Tuesday, March 30, 1999

Oil focus made Arco a tempting takeover target

BP merger negotiations confirmed

The Associated Press

        LOS ANGELES — Atlantic Richfield Co. (Arco) executives may have made a bad bet when they focused the company almost exclusively on oil production and refining.

        The move left the company especially sensitive to crude oil prices. So when the crude market began to collapse in late 1997, Arco went with it — turning the nation's seventh- largest oil company into a potential takeover target for bigger, more diverse competitors like BP Amoco, analysts said.

        “Unfortunately, they were hit by slumping oil prices,” said Fadel Gheit, an analyst with Fahnestock & Co. in New York. “Their timing was just awkward and bad. It's more bad luck than anything else.”

        Arco and BP Amoco confirmed Monday that they are discussing a possible merger, but that no definitive agreement has been reached. Neither company would comment in detail on the talks.

        For months Los Angeles-based Arco has been considered a prime takeover target in an industry where mergers have become commonplace. London-based ABN Amro Inc. identified Arco in January as the company most likely to be picked off. Key reasons were the company's tight focus on production and refining and its large, undeveloped holdings overseas.

        “These mergers are all about oil and gas,” said Eugene Nowak, an analyst with ABN Amro who is based in New York.

        In their breadth of operations, Arco and BP Amoco are a study in contrasts. Arco sold off its coal mining and petrochemicals operations in 1997 and 1998, becoming an almost “pure play” oil operation. Arco develops untapped fields, pumps and refines oil into gasoline, and sells refined gasoline through its am/pm chain of convenience stores.

        As Arco has narrowed, BP Amoco has expanded, most notably through the $57.6 billion merger in December of British Petroleum Co. and Chicago-based Amoco Corp. The merged company is one of the world's largest oil producers. It also is one of the biggest manufacturers of petrochemicals, the petroleum byproducts used to manufacture products from polyester slacks to the carbon-fiber components of jet airplanes.

        Both companies lost money when oil prices plummeted, but Arco suffered more because a bigger piece of its revenue comes from crude production, said Mr. Gheit. As production has declined from Arco's Alaska holdings, the company has invested heavi ly in new ventures in Russia, Algeria and the Gulf of Mexico.

        If the merger becomes reality, BP Amoco will pick up Arco's 4.5 billion barrel reserve of crude oil — increasing its holdings by one-third. Arco's ability to develop those fields has been curtailed sharply by its declining revenues.


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- Oil focus made Arco a tempting takeover target