NEW YORK (CNNfn) - Phillips Petroleum Co. agreed Wednesday to buy Atlantic Richfield Co.'s oil-producing assets in Alaska for $7 billion, clearing away a top concern of federal officials who had sought to block BP Amoco's $27 billion buyout of Arco for antitrust reasons.|
The sale, if it is approved by the Federal Trade Commission, will give Phillips (P: Research, Estimates) access to a sizable portion of Alaska's lucrative oil production operations and is expected to boost Philips earnings by $1.28 per share this year. Arco's Alaska operation alone boasted roughly 1.53 billion barrels of proven oil reserves during 1998.
"The acquisition of Arco's Alaskan assets represents a significant step in our strategy of growing our exploration and production business," said Jim Mulva, chairman and chief executive officer of Phillips. "We gain a substantial position in the two largest fields in North America, immediately form a new production center and become a major merchant supplier of crude oil to the West Coast."
Despite the divestiture, a combined BP Amoco-Arco will still be the largest producer in Alaska, with roughly 45 percent of production in that state. Still, BP Amoco executives were displeased they weren't able to complete the merger on the original terms they crafted for the merger last April.
Alaska, BP Amoco and Phillips signed Wednesday an "addendum" to a charter, signed last December, in which the state approved the BP Amoco buyout of Atlantic Richfield, also known as Arco. But the FTC didn't give its blessing to the December accord and last month sued to block the merger.
In its lawsuit, the FTC charged the merger would give the combined company too large a stake -- about 75 percent of the total current total output -- in the Alaskan oil fields. The commission was concerned about how much control the combined BP Amoco-Arco would have on gasoline prices in California, which already has some of the highest pump prices in the nation.
Tony Knowles, the governor of Alaska, expressed relief that the merger now appears ready to win FTC approval and will end the state of limbo for affected oil-industry workers in his state.
The sale of the Arco's assets, which make up the company's full portfolio in Alaska, is contingent on the completion of the BP Amoco-Arco merger. The sale is expected to be completed as early as next month.
A "hectic" process ... not finished just yet
The BP Amoco-Arco merger was struck nearly a year ago, but has been plagued by regulatory hurdles. The "hectic" approval process now seems ready to bear fruit, Rodney Chase, BP Amoco deputy chief executive, said during a conference call Wednesday.
"In reaching this accord with the FTC, we can now move forward," Chase said. "There is no point in denying that our preference would have been to complete the transaction as originally [struck]."
Hours before the Phillips-Arco deal Wednesday, the FTC said it and the companies shelved the February lawsuit that the FTC filed to stop the BP Amoco-Arco merger.
"In light of the substantial and constructive proposals made by all the defendants, all parties have agreed to seek adjournment of the federal court proceedings ... in order to conduct negotiations," Richard Parker, director of the FTC's bureau of competition, said in a statement.
The FTC must approve any deal reached concerning the sale of the oil fields. The commission and the oil companies were prepared to open their court hearing on the preliminary injunction next Monday - but the FTC statement will bring the two sides back to the bargaining table.
"It leaves it open-ended so all the parties can continue to negotiate," FTC spokesman Mitch Katz said of the adjournment. He said the FTC will decide whether to withdraw its suit after examining the sale agreement.
BP Amoco still would be left with Arco's Vastar Resources Inc. operation in the Gulf of Mexico, which had 185 million barrels of proven reserves at the end of 1998, as well as two large West Coast refineries.
Investors in the merging companies cheered the prospects of the sale, which was announced after the market close on Wednesday. Arco (ARC: Research, Estimates) shares closed up 4-1/4 to 83-1/4, and the American depositary receipts of BP Amoco (BPA: Research, Estimates) rose 1-5/8 to 52-3/4. But Phillips shares fell 3/8 to 39-1/16.
Amid reports of the pending deal, ratings agency Standard & Poor's late Wednesday said Phillips' credit quality could weaken significantly if it uses large amounts of debt to pay for those Alaska assets. S&P placed Phillips on "CreditWatch" with a negative implication, an indication that the ratings agency is considering a downgrade.
Mulva said during the conference call that he expects a downgrade, but added that they company should retain an investment-grade rating on its debt.