Focus: Are Chevron and Phillips to merger by December ?
Renewed rumors going around through the American oil industry that Chevron, the second largest U.S. oil firm, is to merge with Phillips Petroleum Co.
The rumors became strong when UK's Sunday Times reported on Sept 10th that the two oil companies were in the final stages of merger negotiations with Chevron set to buy the Phillips company for more than $70 a share.
The U.K.’s Sunday Times reported that company executives say that Chevron and Phillips will decide on the merits of a merger by year-end. It also said the combination would be worth about $78 billion.
A Phillips spokeswoman wouldn't comment on the speculation, wrote Bridge News.
Shares of Phillips Petroleum and Chevron Corp. were up sharply next Monday after the report in the UK's Sunday Times that the two oil firms were close to a merger valued at $83 billion.
Both companies said that they had no comment on the report, except to point out that the publication said Chevron Chairman and CEO Ken Derr was interested in the deal, when Derr retired from Chevron at the end of December.
"We don't comment on rumors about deals that may or may not be under discussion," said Mike Libbey, Chevron spokesman. "Dave O'Reilly is the chairman and Mr. Derr is happily retired after serving for 11 years as chairman and CEO."
"We don't comment on market rumors," said Phillips spokeswoman Kristi DesJarlais to Bridge News. UK's Sunday Times cited Phillips and Chevron executives as sources for their report.
Analysts said that both companies shares were being boosted by a combination of the merger report and the strong crude oil and natural gas prices. "The impetus is from both factors," said Gaspar an analist in the sector "The companies are saying nothing and our posture is we don't think much is going to happen in the near future.
You can't say it's not a possibility. I would believe that ultimately this could potentially be a good combination for the companies." But Gaspar added that he thinks that to get a deal done reported Bridge News.
This isn't the first time merger speculation has surrounded Chevron. In mid-August, there was speculation that Chevron had renewed its talks with Texaco Inc. More than a year earlier, Texaco and Chevron confirmed they had held talks. But with the oil prices on the low level side and the companies costs stuctures, were not compatible.
It was nearly a year ago, when the Sunday Times first reported talk of a Phillips-Chevron combination in an article similar to its recent account. The acquisition of Phillips would make sense for Chevron for a number of reasons.
At the top of the list is the boost such a combination would give Chevron's West Coast refining assets.
Although Chevron is a large West Coast refiner, it doesn't have a significant amount of production in Alaska. Phillips, however, is a key supplier of Alaskan crude oil since it acquired signficant Alaskan production from Atlantic Richfield Co.
The two also have other complimentary assets, including adjacent oil iscoveries in Kazhakstan, and its chemicals joint venture. The chemicals venture is part of a larger strategy Phillips has been pursuing to improve its refining and marketing operations, specially with Dave O’Reilly, chairman and chief executive officer (CEO) of Chevron Corp, he serve for two decades within Chevron's chemicals and refining divisions and in 1989, he assumed his first executive posting as Chevron Chemical Co.'s senior vice president and chief operating officer and later as a corporate vice president responsible for strategic planning.
In September 1994, he was made president of Chevron Products Co., where he is credited with greatly improving the performance of the company. During his tenure in that position O'Reilly led the turn-around of Chevron's U.S. refining and marketing operations, where earnings rose from $73 million in 1995 to an impressive $633 million in 1998.
In addition to the chemicals venture with Chevron, Phillips operates a natural gas gathering venture with Duke Energy Corp. (DUK) and is seeking a partner for its refining, marketing and transportation assets as well.
Dow Jones News cited Banc of America Securities LLC analyst Tyler Dann put the likelihood of such a deal at "less than 20 percent." The analyst cited several factual errors in the Sunday Times account for his opinion.
Analysts also speculated that a Phillips-Chevron combination may raise antitrust concerns from federal regulators because of the perceived influence the combination would have on West Coast oil prices, which are among the highest in the U.S. PaineWebber Inc. analyst Christopher Stavros also pointed out that with oil prices near a 10-year high, oil company acquisitions are currently expensive because such deals factor in the price of the commodity in determining the value of the company's assets.
Other Analysts said that a full merger between Chevron and Phillips has been rumored since merger talks between Chevron and Texaco Inc., the No. 3 U.S. oil company, broke down in June of 1999. If Chevron buys Phillips, it would be acquiring a company that just added 2.2 billion barrels of crude and natural gas to its reserve base through the recent purchase of Atlantic Richfield Co.’s (Arco) Alaskan oil assets.
Chevron and Phillips Petroleum already operate a $6 billion joint chemicals venture established earlier this year called Chevron Phillips Chemical Co. Phillips CEO Jim Mulva has said he wants to form a partnership for Phillips’ refining, marketing, and transportation assets. Phillips has downplayed interest in a merger, instead focusing on joint ventures to shore-up its less profitable businesses and concentrating on its exploration and production operations wrote Dow Jones.
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