$110bn BP-Amoco deal set to spark oil merger frenzy

THE WORLD oil industry was poised for a frenzy of consolidation last night after the shock $110bn (pounds 67bn) merger of BP and Amoco, creating a super oil major to rank alongside Shell and Exxon.

Analysts were predicting a wave of further deals and alliances as second- tier players in the oil sector scramble to shore up their positions.

Texaco and Mobil were seen as vulnerable to merger activity, as were specialist exploration companies such as Enterprise Oil and Lasmo.

Adam Sieminski, energy analyst with BT Alex.Brown in the US, said: "This deal is good for both BP and Amoco. But it will set the bar for the competition. There are now three super majors and I do not think Texaco, Chevron or Mobil will idly stand by and watch this happen."

Alan Marshall, energy analyst with Robert Fleming, said: "This is a pretty cute deal. Amoco is the cheapest and least profitable. There is a lot of scope for an improvement in its profits."

BP Amoco will have net income of $6.4bn, combined production of 3 million barrels of oil a day, reserves of just under 15 billion barrels and 100, 000 staff.

The combined business will rank close behind Shell and Exxon in terms of market capitalisation and profits. But Sir John Browne, the chief executive- designate of the merged company, said it had set a target of increasing profits by $2bn a year through efficiency savings in two years' time.

The merger should also deliver a huge boost to revenues, further improving BP Amoco's bottom line. BP is already the largest oil producer in the North Sea and the US. The addition of Amoco will make it the biggest or second-biggest petrol company east of the Rocky Mountains - a vast swathe taking in large parts of the US mid-west and eastern seaboard.

Around 70 per cent of the combined group's assets will be in OECD countries, and 80 per cent of profits will come from the US and Europe.

But analysts forecast that the merger would give BP Amoco the firepower to expand into higher-growth markets in developing countries.

Sir John said the merger was "aggressive not defensive", describing it as "a superb alliance of equals with complementary strategic and geographical strengths".

The two companies insisted that they saw no major regulatory hurdles to the merger. But a number of asset sales are being lined up should competition authorities require it.

AS well as consolidating BP's position as the world's number three oil major, the deal will also create the world's third biggest chemicals company with leading positions in key products such as acetic acid, acrylonitile and teraphthalic acid, which is used to make polyester fabric and plastic containers.

BP is offering just under four of its shares for every Amoco share, which last night valued Amoco at $49.8bn. The offer is a 15 per cent premium to Amoco's closing price on Monday.

The 6,000 job losses out of a combined workforce and associated restructuring are expected to result in one-off charges of about $500m. But Sir John said the merger would be earnings-enhancing in the second year.

Larry Fuller, the chairman and chief executive of Amoco, will become joint chairman alongside Peter Sutherland of BP but will retire in 2000. BP shareholders will own 60 per cent of the company and its directors will dominate the board accounting for 13 of the 22 seats including six of the eight executive director posts.

Potential difficulties could come if Amoco shareholders decide that a 15 per cent premium is not high enough, said Mr Marshall of Robert Fleming.

There are also significant differences in cultures which Mr Fuller conceded would create some "rubbing" from time to time. One example of this is BP's increasing concern about the impact of global warming.

BP has pulled out of the Global Climate Coalition (GCC) of US oil and car companies opposed to the Kyoto Treaty conditions on fossil fuel emissions. Amoco has been a big supporter of the GCC.

Wall Street has been awash with rumours of talks between all major oil companies. Whilst dialogue about downstream links has been under way for some time, discussions have spread to all aspects of business.

Oil prices are languishing at a 25-year low - they averaged $12.44 a barrel in the first half of 1998 compared to $19.09 for the same period last time. Profits and share prices have slumped, so there has been plenty for the players and merchant banks to talk about.

The average net profit of the leading US integrated companies fell 28 per cent in the second quarter. The UK exploration and production sector has underperformed the London market by 33 per cent this year.

There have been a host of small asset swaps in recent months, but analysts have predicted for some time that low oil prices must lead to consolidation. Yesterday the share prices of Lasmo and Monument followed BP upwards as investors hoped these companies would be next in line for acquisition.

Mr Sieminski said it was just a matter of time before more deals were hatched.

Additional reporting by Terry Macalister