Chevron Corp. and Phillips Petroleum Co. are combining their worldwide chemicals operations in a joint venture. The new company, which will be named later, will be based in Houston, have more than $6 billion of assets, and combine the companies' olefins, polymers and aromatics businesses. Chevron and Phillips expect to close the deal, which does not include Chevron's Oronite lubricants additives division, by midyear. Lehman Brothers Inc. advised Chevron in the transaction, while Goldman, Sachs & Co. advised Phillips. The joint venture's expected annual savings of $150 million clearly appeals to Chevron, which restructured its North American upstream and downstream companies significantly this past year. The San Francisco multinational oil company also revamped its human resources and finance staffs, increased standardization of its information technology systems and improved its procurement activities during 1999. It expects the cost-cutting initiatives that it undertook last year to result in the elimination of approximately 3,500 staff positions across the company by mid-2000. But the partnership probably means even more to Phillips, since it closely follows the Bartlesville, Okla., formation of a midstream natural gas joint venture with its GPM division and the Duke Energy Field Services unit of Duke Energy Corp. By taking its chemical operations into a joint venture with Chevron, Phillips chairman Jim Mulva apparently has moved closer to delivering on his promise to transform the domestic integrated oil company into one with a much bigger exploration and production presence. He expects the two joint ventures to improve Phillips's return on capital employed by two percentage points per year and lower its debt-to-total-equity ratio from 45% to 31%. The partnerships will bring approximately $2 billion back to Phillips, which will be available for acquisitions, debt reduction and share repurchases. The joint venture's formation led three major debt-rating services to affirm their assessments of Phillips' credit. "Phillips and Chevron are strong companies with excellent chemicals assets and a shared vision of growth for their chemicals businesses," Mulva told Wall Street analysts and investors during a briefing on the chemicals joint venture. He predicted that the new company would be one of the world's leading chemicals producers, with a global market presence, excellent growth prospects and a strong financial position. Chevron thought that its chemicals operations needed to be bigger and found that it had many things in common with Phillips, Chevron chairman Dave O'Reilly said. The resulting company will be a formidable entity "able to compete with the best in this expanding industry," he indicated. The joint venture will arrange $1.6 billion of debt financing in the next few months and make onetime cash payments of $800 million to each parent at or shortly after closing. Chevron and Phillips expect the transaction to be accretive to their net incomes and net cash flows after it is implemented. They expect to meet the new venture's annual $150-million cost reduction target by tapping efficiencies in purchasing and logistics, enhancing feedstock flexibility, optimizing production scheduling, improving organizational efficiency and reducing staffing. Approximately 600 positions are expected to be cut from the combined staffs of 6,000 at Chevron Chemical Co. and Phillips Chemical Co. The new company will be governed by a sixmember board, consisting of two directors appointed by Chevron, two appointed by Phillips and the joint venture's chief executive officer and chief financial officer, who will be nonvoting members. Jim Gallogly, senior vice president of chemicals at Phillips, has been named president and chief executive officer, and Kent Potter, vice president of finance for Chevron Overseas Petroleum Inc., has been named chief financial officer. Each partner will each make two more senior management appointments. Management compensation will be tied to achievement of the cost savings and other expected synergies. "We see at least $150 million of savings, but we believe we can achieve more," said Mulva. "That's why we have tied management compensation to achieving these synergies. At the same time, we believe that we're near the nadir of the chemical cycle. So this joint venture can look forward to greater growth not only from an improving market, but also from its operating efficiencies and other synergies." -Nick Snow
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