Shell Oil Co. completed its acquisition of Pennzoil-Quaker State Co. yesterday, after agreeing to meet regulator demands to sell Pennzoil-Quaker States stake in the Excel Paralubes base oil joint venture.
Shell officials lauded the deal despite the divestiture required by the U.S. Federal Trade Commission, predicting the acquisition would allow the Royal Dutch/Shell Group to become the biggest and most profitable lubricant marketer in the United States and the world.
The acquisition of Pennzoil-Quaker State is the first step of Shells strategy to establish global leadership in lubricants, Shell Oil Products U.S. President and Chief Executive Officer Rob Routs told the Independent Lubricant Manufacturers Association at its annual meeting in Colorado Springs yesterday.
Independents generally welcomed the settlement requirements to divest the stake in Excel Paralubes, a 50-50 joint venture with ConocoPhillips that owns a 21,300-barrel-per-day Group II base oil refinery at Westlake, La. Proponents expressed hopes that the divestiture will maintain competition in the U.S. market for Group II stocks. But an ILMA official cautioned that the outcome wont be known until the stake is sold.
Our guys are interested in seeing that the base oil they need makes it to the market, legal counsel Jeffrey Leiter said. Well have to see who the buyer is and whether they put it on the market. If [Valvoline parent company] Ashland ends up buying it and keeps all of that supply in-house, then its not a resolution that works for our guys.
The acquisition gives Shell the two best-selling passenger car motor oil brands in the United States – Pennzoil and Quaker State, with a combined market share of 36 percent. Before the deal, Shell claimed a modest 3 percent market share, although its Rotella is one of the two leading brands of motor oil for heavy-duty trucks.
The deal also instantly makes Shell the quick-lube king. Pennzoil-Quaker States Jiffy Lube has more than 2,100 outlets in the United States, more than twice as many as the next-largest chain.
But Shell officials maintained that there is more to the deal than the combined size of the separate companies and that they will unlock value in each other. Pennzoil-Quaker State, they say, brings expertise in consumer marketing. Shell has outlets around the world to sell Pennzoil-Quaker State products, plus the financial strength to invest in growth opportunities.
Overall, the acquisition is a great strategic fit, Vice President of Lubricants David Pirret said. The companies have predicted the merger will create $140 million in value, partly from the savings generated by the elimination of 1,200 jobs – 15 percent of the workforce of the combined lubricants businesses.
The requirement to sell the Excel Paralubes stake was the most significant of several conditions for the FTC approval, all of which pertained to Group II base oil supply. The commissions demands were based on its conclusion that Group II base oil has evolved into its own market in the United States and Canada, mostly due to upgrades in motor oil standards that have increased demand for Group II. As the commission noted, the trend is expected to continue.
Shell is already a 50-percent owner and managing partner in Motiva, a joint venture with Saudi Refining Inc. that owns a 22,000 b/d Group II refinery at Port Arthur, Texas. Pennzoil-Quaker State, in addition to its 10,650 b/d of capacity at Excel Paralubes, is buying 1,500 b/d of Group II under a long-term contract with ExxonMobil. Altogether, the commission said, Shell would have controlled 39 percent of the 87,800 b/d Group II capacity in the United States and Canada.
Without the conditions of this order, direct competition between Shell and Pennzoil in the production of Group II base oils would be eliminated, with the significant potential for reduced competition and higher prices for consumers, said Joe Simons, director of the commissions Bureau of Competition.
The commission gave Shell one year to sell the stake in Excel Paralubes and ordered that the interest be managed in the meantime by a trustee, so as to be held separate. It also stipulated that Shell cannot sell the stake to ConocoPhillips, which owned the right of first refusal.
Conoco is already a significant supplier, a commission spokesman explained, so having Conoco acquire the other half would have been problematic by itself. Not as problematic as if Shell kept it, but still a problem.
According to the settlement, the commission must approve the purchaser. The commission spokesman said it would not likely allow a sale to a company that is already a significant supplier in the market. Furthermore, Shell cannot enter a contract to buy the supply from the purchaser for more than one year.
Finally, the agreement prohibits Shell from increasing Pennzoil-Quaker States current 1,500-b/d of Group II procurement from ExxonMobil.
Shell officials insisted that the divestment of the Excel Paralubes interest will not lessen the value of its acquisition of Pennzoil-Quaker State.
The deal that weve done was primarily driven by passenger car motor oil, Pirret told Lube Report. It happened to bring with it something that makes for a valuable stand-alone asset. [Excel Paralubes] is a nice business to have but we dont need to be that long in base oil.