The Oil Patch: From Big To Behemoth

After BP-Amoco, the oil patch may be in for a wave of megamergers

Since taking command at British Petroleum Co. in 1995, John Browne has been sending shock waves through the oil industry. Now he is close to pulling off his biggest shocker yet. The $53 billion merger with Amoco Corp. announced on Aug. 11 not only will create a third "supermajor," approaching Exxon Corp. and Royal/Dutch Shell Group, it also may herald a sweeping realignment of the industry.

Big Oil has been one of the few industries left largely untouched by the 1990s' merger frenzy. No longer. With the new BP Amoco PLC catapulted into the industry's top tier, pressure will be intense for others to join the wave. Indeed, shares of Chevron, Mobil, and Texaco all spurted on Aug. 11, despite the overall market decline. "This deal puts pressure on all the oil companies," says Stan Majcher, petroleum analyst at Los Angeles-based institutional fund manager Hotchkis & Wiley. "The market is saying, `You need to be extremely large to be competitive."'

RABID RIVALRY. Browne, 50, will be CEO of the new company while his counterpart at Amoco, H. Laurance Fuller, 59, will be co-chairman until his retirement at the end of 2000. In an interview, Browne insisted that bigger is, indeed, better. Competition is becoming fierce as national companies from Venezuela, Saudi Arabia, and China branch out of their home territories. European outfits like Total and Elf Aquitaine are also challenging big internationals. To prosper in an era of $13 crude oil, Browne says, companies need vast financial clout as well as scale to drive down costs. With development costs for new fields in the billions of dollars, only the largest companies are likely to get access to giant fields where the biggest profits are made.

And, Browne says, companies are going to have to invest heavily to supply increasingly demanding consumers with cleaner and cheaper fuels, liquefied natural gas, or packages of petrochemical feedstocks. Indeed, investors are already rewarding Shell and Exxon with price-earnings premiums of around 20%.

BP Amoco will now have plenty of heft. Its $6.4 billion in profits would put the new entity third behind Exxon and Shell, while its 14.8 billion barrels of oil and gas reserves would rank BP Amoco second behind Shell among nonstate oil companies. The company would have nearly 18,000 gasoline outlets worldwide, rank third among the world's largest chemical makers, and be the largest U.S. producer of oil and gas. To increase profitability, BP Amoco expects to whack about $2 billion in costs within two years of closing the deal. About $1 billion will come from 6,000 job cuts, many of them in U.S. downstream operations.

But it is not cost-cutting that excites Browne. He sees the deal as a springboard from the second tier to the big time. "We're not going to settle for an easy third place," he says. "The whole point of the deal is it gives us the opportunity to do more."

BP Amoco, he says, will have control of its own destiny instead of having to settle for small stakes in joint ventures. It will, for instance, have a better shot at exploration acreage because it will be able to offer developing countries packages including prized downstream investments that create jobs. Countries are nervous about companies that just want to develop profitable oil fields, Browne says. "That looks like you are there just to take a quick rent," he notes. "They would like you to do something for the real economy."

BP Amoco will be a dominant player in Venezuela, Azerbaijan, and Colombia. Another possible target would be China, where BP has already made preliminary forays. "We will have the scale to approach China in a way we would not have before," says Fuller.

Browne also sees big gains to be made by culling the best of the two companies' technologies. Despite the industry's "John Wayne, brute strength" image, he says, it is actually the largest U.S. employer of engineers and scientists after the information-technology business. Applying the best of each company's technology across a much broader canvas should be a big profit booster, Browne argues.

For the soft-talking, cheroot-smoking Browne, the bid for Amoco is yet another example of a career at the cutting edge. As head of exploration operations in the early '90s, he successfully focused BP on a few key areas and sold off loads of unproductive assets. He believes that only by being first on huge finds can a company produce fat returns. "The thing about giant fields is they have the lowest costs and the next-size fields come along with them," he says.

As CEO in 1995, Browne put together the industry's first downstream alliance, combining BP and Mobil Corp.'s European refineries and gas stations. Shell, Texaco, and Saudi Arabian Oil Co. recently copied that move in the U.S.

ON THE PROWL. BP was a troubled company in the early '90s, but its strong recent performance has given it the financial strength to attempt the biggest oil industry merger ever. BP's 15% return on capital employed last year--a key measure of financial efficiency--ranked just behind industry leader Exxon's 15.5%. BP has been on the prowl for acquisitions in recent years. A financial source says BP also mulled mergers with Mobil and U.S. chemicals giant Union Carbide Corp. before settling on Amoco. It had been talking to Amoco for about a decade on petrochemicals, but the idea for a merger came up at a meeting between Browne and Fuller in June.

Both BP and Amoco felt pressure to get bigger. "We've both been convinced consolidation would happen," says Amoco President William G. Lowrie. "It's been a matter of when, not if." The British company was willing to pay a 15% premium because it considers Amoco a good fit. The deal will boost BP's U.S. marketing efforts, which it thought were weak. U.S. filling stations will eventually be under the more appealing Amoco brand.

The surprise is that such a deal hasn't come sooner. Oil watchers have been saying for a year that the industry has reached the limits of internal cost-cutting. But it has taken deals such as Browne's with Mobil and Amoco to show the way. Browne says that he doesn't know if BP and Amoco will stop here. It's a fair guess that a lot of other boardrooms will get busy, too.

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