UDS, Phillips to merge their refining, marketing businesses

North America's biggest independent refiner/marketer is expected to result from the proposed merger of Phillips Petroleum Co.'s North American refining, marketing, and transportation (RM&T) operations with independent refiner/marketer Ultramar Diamond Shamrock Corp. (UDS), San Antonio.

UDS and Phillips earlier this month signed a letter of intent to create a joint venture, limited liability company, to be called Diamond 66 (OGJ, Oct. 12, 1998, Newsletter). UDS will own 55% of the firm, and Phillips 45%. Phillips will receive two cash payments totaling $800 million.

The JV will be accretive to earnings and cash flow for both firms in the first year. For UDS, the accretion will be about 10% in the first full year of joint operation and 25-30% in the second year. For Phillips, it will be 5-7% in Year 1 and 12-14% in Year 2.

The new firm

Diamond 66 will have an initial value of $8 billion and revenues of $20 billion. The firm will operate 10 refineries with more than 1 million b/d of distillation capacity (see map, p. 40 [98,706 bytes], and table [97,898 bytes], this page).

Other assets include retail outlets, a pipelines/terminals network, NGL fractionators, and chemical plants. The two firms' chemical operations include ammonia, solvents, aromatics, and polypropylene production facilities.

Jean Gaulin, vice-chairman, president, and COO of UDS, will be chairman and CEO of Diamond 66 upon closing, which is expected in first quarter 1999. Roger Hemminghaus, current UDS chairman and CEO, will continue to serve as chairman of UDS after the merger, but he will hand over the CEO job to Gaulin at yearend 1998. Gaulin will continue to be UDS CEO after the merger closes.

As in most merger agreements these days, management compensation will be linked to the synergies achieved and savings realized.

Diamond 66 will be a consolidated subsidiary of UDS, and UDS will account for the merger transaction as a stock purchase of Phillips's RM&T business. Phillips's minority interest in the JV will be reflected as an equity investment.

Expected savings

The companies say the merger will generate more than $250 million in "incremental cost and productivity synergies" in the second year of joint operation. They also expect to reduce capital expenditures by at least $50 million/ year.

These totals break down as follows: In 1999, the firms will save $60 million in organizational efficiencies, $15 million in each of the areas of crude supply and product supply-distribution, and $35 million in refining operations. In 2000, the savings will be $90 million in organizational efficiencies, $15 million in crude supply, $35 million in product supply-distribution, and $110 million in refining operations.

"The industry now is characterized by continuing consolidation, low product demand growth, new technologies, and intense competition at all levels," said Hemminghaus. "This new combination with Phillips will allow Ultramar Diamond Shamrock to become stronger and more efficient, generate higher earnings and cash flow, and enjoy a stronger balance sheet."

Phillips Chairman Wayne Allen said, "This moves our RM&T business to cost-of-capital-or better-returns ellipseIt provides us with greater flexibility for investing in our higher-returning upstream business, repurchasing shares, and repaying debt as a result of the additional cash flow generated by Diamond 66."

Layoffs

Diamond 66's corporate headquarters will be in San Antonio. The firm will operate its credit card, pipeline, lubricants, and aviation businesses from Bartlesville, Okla., where Phillips is now based.

In order to achieve their projected cost savings, UDS and Phillips expect to eliminate about 1,000 jobs. The exact number will be determined in the next few months.

Staffing levels will likely increase at San Antonio, but Phillips expects to transfer or eliminate about 500 employees from Bartlesville.

The firms say they hope to minimize layoffs through attrition and early retirement.

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