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Phillips, Conoco complete merger; new company sixth-largest on globe Kevin Meyers reports to Conoco’s top exploration executive Rob McKee, who supervised Conoco’s Alaska assets back when it was Milne Point operator Allen Baker PNA Contributing Writer
The merger of Phillips Petroleum Co. and Conoco Inc., completed on Aug. 30, just hours after federal regulators approved the deal, could have major implications for Alaska beyond the replacement of the big Phillips 66 shield on the company’s office in downtown Anchorage.
The merger makes what has been Phillips Alaska a much smaller percentage of the new ConocoPhillips. And Kevin Meyers, president of the new ConocoPhillips Alaska, will be reporting to Robert E. McKee, who had headed Conoco’s exploration and production since 1996.
McKee no stranger to Alaska McKee, 56, is no stranger to Alaska, however. He supervised Conoco’s Alaska assets back when the company was operator of Milne Point, which it traded to BP in 1993 for properties in the Gulf of Mexico as Conoco essentially exited Alaska.
The new executive vice president of exploration and production for ConocoPhillips says the company plans to boost its upstream assets to 65 percent of its total portfolio from the current 57 percent.
But that likely won’t come from an aggressive exploration program, in Alaska or elsewhere, at least in the early years. ConocoPhillips is aiming to cut it debt to 30 percent of capital within three years to boost its credit rating to double-A and cut interest costs.
Major debt load The debt is a big number, with conventional debt, minority interests and other similar obligations amounting to about $28 billion as of June 30, according to Standard & Poor’s Ratings Services. S&P raised its credit rating for ConocoPhillips to single-A-minus on Sept. 4, just after the merger was completed, and took the two companies off its Credit-Watch.
ConocoPhillips’ strengths, according to S&P, are a competitive portfolio of operations that span the upstream and downstream segments. “These strengths are tempered by its debt leverage, high ongoing capital requirements, and questions about management’s willingness to deleverage,” S&P said.
Merger savings In announcing the merger last November, executives said they expected “synergies,” or cost savings, of at least $750 million. In an interview with CNBC after the merger, new ConocoPhillips CEO Jim Mulva, who headed Phillips, said even greater savings are now expected. Some analysts now put the number at $1 billion to $1.25 billion.
Much of that will come from the downstream segment, where the company — now the nation’s biggest refiner and marketer — can cut costs by eliminating duplicate advertising as it concentrates on only one brand per region.
Some jobs go Some of the savings will also come from paring workers, the new company’s leaders admit. The actual number of job cuts is still being evaluated, said Carlton Adams, a company spokesman in Houston.
In Alaska, about 60 jobs, or more than 6 percent of the 950 workers, will be eliminated as accounting and other support functions are centralized, according to Dawn Patience, a company spokeswoman in Anchorage. Some will be offered jobs in Bartlesville, Okla., the former Phillips headquarters, and some will get opportunities in Houston, where the new company is based, she said.
But in any case, 60 Alaska jobs will be gone as a result of the merger. Affected employees will know their status within 45 days of the Aug. 30 merger date, Patience said.
Alaska’s smaller role Alaska provided about half of the total production for Phillips, but will be the source of less than a quarter of the new company’s output. And that percentage is likely to shrink.
“Current upstream production is strongly concentrated in oil and comes primarily from Alaska, the continental United States, Canada and the North Sea,” according to Moody’s Investors Service, another credit rating agency. “However, production growth in the near and medium term is expected to come from new areas under development such as Venezuela, China and Indonesia, with the balance of reserves and production gradually shifting to higher growth areas over the next 10 years as these and other emerging areas such as the Caspian region and the Middle East undergo development.”
Growth could be pinched because, as Moody’s notes, the company “will need to reduce its leverage through a combination of asset sales, debt reduction and earnings growth to achieve higher credit ratings.”
Modest plans Plans for Alaska exploration in the near term appear to be fairly modest, though the budget is still under review, according to Patience.
The company told state officials it planned to drill one to four exploration wells this winter in the National Petroleum Reserve-Alaska, and on state and private lands west of Kuparuk. This past winter, Phillips drilled seven exploration wells in that area.
An added wrinkle in the Alaska equation is the major gas interest the new company holds in the Mackenzie Delta, where Conoco was one of the four big holders in the Mackenzie Delta Producers Group.
Phillips was a supporter of the Alaska Highway route for a gas pipeline, a route that wouldn’t pick up the Mackenzie Delta reserves as would the alternative, a line across the Beaufort Sea and down the Mackenzie.
One way or another, ConocoPhillips expects to ship gas south from both the Mackenzie Delta and the North Slope.
“Our opinion is there’s sufficient growth in the North American gas demand to support both projects,” said Adams, the company spokesman. “We expect both to go forward.”
Gas emphasis? ConocoPhillips might well shift more attention towards the gas side. New ConocoPhillips Chairman Archie Dunham, the former head of Conoco, told CNBC in an interview that oil supplies for the U.S market are plentiful, but “we desperately need to do something about our gas supply.” And he specifically mentioned Alaska, noting that there is “a lot of gas undeveloped in Alaska, Mexico and the deepwater Gulf (of Mexico).”
The new company has operations in 49 nations altogether, with production of 1.7 million barrels of oil equivalent daily and a downstream capacity to refine 2.7 million barrels daily, along with 17,000 branded stations to sell its products. Proved reserves total 8.7 billion barrels of oil equivalent, making ConocoPhillips the sixth-largest oil company in the world.
COC+P=COP The new company’s website is www.conocophillips.com. It trades on the New York Stock Exchange under the symbol COP, giving up the coveted single-letter ticker symbol that Phillips used to hold, the letter P. Conoco traded under the COC symbol.
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