Corporate Restructuring – Phillips Petroleum Maps Series of JVs

Amid the diverse range of company responses to restructuring and consolidation in the oil and gas and chemicals industries, Phillips Petroleum Co. is hitching its future to taking in partners. If everything pans out, the Bartlesville, Okla.-based company’s core business will be oil and gas exploration and production while its gas processing, chemicals, and downstream – refining and marketing – operations will be operated through a network of jointly owned satellites formed by “near-mergers.” Phillips already has agreed to put its gas processing business into a JV with Duke Energy Corp.’s gas gathering and processing unit, which has filed a registration statement to go public, and combine its chemicals operations with those of Chevron Corp. Meanwhile, EVP Kirby Hedrick disclosed during a mid-February speech in New York that Phillips was trying to work out a downstream JV by late this year or early 2001. And in mid-March, Phillips took another key step toward executing its strategy by beefing up its exploration and production operations through an agreement to acquire Atlantic Richfield Co.’s Alaskan assets for up to $7 billion. The deal was designed to help get the acquisition of ARCO by BP Petroleum PLC by antitrust regulators, who had held up the cross-border merger because of the combined company’s huge share of crude pumped out of Alaskan fields (see page 15). In each venture, the “near-merger” will create a large organization with the mass to weather the conditions challenging oil and gas and chemicals firms. Joint ventures for subsidiary operations at various stages of the oil and gas supply chain are not new, but no company has gone as far as Phillips in using the technique. These restructurings have been hammered out as the industry is sharply questioning whether the traditional model of the integrated petroleum company – control over all stages from the oilfield to the gasoline station pump as well as owning a large petroleum-based chemicals business – will stand up to future volatility. The major production phases are exploration and production, transportation, refining, and marketing. Some observers say that these have become separate businesses and some companies have agreed by either splitting themselves up, putting downstream operations in JVs, or divesting parts. Complex though the proposed structure may be, a Phillips spokeswoman said it balanced the need for creating bigger competitors with the company’s desire to remain an integrated company. “We are extremely interested in remaining integrated,” said Kristi DesJarlais. “We want to commit to the supply chain. It is the best strategy for us and we think it is going to work out fine.” At the same time, she pointed out, each of the jointly owned companies is a large competitive organization that will be separately managed while Phillips focuses on exploration and production. Phillips has targeted such foreign territories as China, Venezuela, and the Timor Sea for major oil and gas projects. The chemicals operation, producer of olefins, polyolefins, aromatics, and styrenics, will have assets of more $6 billion; the gas business, which is being readied for an IPO, processes natural gas and produces natural gas liquids and has an enterprise value of between $5 billion and $6 billion. For kickers, the JVs are adding huge sums to the partners’ war chests for redeployment in mainstream operations. The new gas company is to borrow $2.4 billion, splitting it equally between Phillips and Duke in one-time dividends. The chemicals unit will pony up $800 million each for Phillips and Chevron after borrowing $1.6 billion. The money should come in handy because Phillips’ debt-to-capital ratio will climb to 60% and total debt to about $9 billion as a result of its purchase of the ARCO operations in Alaska. Selling the complex organizational structure and its purported benefits to a stock market that cherishes simplicity may be tough. Phillips stock price wasn’t winning many kudos from investors by February 29, when the shares closed at 38-1/4 on the New York Stock Exchange, near the trough of a 52-week range of 35-15/16 to 57-1/4.