," he surmised.

"Ironically, the fact that Exxon and Mobil can come together means there can be no wallflowers. Everyone must be considered a player, or 'in play.'"