Texaco-Getty deal expected to spark more oil industry mergers
Texaco Inc.'s merger with Getty Oil Company is likely to encourage other oil companies step up their search for a corporate marriage partner, analysts say. While such weddings may change the sign hanging over the neighborhood gas station, the mergers should not add to the price consumers pay for gasoline or heating oil, many analysts argue.
And although a merger between the third and 14th largest oil companies does not necessarily break new ground in antitrust policy, it does raise questions about the amount of oil exploration the United States can sustain, experts say.
Texaco's plan to acquire Getty for $10.1 billion, the largest such deal in corporate history, was approved Monday by the Federal Trade Commission (FTC) in a 4-to-1 vote. In approving the deal, the commission required Texaco to sell more than $100 million worth of Getty assets to preserve competition.
The key reason behind the merger is that energy companies figure oil is cheaper to find on the floor of the New York Stock Exchange than in oil fields. Analysts estimate that Texaco paid between $4 and $8 per barrel of oil acquired from Getty vs. an estimated $12 per barrel cost to find oil in the ground.
''The 'finding' cost is not a very scientific figure,'' cautions Stephen A. Smith, senior vice-president for energy products at Data Resources Inc., an economic consulting firm. One reason is that oil companies typically understate the oil they have found and thus overstate the finding cost of each barrel. But while the finding cost may be less than $12 a barrel, there still is ''a huge gap'' between the cost of buying oil and exploring for it, which provides ''good incentives'' to purchase oil from another firm, Mr. Smith says.
And in wake of FTC approval of the Texaco-Getty combination ''there are a lot of people talking and thinking'' about acquiring a smaller oil company to beef up reserves, says Dillard P. Spriggs, president of Petroleum Analysis Ltd., an oil industry consulting firm.
For a while this week it appeared that an even bigger oil-industry combination than the Texaco-Getty deal was in the works. The New York Times reported in its Tuesday editions that Atlantic Richfield Company had offered to buy the Gulf Oil Corporation for nearly $11 billion. Gulf currently is trying to fend off a takeover bid from an investors group headed by Texas oilman T. Boone Pickens Jr., chairman of Mesa Petroleum Company.
In a statement, Gulf Oil said that ''no offer of a business combination with Arco has been received or sought by Gulf nor would one be welcome.'' Gulf asserted that a rumor to the contrary ''is but one more demonstration of the stock manipulation that has been going on.''
Gulf has alleged that Mr. Pickens has manipulated the stock market to aid the proposed takeover. Meanwhile, Atlantic Richfield board chairman Robert O. Anderson said that he had met separately with Gulf chairman James Lee and with Pickens ''to assess the Gulf situation several weeks ago.'' But in a statement Mr. Anderson said he ''had not made an offer to purchase the shares or assets of Gulf.''
The Getty oil deal made a big dent in Texaco's pocketbook, but there will be ''virtually no'' impact on consumers' wallets from the deal, Mr. Smith says.
One reason, notes Morris Greenberg, an energy expert at Chase Econometrics, another economics consulting firm, is that ''the FTC has taken steps to take care of (anticompetitive) problems.''
The FTC required Texaco to sell oil for another five years to independent refiners on the West Coast who were Getty customers. Texaco has to sell 1,900 Getty gas stations in Northeast and mid-Atlantic states to Power Test Corporation.
However, FTC Commissioner Michael Pertschuk said the deal would remove a major supplier to independent oil companies that could not easily be replaced, thus threatening to drive up prices.
The consolidation of some facilities expected after the merger will probably cut some of Texaco's costs, argues Mr. Smith of Data Resources. ''A change in structure is going on anyway (in the industry),'' he says, as oil companies close refineries and learn to cope with a smaller market.
In terms of antitrust policy, the FTC's approval of the Texaco-Getty deal ''is not at all an astounding result given the level of concentration'' in the industry, says Roger Schechter, a law professor at George Washington University. Before the merger, Texaco had 3.5 percent share of the US crude oil market and Getty has a 2.7 percent share.
Some analysts say that merger activity may cut into oil exploration in the US. When one oil company borrows to buy another one, it may offset its interest costs of the purchase by cutting back on spending for exploration, Mr. Spriggs notes.
One can argue, Mr. Schechter says, that society would have been better off if Texaco had used $10.1 billion to search for undiscovered oil, instead of spending it on Getty. ''Society already has Getty's oil,'' he says.