ConocoPhillips: A Fit for Lubes?


The newly proposed merger of Phillips Petroleum Co. and Conoco Inc. would combine a broad range of lubricants assets and operations. But the different histories of those operations, analysts say, make it difficult to predict the direction that the combined lubes business might take.

The deal, announced Sunday, would create a company with market value of $35 billion. Phillips would spend approximately $15.2 billion on a stock swap and would assume roughly $8 billion in debt.

Like most petroleum industry mergers, this one is motivated by upstream and fuels marketing concerns. ConocoPhillips would be the third-largest U.S. energy company and rank sixth worldwide in terms of oil and gas reserves.

On the surface, at least, the combined company would appear to have a well-rounded lubricants business. Conoco is a major base oil supplier through Excel Paralubes, a 50-50 joint venture with Pennzoil-Quaker State Co. The alliances West Lake, La., refinery is the second-largest base oil plant in the United States, with capacity of 21,500 barrels per day.

Phillips has no base oil refining capacity but owns a stable of well-recognized finished lubricant brand names. Trop-Artic motor oils have strong sales to the passenger car, commercial fleet and farm segments. In addition, the company acquired the 76 Lubricants and Kendall brands when it bought Tosco Corp. earlier this year.

The different backgrounds do not immediately suggest an obvious strategy for the combined lubes business, according to Suzan Jagger, business strategy practice leader for the Dallas-based consulting firm Muse Stancil.

These businesses have had two very different histories, she said. Conoco is integrated into base oils. Thats their heritage and where their interest is. Theyve also had a focus on parts of the industrial segment.

Phillips, on the other hand, has a whole collection of regional brands, some of which have had a rocky history. I dont think they had pulled them together into any sort of integrated business since the Tosco acquisition. So the lubes businesses are coming from two very different directions and its difficult to say what theyre going to do.

A Conoco spokesman said the companies have yet to plan integration of lubricants and other operations. Judging from comments of top executives, the merged company would focus its attention on upstream activities. Phillips Chairman and Chief Executive Officer Jim Mulva said the merged company would aim to increase the portion of capital employed upstream from 57 percent to 70 percent or more.

Paul Mawn, of Concord Consulting Group in Concord, Mass., suggested that the biggest implications for lubricants operations might stem from the mergers effect on overall corporate strength.

The biggest thing is that this merger gives these companies better economies of scale and may better enable them to stay in business, he said. Also, to the extent that it allows them to spread overhead, it may reduce costs.

Under terms of the agreement, Phillips stockholders would own 56.6 percent of the combined company, Conoco’s stockholders would own 43.4 percent. ConocoPhillips would be based in Houston, Conocos headquarters, but officials said they plan to maintain a diminished presence in Bartlesville, Okla., where Phillips is based.

Officials said they expect the merger to receive regulatory approval and be completed during the second half of 2002. Because Phillips is paying no premium for Conocos shares of stock, some analysts said another company could step in to attempt a hostile takeover.

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