Conoco and Phillips Merge

Conoco Inc. and Phillips Petroleum Company announced that their boards of directors have unanimously approved a merger of equals, and that the companies have signed a definitive merger agreement.

The new company, which will be named ConocoPhillips, will be a strong competitor with enhanced returns and accelerated growth opportunities from an excellent financial and operational position.

ConocoPhillips will be the third-largest integrated U.S. energy company based on market capitalization and oil and gas reserves and production. Worldwide, it will be the sixth-largest energy company based on hydrocarbon reserves and the fifth-largest global refiner.

As a premier global major, ConocoPhillips will have the size, portfolio of high-quality assets, and the capabilities and financial strength to generate enhanced value for its shareholders. Specifically, ConocoPhillips will have:

  • substantial growth opportunities;
  • world-class technology, workforce and operational practices;
  • significant opportunity to enhance its exploration portfolio;
  • diversified earnings and cash flow;
  • a strong balance sheet, with an expected debt-to-capitalization ratio of approximately 35 percent;
  • improved capital efficiency; and
  • an efficient cost structure.

Under the terms of the agreement, Phillips shareholders will receive one share of new ConocoPhillips common stock for each share of Phillips they own and Conoco shareholders will receive 0.4677 shares of new ConocoPhillips common stock for each share of Conoco they own. Based on the closing market prices for the shares of both companies on Friday, Nov. 16, 2001, and their debt levels as of Sept. 30, 2001, the new company would have an enterprise value of $53.5 billion ($34.9 billion of equity; $18.6 billion of debt and preferred securities). At inception, Phillips shareholders will own about 56.6 percent and Conoco shareholders will own about 43.4 percent of the new company. The transaction is structured to be tax-free to the shareholders of each company.

The transaction is expected to be accretive to earnings and cash flow per share of each company after achieving anticipated annual cost savings of approximately $750 million. The companies expect to achieve the annual rate of synergies within the first year after closing.

Upon completion of the merger, Archie W. Dunham, Conoco chairman and chief executive officer, will serve as chairman of ConocoPhillips and will delay his scheduled retirement to 2004. James J. Mulva, Phillips chairman and chief executive officer, will be president and chief executive officer of the combined company, and also become chairman upon Mr. Dunham's retirement. The ConocoPhillips board of directors will consist of 16 directors, eight designated by each of the two companies, including Mr. Dunham and Mr. Mulva. ConocoPhillips will be headquartered in Houston, with a significant and continuing presence in Bartlesville and Oklahoma.

Mr. Dunham of Conoco said, "This merger of equals represents an excellent strategic fit for both Conoco and Phillips. It will position ConocoPhillips as a stronger U.S.-based, global energy producer by significantly enhancing its capability and growth prospects on five continents in both current and prospective ventures, while generating major synergies. It will create significant long-term value for the shareholders of both companies, partly through cost savings, but also because of a significantly larger portfolio of global assets, skills and opportunities. With a very strong balance sheet, more capital for upstream investment, and greater operational efficiency downstream, ConocoPhillips will be a tough new competitor to the larger global majors."

Mr. Mulva of Phillips said, "This merger ensures that the United States will be home to a third major international petroleum company. For Conoco and Phillips, joining forces is the ideal way to be competitive in the reshaped energy industry. ConocoPhillips will move forward to deliver on our legacy growth projects, develop new opportunities in existing and emerging business lines, and enhance returns in our downstream business with our companies' leading technologies. With our greater financial strength and flexibility, we will be able to fund these capital programs while also reducing our debt-to-capitalization ratio, repurchasing shares and providing a competitive dividend. Just as important, our compatible cultures, similar values and determined focus will facilitate a smooth integration and enable ConocoPhillips to get off to a fast and successful start."

Mr. Mulva added, "I want to emphasize that, reflecting our companies' deep roots in Oklahoma, ConocoPhillips will continue to have a significant operational presence here. ConocoPhillips intends to continue the philanthropic and community commitments of Conoco and Phillips. In addition, ConocoPhillips will initiate technology or other partnership commitments with the University of Oklahoma and Oklahoma State University."

In the upstream segment, ConocoPhillips' global scale and presence will allow for increased efficiency in core areas and delivery of legacy growth projects. The combined company will have pro forma year 2000 hydrocarbon reserves of 8.7 billion barrels of oil equivalent (BOE) and daily production of 1.7 million BOE, based on the companies' estimates for 2001 year-end production. ConocoPhillips will have numerous legacy asset positions, including those in Alaska, Canada, the Lower 48, the North Sea, Venezuela, China, the Timor Sea, Indonesia, Vietnam, the Middle East, Russia and the Caspian area.

In the refining and marketing segment, ConocoPhillips will operate or have equity interests in 19 refineries in the United States, the U.K., Ireland, Germany, the Czech Republic and Malaysia, with a refining capacity of 2.6 million barrels a day. It will also have a strong marketing presence in the United States.

In addition, ConocoPhillips will continue Phillips' equity participation in the natural gas gathering and processing joint venture, Duke Energy Field Service, and in the chemicals and plastics joint venture, Chevron Phillips Chemicals.

The companies expect the combined enterprise to achieve annual cost savings of at least $750 million within the first full year after closing. These savings will result from more efficient exploration, production and downstream activities, and the elimination of duplicate corporate and administrative positions, programs and operating offices. A transition team led by Philip L. Frederickson, Conoco's Senior Vice President Corporate Strategy and Business Development, and John E. Lowe, Phillips' Senior Vice President, Corporate Strategy and Development, will begin work immediately to ensure integration occurs quickly and smoothly.

It is anticipated that upon closing of the transaction, the ConocoPhillips board of directors will adopt a competitive dividend policy. Currently, Conoco pays an annual dividend of $0.76 per share and Phillips pays an annual dividend of $1.44 per share.

The merger is conditioned upon, among other things, the approvals of the shareholders of each company and customary regulatory approvals. The transaction is expected to be completed in the second half of 2002.

Morgan Stanley, Credit Suisse First Boston and Salomon Smith Barney acted as financial advisors and Cravath, Swaine & Moore acted as legal counsel to Conoco. Goldman, Sachs & Co., J.P. Morgan Securities Inc. and Merrill Lynch & Co. acted as financial advisors and Wachtell, Lipton, Rosen & Katz acted as legal counsel to Phillips.

Conoco Inc. is an integrated, international energy company with operations in more than 40 countries. Headquartered in Houston, Texas, the company had 20,000 employees and $27.7 billion in assets at Sept. 30, 2001.

Phillips Petroleum Company is an integrated petroleum company with interests around the world. Headquartered in Bartlesville, Oklahoma, the company had 38,500 employees and $35.4 billion of assets at Sept. 30, 2001.


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