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ConocoPhillips is the third largest U.S. integrated oil company, behind only Exxon Mobil Corporation and ChevronTexaco Corporation. The company was formed in August 2002 from the $15.12 billion merger of Conoco Inc. and Phillips Petroleum Company. ConocoPhillips' main focus is on the upstream side of the petroleum industry. The firm has exploration activities in 29 countries, centering on seven areas: northwestern North America, the Gulf of Mexico, Venezuela, the North Sea, West Africa, the Caspian Sea, and the Asia-Pacific region. Production areas are located in 13 nations: the United States, Canada, Venezuela, the United Kingdom, Norway, Nigeria, Dubai, Russia, China, Indonesia, Vietnam, Australia, and East Timor. Production totals about 1.6 million barrels of oil equivalent per day out of proven reserves of 7.8 billion barrels. Following the merger, ConocoPhillips began shedding some of its downstream operations, but the company remains the fourth largest petroleum refiner in the world, with 12 refineries in the United States, five in Europe, and one in Asia. Worldwide refinery capacity stands at 2.6 million barrels of crude oil and other feedstock per day. The company's marketing operations include about 14,300 retail fuel outlets in the United States and another 3,000 in Europe and Asia, with the petroleum products sold under several brands: Phillips 66, Conoco, 76, Jet, ProJET, Seca, and Turkpetrol. ConocoPhillips has two other core businesses: the gathering, processing, and marketing of natural gas, an activity conducted through Duke Energy Field Services, LLC, in which ConocoPhillips holds a 30.3 percent stake (with the remainder held by Duke Energy Corporation); and the manufacturing and marketing of petrochemicals and plastics, which is conducted through Chevron Phillips Chemical Company LLC, a 50-50 joint venture between ConocoPhillips and ChevronTexaco.
Conoco's Early History As Continental Oil
Conoco's earliest predecessor, Continental Oil & Transportation Company (CO&T), was founded in Ogden, Utah, in 1875 by Isaac Elder Blake to transport petroleum products from the East Coast for sale in Utah, Idaho, Montana, and Nevada. Operations were later expanded to include Denver and San Francisco, and in 1877 the company was reincorporated in California.
Blake's pioneering use of railroad tank cars to transport oil contributed to CO&T's quick success. By the early 1880s, CO&T was sending modest shipments to Mexico, Canada, the Hawaiian islands, the Samoan islands, and Japan. In the western United States it was competing with Standard Oil Co.
In 1884 CO&T agreed to become a Standard affiliate. The following year CO&T merged with Standard's Rocky Mountain operations, and the company was reincorporated in Colorado as the Continental Oil Company. Blake was named president of the new concern, and headquarters were established in Denver. Continental continued to function much as CO&T had, although operations were consolidated with Standard's in Colorado, New Mexico, Wyoming, Montana, and Utah.
Continental products were purchased from Standard and other providers in the East and included kerosene refined for lamp oil, lubricating oils, heavy oil for heating fuel, and paraffin used in candlemaking. In 1888 Continental eliminated the need for transporting products from the East Coast by acquiring a minority interest in United Oil Company with production and refining interests in Colorado.
In 1893 Blake resigned, having become bogged down in personal debt due to heavy investments in railroads and other ventures. For the next 14 years, Henry Morgan Tilford served as president. By 1900, Continental was heavily involved in the marketing of kerosene, although its product line had been expanded to include lamps, cooking stoves, ovens, and a variety of household and industrial oils.
Continental continued to grow in its own market under Tilford but did not venture outside of the Rocky Mountain area, where it became the Standard affiliate most closely resembling a monopoly. In 1906 Continental took over Standard bulk stations in Idaho and Montana, and by the end of the year controlled better than 98 percent of the Western market.
In 1907 Continental purchased the Denver office building that housed its sixth-floor headquarters and renamed it the Continental Oil Building. That same year, Edward T. Wilson, who had worked his way up from junior clerk, was named president.
In 1911 the U.S. Supreme Court ordered Standard Oil to divest some of its holdings. Two years later Continental Oil Company became one of 34 independent oil companies formed as a result of the court's antitrust ruling. Continental tapped into the growing market for automobile gasoline in 1914 and built its first service station. Two years later Continental bought out United Oil and officially entered the oil production business.
During World War I Continental worked under the direction of the oil division of the U.S. Fuel Administration, producing airplane fuel for pioneer aircraft and training planes. In 1919 the company adopted a new trademark, a circular emblem with a soldier standing below the word Conoco.
In 1924 C.E. Strong, who had worked his way up through the Continental accounting department, was elected president and chief executive officer. Continental became a fully integrated oil company later that year when it merged with Mutual Oil Company, owning assets in production, refining, and distribution.
By 1926 Continental's assets topped $80 million, including 530 miles of pipeline, six refineries, and marketing operations ranging through 15 states. That year, sales surpassed $50 million for the first time. The following year the company moved into its new $1 million Denver headquarters, and S.H. Keoughan, a former president of Mutual Oil, was named president and chief executive officer of Continental.
Continental's Merger with Marland Oil in 1929
In 1929 Continental merged with Marland Oil Company. The Marland Oil Company had been incorporated in 1920 to combine assets of the Marland Refining Company and Kay County Gas Company, all under the direction of Ernest Whitworth Marland. E.W. Marland, a Pittsburgh attorney turned oil wildcatter, had come to Oklahoma in 1908 and a year later discovered oil on Indian burial grounds near Ponca City. Marland later assembled a staff of geologists who led him to one strike after another, while his young companies paced development of the Oklahoma oil industry and the new group of independent oil concerns. Marland's interests in exploration extended outside of Oklahoma, leaving him in need of additional financing. In 1923, that financing approached Marland when John Pierpont Morgan of J.P. Morgan & Co. offered to become Marland Oil's banker. E.W. Marland agreed and sold Morgan $90 million in company stock.
By 1926 the company owned or controlled 5,000 tank cars emblazoned with Marland Oil's red triangle, operated more than 600 service stations in the Midwest, and was marketing products in every state as well as in 17 foreign countries. Employees shared in the success, receiving high salaries, free medical and dental care, and company loans to buy homes. In 1926 Marland negotiated the right to explore for oil in Canada on land concessions owned by the Hudson's Bay Company of Canada.
While Marland had expanded rapidly, however, so had its liabilities, which had grown to more than $8 million by the end of the year. Marland blamed the company's increasing liabilities on Morgan's bankers, who had forced him to sell oil to Standard, vetoed pipeline plans, and stymied expansion during the mid-1920s. By 1928 those bankers had gained increasing power on the company's board. During an executive committee meeting that year Marland was informed that he would be replaced as president by Dan Moran, former vice-president of the Texas Company. Marland was offered the chairmanship of the company and a pension but was told he would have to leave Ponca City. Marland promptly resigned and left the oil industry altogether shortly thereafter. He was later elected Oklahoma governor and became instrumental in leasing state capital grounds for oil production.
In January 1929 Marland Oil acquired the Prudential Refining Company with a large refinery in Baltimore, Maryland. In June of that year Morgan bankers fostered a merger agreement between Marland Oil and Continental, under which Marland agreed to purchase Continental while the Continental name would be retained. Moran was named president and chief executive officer, Edward Wilson chairman of the board, and Keoughan chairman of the executive committee.
Shortly after the new Continental moved its headquarters from Denver to Ponca City in 1929, the stock market crashed with the company holding a $43 million debt load. During the first full year of the ensuing Depression, Continental lost nearly $11 million. While losses were mounting that year, Moran devised a scheme for a pipeline that would run from Ponca City to Chicago and Minnesota and greatly reduce transportation costs. A partnership was formed called the Great Lakes Pipe Line Company, and Continental subscribed to a 31 percent stake.
The 1930s and 1940s
In 1932 Continental entered the Midwest through the acquisition of 119 service stations and 43 bulk plants. Meanwhile an emphasis on research resulted in the development of new products, which included Germ Processed Motor Oil and Bronze Gasoline, touted as a high-performance fuel. To reduce company debt, Moran focused the company's attention on domestic operations. In 1933 the Sealand Petroleum Company in the United Kingdom, formed seven years earlier by Marland, was sold and the following year Hudson's Bay's operations were shut down. Continental also withdrew from northeastern states but maintained production at the Baltimore refinery to serve southern markets. By 1937 Continental had eliminated its debt load, and in December of that year 5,000 bonus checks worth a total of $770,000 were awarded to employees.
During the late 1930s Continental expanded its pipeline system by purchasing majority interests in the Rocky Mountain Pipe Line Company and the Crude Oil Pipe Line Company. Refinery operations were expanded in 1941 and a new $4.5 million refinery was opened in Lake Charles, Louisiana. In June of that year, Continental introduced its new lubricant, Conoco Nth Motor Oil, to meet the demand for heavy fuel oils.
During World War II the U.S. government constructed a 100-octane refinery in Ponca City, and Continental's vice-president of manufacturing, Walter Miller, was named to supervise operations. The plant went online in mid-1943 and began producing high-octane jet gasoline. Following the war, Continental focused on areas in which it was fully integrated, namely Texas, Colorado, Oklahoma, Illinois, Kansas, Missouri, and Iowa.
In 1946 a new era of oil exploration was launched when Continental joined with three other oil companies in developing Laniscot I, the world's pioneer offshore exploration boat. The following year Dan Moran resigned because of ill health, and Leonard F. McCollum left Standard Oil Company of New Jersey to become president and chief executive officer at Continental. McCollum's aggressive exploration program soon led to the 1947 acquisition of oil leases for 209,000 acres in the Gulf of Mexico. Hudson's Bay Oil and Gas Company (HBOG) was reactivated about the same time, after oil was discovered in Alberta, Canada. In 1948 Continental joined Ohio Oil Company and Amerada Petroleum Corporation in forming Conorada Petroleum Corporation to explore for oil outside North America.
Continental also initiated a refinery modernization and construction program in the late 1940s, leading to enlarged refineries in Denver and Ponca City and a new refinery in Billings, Montana. Meanwhile, production efforts in Kansas were reduced as the company focused on Texas, Kansas, California, and Wyoming.
Exploration and Diversification at Continental: 1950s-60s
Continental celebrated its 75th anniversary in 1950 by breaking ground for a $2.25 million Ponca City research laboratory and relocating its headquarters from Ponca City to Houston. The company also broke into new business fields during the early 1950s. A synthetic detergent plant was acquired, and Continental Oil Black Company was formed to produce carbon black, used in the production of synthetic rubber.
In 1952 Continental acquired interests in 1,390 miles of pipeline, including the new 1,080-mile line from Wyoming oilfields to an important refining center in Wood River, Illinois. Four years later offshore exploration was revolutionized when Continental, along with the Union, Shell, and Superior oil groups, launched CUSS I, the world's first drill ship.
Continental's interest in overseas exploration grew throughout the decade, and by 1957 the company held exploratory concessions for nearly 50 million acres outside the United States, including land in Libya, Guatemala, and Italian Somaliland. HBOG, by 1957, had rights to a total of 700,000 acres in Egypt, Libya, Somalia, British Somaliland, Venezuela, and Guatemala.
During the 1960s, Continental purchased several independent gasoline station chains in Europe to provide a market for its newly found Libyan oil. Included in a string of acquisitions were SOPI, with more than 400 stations in West Germany and Austria; Jet Petroleum, Ltd., with more than 400 stations in the United Kingdom; SECA, with stations in Belgium; Arrow Oil Company, with 70 retail outlets in eastern Ireland; and the Georg Von Opel chain of 155 stations in West Germany.
Continental also strengthened its European presence in the carbon black market by establishing production facilities in Italy, The Netherlands, France, and Japan. The company's presence in North and South America also grew with an expansion of its Montana pipeline system and purchase of the Douglas Oil Company, operating three southern California refineries and more than 300 stations. Continental opened a new refinery near the Atlantic Ocean entrance to the Panama Canal and acquired Mexofina, S.A. de C.V., with exploratory rights in Mexico.
Annual sales topped $1 billion in 1962 and diversification moves followed. In 1963, Continental acquired American Agricultural Chemical Company (Agrico), a major manufacturer of plant foods and agricultural chemicals. About the same time Continental became involved in the production of biodegradable detergents and plastic piping.
In 1964 Andrew W. Tarkington, a former executive vice-president, was named president of Continental. McCollum remained chief executive and was named to the additional post of chairman. By that time, Continental was pumping more crude out of Libya, Canada, Venezuela, and Iran than it was producing in the United States, with Libyan oil having almost by itself made Continental an international dealer. Exploration and production teams also were operating in the Middle East, Mexico, Panama, Argentina, Pakistan, New Guinea, and Australia. With its worldwide presence growing, Continental moved its headquarters from Houston to New York that same year.
In 1966 Continental diversified into minerals and acquired Consolidation Coal Company (Consol), the second largest U.S. coal-producing company. During the late 1960s expansion and diversification continued as the company purchased the Australia pesticides distributor Amalgamated Chemicals, Ltd. as well as Vinyl Maid, Inc., a manufacturer of polyvinyl chloride containers. Continental also entered joint agreements to build a calcined-petroleum coke plant in Japan, a polyvinyl chloride resin plant in the United Kingdom, and Spain's first biodegradable detergent plant.
In 1967 Tarkington assumed the additional duties of CEO while McCollum remained chairman. During the next two years Tarkington spearheaded consolidation efforts and established new policies for gauging financial risks. John G. McLean, another former executive vice-president, was named president and CEO in 1969, replacing Tarkington, who was named vice-chairman of the board.
Leadership Changes and a New Name, Conoco: 1970s
McLean reorganized administrative levels and created a management team with four divisions--Western Hemisphere petroleum, Eastern Hemisphere petroleum, Conoco Chemicals, and Consol. In 1972 he replaced McCollum, who had retired as company chairman. Under McLean's leadership, the company established a policy of focusing on its new mix of natural resources, including coal, uranium, and copper. During the early 1970s the company sold its plastic pipe manufacturing business and interest in Amalgamated Chemicals and closed a petroleum sulfonates plant. Continental stepped up its mineral production during the same period, entering joint ventures to develop uranium prospects in Texas and France. With the onset of the 1973 oil crisis, Continental accelerated its search for oil outside the Middle East, and during the next two years made significant discoveries in the North Sea.
In March 1974, Howard W. Blauvelt was named to fill the post of president, which McLean had left vacant when he assumed the chairmanship. Within two months, however, the responsibilities of chairman and chief executive were also thrust upon Blauvelt, following the untimely death of McLean. During this time of upheaval, John Kircher was named president.
Conoco Coal Development Company, a wholly owned subsidiary, was formed in 1974 to coordinate research and long-range planning for the production of synthetic fuels made from coal. That same year the company signed a ten-year contract for oil and gas exploration for more than two million acres in Egypt.
In 1979 Continental changed its name to Conoco Inc. That year, Ralph E. Bailey was named president, replacing Kircher who remained deputy chairman, a post to which he had been appointed in 1975.
During the late 1970s Conoco entered three major joint ventures, combining with Monsanto Company to manufacture ethylene and related products, with E.I. du Pont de Nemours and Company (DuPont) in a $130 million oil and natural gas exploratory program, and with Wyoming Mineral Corporation, a subsidiary of Westinghouse Electric Corporation, to develop a Conoco uranium deposit in New Mexico. Blauvelt resigned as chairman and CEO in 1979 and was replaced by Bailey in both positions.
The 1980s: Takeover of Conoco by DuPont
Conoco began the 1980s as the ninth largest oil company in the United States with $2 billion dedicated to capital outlays. In 1980 Conoco purchased Globe Petroleum Ltd., with 220 retail outlets in the United Kingdom, and entered into a second exploration venture with DuPont. A facility expansion program was also initiated early in the decade, including a $2 billion upgrade of the Lake Charles refinery, additions to the Lake Charles coke-manufacturing plant, and construction of a Lake Charles detergent chemical plant as well as a St. Louis-based lube-oil plant. In 1981 the company announced that it would build a new world headquarters in Houston for its petroleum and chemical operations.
In May 1981, Dome Petroleum, Ltd. of Canada offered to buy 13 percent of Conoco's common stock for $910 million, in hopes of exchanging the stock for Conoco's 53 percent stake in HBOG. A month later a deal was consummated giving Dome a 20 percent interest in Conoco, which was traded along with $245 million for Conoco's stake in HBOG. The transaction sent a message that Conoco was ripe for a takeover, and a bidding war for the company ensued with Seagram Company and Mobil Corporation participating. With threats of a hostile takeover looming, Conoco went in search of a white knight--a friendly acquirer--and found DuPont a willing participant. By September 1981, DuPont had acquired Conoco for $7.4 billion in the most expensive merger to that date.
Following the takeover, DuPont consolidated Conoco operations and began selling the oil company's interests to reduce a $3.9 billion debt incurred in the purchase. During the first three years after the takeover DuPont closed down some oil and chemical facilities and sold better than $1.5 billion in Conoco assets, including Continental Carbon Company and a variety of chemical, mineral, oil, and gas assets. Conoco Chemicals was absorbed by DuPont's larger petrochemicals departments. DuPont also began utilizing some of Conoco's former chemical assets, including its ethylene business. By 1983 DuPont had increased its output of ethylene, a petrochemical feedstock used in making polyethylene, from 850 million pounds annually to three billion pounds.
In 1983 Constantine S. Nicandros was named president of Conoco, which that same year shifted headquarters to Wilmington, Delaware (where DuPont was based). In the following years, Conoco stepped up offshore exploration and production efforts in the Gulf of Mexico and the North Sea. In 1984 the company began operating the world's first tension leg well platform for deep-sea oil exploration in the North Sea, with capabilities of producing oil under 2,000 feet of water.
During the mid-1980s, Conoco also expanded its oil and gas activities in Canada and Egypt. In January 1985 Conoco joined four other oil companies in a $312 million partnership to produce oil in Alaska. Two years later, however, Conoco pulled out of the partnership, after the price of crude oil dropped.
In 1987 Bailey retired as chairman and his position was eliminated. Edgar S. Woolard was named president of DuPont, with duties to include overseeing Conoco operations. At the same time, Nicandros assumed the additional duties of CEO. Conoco shifted its headquarters yet again in 1987, this time moving back to Houston.
During the late 1980s Conoco made significant oil discoveries in Norway, the United Kingdom, Indonesia, Ecuador, and the United States. In 1989, after a two-year lapse, Conoco reopened its oilfields in Alaska. That same year 64 service stations were purchased in the Denver area in an effort to boost name recognition and sales by branded outlets. In an early 1990 joint venture, Conoco and Calcined Coke Corporation formed a company called Venco to enhance Conoco's ability to meet DuPont's needs for specialty coke products.
Environmental Commitments and High-Risk Prospecting: Early to Mid-1990s
Nicandros would head Conoco from the early 1990s until 1996, a period in which he became widely known both within and outside the international oil industry because of his commitment to the environment and his company's penchant for prospecting in high-risk areas. In 1990 he issued his "nine points for environmental excellence" program as a guide for Conoco's future development in an "earth-friendly" manner. Hailed by environmentalists and anticipative of future U.S. Congressional mandates, the program's most striking commitment was to construct only doubled-hulled tankers in the future in order to prevent oil spills at sea. Industry experts estimated that adherence to the program cost Conoco $50 million a year.
Conoco began the 1990s with exploration teams in 21 countries, and under Nicandros the company aggressively sought new areas of exploration in the early 1990s. With the huge oilfields of North America and the North Sea continuing to be drained, Conoco more than any other oil company reached out to high-risk areas as a long-term strategy of keeping its reserves at an acceptable level. In 1991 the company formed a joint venture in Russia--in that country's largest oil investment by a foreign country to date--to drill oil in the Russian Arctic. By the fall of 1994, the Ardalin oil complex began producing crude oil out of its field of 110 million barrels of recoverable oil beneath the frozen tundra. Conoco also began to see results in 1995 from its 18 percent interest in a $3.9 billion project in the Norwegian Sea, which involved a 288,000-ton tension leg platform installed at a water depth of 1,150 feet through a combined 30 million person-hours of work over a four-year period.
A few of the company's exploration efforts, however, met with some challenges. In March 1995, for example, after three years of negotiations, a $1 billion deal to produce oil in Iran was blocked by the Clinton administration as part of increasingly hostile relations between the United States and Iran. Moreover, in January 1996 a consortium led by Conoco proposed to develop a natural gas field in northern Mexico, a country highly protective of its petroleum industry. Two months later Conoco signed a deal with the state oil company of Taiwan to explore for oil and gas in the Taiwan Strait, an area that had recently been the site of Chinese war games. In April Vietnam's state-owned Petro-Vietnam awarded Conoco rights to develop three million acres of the South China Sea, an area whose sovereignty was in dispute between Vietnam, China, and other southeast Asian countries. China, which had already granted rights to an overlapping area to Denver-based Crestone Energy Corp., issued a warning to Conoco not to proceed, with the company responding that it would leave the issue up to the involved governments.
Meanwhile, also in Asia, Conoco began in 1993 to develop refining and marketing operations as a start toward capturing part of the region's fast-growing petroleum market. That year, the company began by building gas stations in Thailand under the Jet brand name, with a goal of having 260 retail outlets in place by the year 2004. Then in 1994 Conoco entered a joint venture (holding a 40 percent stake) with Petronas, the national oil company in Malaysia, and Statoil of Norway to construct a 100,000 barrel per day, $1.1 billion refinery in Malaysia. This represented Conoco's largest investment outside the United States. Future plans were to spend more than $2.5 billion in Malaysia through 2005, with plans for more than 200 retail outlets in the country. Overall, from 1996 to 1998, Conoco planned to spend 10 to 15 percent of its $2.5 billion capital budget in Asia.
Conoco's overall operating results stagnated during the early 1990s under the pressure of heavy competition. The after-tax operating income as a percentage of sales mark of 6.7 percent in 1990 represented the high level through 1996. A three-year restructuring program that Nicandros initiated helped the company post better results than it would have otherwise. In addition to its exploration efforts and entrance into Asia, neither of which helped in the short term, Nicandros also sought new areas for growth within the broader energy sector, notably the establishment of a Conoco Power business unit that would pursue projects in the worldwide electrical power market. One possible shorter-term aid to company profitability arose in the talks between Conoco and Phillips Petroleum started in late 1995 regarding the combination of the companies' domestic marketing, refinery, and pipeline operations in a 50-50 venture. This would have created the sixth largest refiner of crude oil in the United States and the second largest chain of U.S. gas stations, but talks broke off in June 1996 when the two sides could not reach agreement on "significant commercial issues."
During the 14 years since the DuPont takeover, the parent company's shareholders had not always benefited from the Conoco acquisition, according to some observers. Although about 42 percent of DuPont's revenues were derived from Conoco operations, Conoco contributed only about 17 percent of after-tax operating income to DuPont's overall total. Following the takeover, DuPont had been left with Seagram holding 24 percent of its common stock and a seat on DuPont's board. In the spring of 1995, DuPont paid $8.8 billion to repurchase all the shares Seagram then held, leaving a huge debt load behind. At the same time DuPont announced plans to sell $650 million in Conoco assets. Speculation then arose about the possibility that DuPont would divest itself of Conoco, in particular after Jack Krol replaced Edgar Woolard as chief executive of the parent company. It was in these difficult and uncertain circumstances that Archie W. Dunham succeeded Nicandros as Conoco chairman, president, and chief executive at the beginning of 1996.
Dunham's leadership stint got off to a stellar start when Conoco posted its second best year ever in 1996, earning $860 million on revenues of $20.2 billion. The improved profits were attributable to higher oil and gas prices and a major restructuring at the firm's Houston headquarters, where the central management staff was cut from around 1,800 to about 150. Also in 1996, Conoco won two of five coveted exploration leases that were open for bidding in Venezuela, which at the time had the hottest exploration and development prospects in the Western hemisphere. In May of the following year, Conoco paid TransTexas Gas Corp. about $900 million to acquire an extensive array of natural gas properties and a 1,100-mile natural gas pipeline, all located in southern Texas. In the North Sea, meantime, Conoco swapped two mature oilfields for Occidental Petroleum Corporation's interest in the Britannia Field, one of the largest natural-gas discoveries in the North Sea. Commercial production at Britannia began in August 1998. Overall, Dunham wanted to take a more focused approach to exploration and development, concentrating on a handful of main areas, including Venezuela, southeast Asia, the Caspian Sea, the North Sea, and the deepwater Gulf of Mexico.
New Era of Conoco Independence: 1998-2001
At this time, Dunham was seeking to gain Conoco's separation from DuPont. He desired to have more financial control over the company in order to pursue the numerous opportunities for foreign asset investments that were arising in the post-Cold War era. Executives at DuPont agreed that the time for a separation had come as they were seeking to transform their firm into a life sciences corporation, shifting focus away from petrochemicals and toward biotechnology. Thus on October 22, 1998, DuPont sold 30 percent of its Conoco stake to the public in what at the time was the largest initial public offering (IPO) in history--nearly $4.4 billion. Conoco emerged as the sixth largest U.S. oil company based on its 1997 revenues of $21.4 billion. The firm employed about 15,000 people worldwide and began its latest stint of independence with about $5 billion in debt. In August 1999 DuPont completed its divestment of Conoco by swapping its remaining Conoco shares (worth about $12.2 billion) for DuPont shares.
Cracks in the OPEC cartel and more efficient energy exploration technologies led to an oil glut and plunging oil prices in 1998 and 1999. Conoco laid off nearly a thousand workers late in 1998 and also reduced its capital budget for 1999 by about $500 million, or 21 percent. Writedowns in the value of reserves, the cost of the workforce reductions, and other special charges pushed the company into the red in the fourth quarter of 1998. Conoco rebounded in 1999 when it earned $774 million (a 65 percent increase over the 1998) on record sales of $27 billion. Meanwhile, the company's joint venture refinery in Malaysia came on line in 1998.
Surging oil and gas prices in 2000 led Conoco to its best year ever: profits of $1.9 billion on revenues of more than $39 billion. The company made major discoveries in Vietnam, the Gulf of Mexico, and the United Kingdom that year, and it also paid Petro-Canada about $200 million for a broad collection of natural gas liquids operations in the province of Alberta. In July 2001 Conoco completed the largest acquisition in its history, buying Calgary-based Gulf Canada Resources Ltd. for $4.33 billion in cash and the assumption of $2 billion in debt. The deal increased Conoco's worldwide reserves nearly 40 percent, from 2.65 billion barrels to 3.7 billion barrels, and increased production by 32 percent. Gulf Canada had exploration and production operations in western Canada, the North Sea, and Ecuador, and it also owned 72 percent of Gulf Indonesia Resources Ltd., a Jakarta-based company with natural gas production on the island of Sumatra, in the Natuna Sea, and off Java. This proved to be the last major deal for Conoco Inc. as just four months later the company agreed to merge with Phillips Petroleum to form ConocoPhillips.
Early History of Phillips Petroleum
Phillips Petroleum was named after brothers Frank and L.E. Phillips and was organized in 1917 to acquire their original venture in the oil business, Anchor Oil and Gas Company. Raised on an Iowa farm, the Phillips brothers left Iowa after Frank heard rumors of vast oil deposits in Oklahoma, then part of the Indian Territory. Along with others Frank Phillips founded Anchor Oil and Gas in 1903. After a struggle, Frank Phillips, joined by L.E., finally began to make money from oil in 1905. They reinvested their profits, founding a bank. Eventually, the brothers decided to leave the uncertain oil business for good and concentrate on banking. They were forestalled, however, when World War I broke out and the price of crude jumped from 40 cents to more than $1 a barrel. The brothers founded Phillips Petroleum Company in 1917, headquartered in Bartlesville, Oklahoma.
From the very beginning, the Phillips brothers found much natural gas while drilling for oil. Most drillers considered the gas useless and burned it off at the wellhead, but the Phillips brothers sought to turn it into a cash crop. In 1917 Phillips opened a plant near Bartlesville for extracting liquid byproducts from natural gas. The byproducts could be used in motor fuels. The company's research into the uses of natural gas received further impetus in 1926, when it won a patent infringement suit brought against it by Union Carbide over Phillips's process for separating hydrocarbon compounds.
Phillips prospered throughout its first decade. By 1927, it was pumping 55,000 barrels of oil a day from more than 2,000 wells in Oklahoma and Texas. Its assets stood at $266 million, compared with the $3 million it had when it was founded. The company also decided to enter the refining and marketing businesses in 1927, in response to automobile sales and as an outlet for its growing production. In 1927, it began operating a refinery near the Texas town of Borger. It also opened its first gas station, in Wichita, Kansas.
Phillips's entry into retailing presented it with the problem of finding a brand name under which to sell its gasoline. According to company lore, the solution presented itself as a Phillips official was returning to Bartlesville in a car that was road-testing the company's new gasoline. He commented that the car was going "like 60." The driver looked at the speedometer and replied, "Sixty nothing ... we're doing 66!" The fact that the incident took place on Highway 66 near Tulsa only strengthened the story's appeal to Phillips's executives. The company chose Phillips 66 as its new brand name, one that endured and achieved classic status.
In 1930 Phillips added to its refining and retailing capacities when it acquired Independent Oil Gas Company, which was owned by Waite Phillips, another Phillips brother. The Great Depression hit the company early and hard. In 1931 Phillips posted a $5.7 million deficit in its first ever loss-making year. As a consequence, it cut salaries and laid off hundreds of employees. Phillips stock plunged to $3 a share, down from $32. The company quickly regained its profitability, however, posting a modest surplus the next year.
Before the decade was out, Phillips also would make two personnel changes to help secure its future for the longer term. In 1932 a promising young executive named K.S. (Boots) Adams was promoted to assistant to the president, Frank Phillips. Six years later, he succeeded Phillips as president when the company's founder assumed the post of chairman. Boots Adams--a boyhood nickname, inspired by his affection for a pair of red-topped boots--was 38 years old when he became president, and he and Phillips made rather an odd couple at the top of the chain of command. They often disagreed as to how the company should be run, but Phillips seems to have known that the future ultimately belonged to his protégé. "Mr. Phillips liked me, but not my ideas," Adams later recalled. "He said to me: 'I'm going to object to everything you do, but you go ahead and do it anyway.'"
Phillips's strength in research and development paid off during World War II. In the late 1930s, the company developed new processes for producing butadiene and carbon black, two key ingredients in synthetic rubber, which became all the more crucial to the United States after Japanese conquests in Indonesia and Indochina cut off the supply of natural rubber in 1941. Phillips also developed high-octane aviation fuels, an early version of which powered British fighters in the Battle of Britain. The fuels were widely used by the Allied air forces.
Postwar Growth and International Expansion
In the years immediately following the war, Phillips began to reap in earnest the harvest of its research and commitment to natural gas. It generated substantial income by licensing its petrochemical patents to foreign companies. At home, the company was eminently positioned to take advantage of the sudden growth of cross-country pipelines in the 1940s and the consequent surge in natural gas prices. By the middle of the next decade, its reserves would total 13.3 trillion cubic feet, worth an estimated $931 million. Phillips also invested heavily in oil exploration, refining, natural gas drilling, and petrochemical plants. In 1948 it formed a new subsidiary, Phillips Chemical Company, and entered the fertilizer business when it began producing anhydrous ammonia.
Although Phillips had the advantage over its competitors in natural gas and chemicals, it fell behind in the postwar foreign oil rush because of Frank Phillips's opposition to overseas ventures. Even though his company had begun drilling in Venezuela in 1944, Phillips was determined to keep the company a mainly domestic enterprise and turned down the exclusive rights to the lucrative concession in the neutral zone between Saudi Arabia and Kuwait in 1947. The company eventually acquired a one-third stake in American Independent Oil, which took the Middle East concession, but it required all of Boots Adams's persuasive powers to get his boss to agree to it.
Frank Phillips died in 1950 and Adams, long his heir-apparent, succeeded him as chairman and CEO. Under Adams, Phillips continued to focus on its interest in natural gas and was the nation's largest producer in the 1950s. Its program of capital expansion was ambitious, with expenditure reaching a peak of $257 million in 1956. Phillips also began to break out of the constricting mold that its late founder had built for it. In 1952 the company started expanding its marketing network beyond the Midwest, opening Phillips 66 stations in Texas and Louisiana. Phillips continued to march through the deep South, then up the Atlantic seaboard, as far as it could extend its supply lines from its refineries. It also was becoming apparent that Frank Phillips had erred in refusing to develop overseas sources of oil, as the cost of finding and pumping crude in the United States increased. Finally, as the decade neared its end, Adams went on an around-the-world fact-finding trip. When he returned, he set a five-year timetable for expanding Phillips's international operations.
In 1951, meanwhile, chemists at Phillips discovered Marlex, a chemical compound that would become a building block for many modern plastics. The first commercial use of the new product was in the manufacture of hula hoops, and the 1950s hula hoop craze fueled demand for the new substance.
Phillips's practice of licensing its patents overseas without acquiring an interest in the new ventures had yielded royalties but no growth; so in 1960 the company took a 50 percent interest in a French carbon black plant using Phillips technology. Petrochemical joint ventures in Asia, Africa, Europe, and Latin America followed. Phillips also acquired drilling concessions in North Africa, the North Sea, New Guinea, Australia, and Iran. These foreign ventures were still not profitable when Adams retired in 1964 and handed the reins to President Stanley Learned, but the company had begun to make up for lost time.
Under Learned, Phillips continued to diversify and expand. In 1964 it acquired packaging manufacturer Sealright Inc. as part of its move into plastics. Two years later, Learned himself broke ground on a petrochemical complex in Puerto Rico that would produce chemical raw materials and motor fuels. Phillips also expanded its domestic oil operations. In 1960, it had tried to break into the California market by acquiring 15 percent of Union Oil Company of California, but litigation by Union Oil and the Justice Department prevented Phillips from pursuing a takeover; in 1963 Phillips sold its stake to shipping magnate Daniel K. Ludwig. Instead, Phillips acquired the West Coast properties of Tidewater Oil Company in 1966 for $309 million. The deal took four months to complete and required great secrecy. When the purchase was announced, the Justice Department filed an antitrust suit to dissolve it, but a U.S. District Court allowed the acquisition to stand, pending an appeal to the Supreme Court. By 1967 there were Phillips 66 stations in all 50 states.
Learned retired in 1967 and was succeeded as CEO by William Keeler. In addition to his career with Phillips, Keeler, who was half Cherokee, was named chief of the Cherokee nation by President Harry S. Truman in 1949. Also known as Tsula Westa Nehi ("Worker Who Doesn't Sit Down"), Keeler used his position as chief to campaign on behalf of Native American causes. Now he assumed responsibility for the eighth largest oil company in the United States, and one in which some serious problems were beginning to manifest themselves. Foremost among these problems was dependence on outside sources of crude oil. For years, Phillips had not pumped enough to supply its refineries, so it had to buy crude from other producers. In 1969 Phillips made an unsuccessful offer to acquire Amerada Petroleum Corporation, a major crude producer with no marketing operations. Phillips was more successful with its new exploration strategy, under which it considerably slowed exploration in the continental United States, the most thoroughly prospected area in the world, and concentrated on Alaskan and overseas locations. This paid off in 1969, when Phillips discovered the massive Greater Ekofisk field under the Norwegian North Sea. Phillips joined with several European partners to develop the field. The discovery of a major field in Nigeria soon followed. In the early 1970s, Phillips joined with Standard Oil Company of New Jersey (later Exxon Corporation), Atlantic Richfield Company, Standard Oil Company of Ohio, Mobil Oil Corporation, Union Oil Company of California, and Amerada Hess Corporation to form Alyeska Pipeline Service Company. Alyeska would build the trans-Alaska pipeline, which allowed the exploitation of the massive deposits in Prudhoe Bay, Alaska.
During this time Phillips suffered from overexpansion and ailing chemical ventures. Some petrochemical projects fared badly because of falling propane and fertilizer prices. In plastics, Phillips found that it could not compete with smaller companies that had lower capital costs. Keeler addressed these problems by installing tighter controls on corporate planning. Phillips executives also found that having gas stations in all 50 states was no advantage when the company's presence in many markets was too small to ensure a profit. In 1973 Phillips divested most of its stations in the Northeast. A price war in California had drained the 3,000 stations acquired from Tidewater from the start, and it never made money; in 1973 the Supreme Court finally ordered Phillips to divest the Tidewater assets, and two years later the company sold most of its Pacific Coast properties to Oil Shale Corporation.
Keeler retired in 1973 and was succeeded as CEO by President William Martin. The remainder of the 1970s would be turbulent years for Phillips. In 1973 Phillips was one of the first and most prominent U.S. corporations to be accused of making an illegal contribution to President Richard Nixon's reelection campaign. Phillips pleaded guilty and admitted donating $100,000 illegally. Over the course of the next two years, Phillips would admit that the company had made illegal contributions to 65 congressional candidates in 1970 and 1972, as well as to Lyndon B. Johnson's 1964 presidential campaign and Nixon's 1968 campaign. The money came from a secret $1.35 million fund set up by Phillips executives for that purpose and channeled through a Swiss bank account. The company paid $30,000 in fines.
In 1975 the Los Angeles-based Center for Law in the Public Interest filed a class-action suit against Phillips on behalf of several small shareholders. In settling the lawsuit, the company agreed to give up the strong majority that its executives had always held on its board of directors. The board was reconstituted, with nine of the 17 directors coming from outside the company.
In turn, these legal difficulties were followed by even greater disasters. In 1977 Phillips's Bravo platform in the Ekofisk field blew out during routine maintenance and spewed oil into the North Sea for eight days. Two years later, 123 people were killed when a floating hotel for Ekofisk workers capsized in a storm. Also in 1979, an explosion at Phillips's Borger, Texas, refinery injured 41 people. Meanwhile, Keeler's strategy of exploring in foreign lands began to backfire as it produced more dry holes than reserves, while other oil companies were discovering new fields in the Rocky Mountains and in Louisiana.
Fending Off Takeovers in the 1980s
Martin retired in 1980 and was succeeded by William Douce. In 1982 Phillips's fortunes revived somewhat when a joint exploration venture with Chevron found substantial reserves under the Santa Maria Basin, off the coast of California. The company added even further to its crude supplies in the following year, when it acquired General American Oil Company, for $1.1 billion, stepping in as a white knight to thwart a takeover bid from Mesa LP. It would not be Phillips's last encounter with Mesa and its chairman, T. Boone Pickens, Jr. In 1984 Phillips acquired Aminoil, Inc. and Geysers Geothermal Company from R.J. Reynolds Industries for about $1.7 billion. Observers noted that the deal made Phillips, now the subject of takeover rumors, a less attractive buyout candidate because of the debt it would have to assume.
The takeover rumors became reality early in December 1984, when Pickens announced that his company had acquired 5.7 percent of Phillips's stock and intended to try for a majority stake. Douce, though scheduled to retire shortly, had prepared for such an event and was determined to fight. "Boone Busters" T-shirts appeared in Bartlesville, which feared for its life should Phillips ever be taken from it, and the company launched a barrage of lawsuits. One suit charged that Mesa was violating a pact it had signed before withdrawing its bid for General American Oil, in which it promised never again to attempt to take that company over. When the dust cleared a month later, Phillips had driven Pickens away and preserved its independence, but Phillips agreed to buy out Mesa's holdings as part of a restructuring that would ultimately cost $4.5 billion, loading itself with debt and requiring the disposal of $2 billion in assets. For his part, Pickens conducted an orderly retreat laden with spoils--$75 million in pretax profits plus an additional $25 million to cover his expenses.
No sooner had Pickens left the field, however, than other attacks began. In January and February 1985, financiers Irwin Jacobs, Ivan Boesky, and Carl Icahn all bought up large blocks of Phillips stock. Then, on February 12, Icahn struck, launching a $4.2 billion offer to buy 45 percent of the company. Combined with the 5 percent he already owned, this would give Icahn a controlling stake. In early March, faced with shareholders willing to sell to Icahn owing to dissatisfaction with the Pickens deal, Phillips executives came up with a plan to exchange debt securities for half of its outstanding stock, including Icahn's 5 percent, at $62 per share, compared with the $53 per share it had paid Pickens. Icahn accepted and he, too, left with his spoils.
The task of rebuilding the battered company--now saddled with $8.9 billion in debt--was left to C.J. (Pete) Silas, who succeeded Douce as chairman in May 1985. Under Silas, Phillips sold off the necessary $2 billion in assets within 18 months of Icahn's repulse. Among those to go were Aminoil and Geyser Geothermal. The company also cut 9,000 jobs by 1989. As a result of its forced restructuring, Phillips gave up becoming an integrated, worldwide energy company, and refocused on its core oil and gas businesses. In the late 1980s, unexpectedly strong earnings from its petrochemical businesses more than offset the effect of lower oil prices and raised hopes for Phillips's long-term recovery.
These hopes received a setback in October 1989, however, when an explosion occurred at Phillips's plastics plant in Pasadena, Texas, killing 23 people and causing $500 million in damage. The disaster temporarily eliminated Phillips's U.S. capacity to manufacture polyethylene, which is used to make blow-molded containers and other products.
Increasing Exploration and Production Operations in the 1990s
Phillips entered the 1990s still saddled with nearly $4 billion in debt from its battles with corporate raiders. Its debt-to-equity ratio stood at nearly 60 percent. The early 1990s were difficult years for the company as the economic downturn hit the oil and gas industry particularly hard. The company completed additional workforce reductions and asset sales. In 1992 Phillips reorganized its operations into strategic business units, which were given greater autonomy and more profit and loss responsibility. That year also saw Phillips create GPM Gas Corporation, a subsidiary that assumed control of the natural gas gathering, processing, and marketing activities. Phillips planned to sell 51 percent of GPM through an IPO to raise funds to further reduce the debt load, but the poor energy market of early 1992 forced Phillips to cancel the IPO.
Wayne Allen was promoted from president and COO to chairman and CEO in 1994. Under Allen's leadership, Phillips increased its exploration and production operations. The company had already, in 1993, proven the viability of drilling for oil and gas beneath the immense sheets of salt that cover more than half of the Gulf of Mexico. The salt layers had stymied previous attempts to seismically map the deeper layers, but Phillips developed a 3-D seismic technology that enabled it to see clearly beneath the salt. So-called subsalt production in the Gulf began in late 1996. Meantime, international exploration efforts led to the company's first production of oil in China in 1994 and a major gas discovery in the Timor Sea located between East Timor and Australia. Also in 1994 Norway's parliament approved Ekofisk II, a $2.5 billion improvement project involving the replacement of five aging platforms with two new ones, along with the extension of the production license to 2028. Phillips expected that by that year, Ekofisk II will have produced one billion barrels of oil. The construction of Ekofisk II was completed in 1998.
On the marketing side of its operations, Phillips's profits were weaker than those in exploration and production. The company worked to expand its network of gas stations and convenience stores in the mid-1990s. As part of an industry trend toward consolidation and the sharing of costs through joint operations, Phillips and Conoco Inc. in 1996 discussed merging their refining and marketing businesses but failed to reach an agreement. That year Phillips posted net income of $1.3 billion on sales of $15.73 billion, enabling it to reduce its debt load to $3.1 billion and its debt-to-equity ratio to 39 percent.
Pressure to consolidate continued to build in the late 1990s as two megamergers rocked the industry: British Petroleum plc's merger with Amoco Corporation to create BP Amoco p.l.c. and Exxon Corporation's merger with Mobil Corporation to form Exxon Mobil Corporation. The new giants dwarfed Phillips with their revenues in excess of $100 billion. In late 1998 Phillips and Ultramar Diamond Shamrock Corporation reached a preliminary agreement to combine their refineries and gas stations in a joint venture, but the deal fell apart early the following year. Meantime, Phillips in 1998 made its largest discovery since Ekofisk in a field in Bohai Bay, off the northeastern coast of China. At the time, this was the largest find off the shore of China.
Phillips's Rapid Transformation into a Major Integrated Oil Company: 1999-2001
During the second half of 1999 James J. Mulva took over as chairman and CEO from the retiring Allen. Mulva would oversee some of the most dramatic events in the company's history soon after taking over, as Phillips decided to focus even further on exploration and production by either selling or placing into joint ventures its other three units. The company at first planned to sell its GPM Gas unit, but instead in March 2000 Phillips combined GPM with the gas gathering, processing, and marketing operations of Duke Energy Corporation to form a joint venture called Duke Energy Field Services, LLC, with Duke initially holding 69.7 percent of the new entity and Phillips holding the remaining 30.3 percent. In April 2000 Phillips substantially bolstered its exploration and production operations through the acquisition of the Alaskan assets of Atlantic Richfield Company for about $7 billion, the largest acquisition in company history. This deal enabled BP Amoco to complete its $28 billion acquisition of Atlantic Richfield. For Phillips, the addition of the Alaskan assets increased its daily production by 70 percent and doubled its oil and gas reserves. Phillips completed a third major deal in July 2000 when it combined its worldwide chemicals businesses with those of Chevron to form a 50-50 joint venture called Chevron Phillips Chemical Company LLC. Through the new entity, whose annual revenues would be nearly $6 billion, the two companies hoped to reap annual cost savings of $150 million.
Plans to shift the company's refining and marketing operations into another joint venture were abandoned with the announcement in February 2001 that Phillips would acquire Tosco Corporation, a major U.S. petroleum refiner and marketer whose main retail brands included 76 and Circle K. Completed in September 2001 at a price tag of $7.36 billion in stock and about $2 billion in assumed debt, the deal made Phillips the number two refiner in the United States, trailing only Exxon Mobil, and the number three gasoline retailer, with about 12,400 outlets in 46 states. Phillips now had strong positions in both the upstream and downstream sides of the oil industry. Although Mulva called this acquisition the "final step" in the company's plan to become one of the major integrated oil companies, just two months after its completion Phillips agreed to merge with Conoco in a truly blockbuster deal.
Creation of ConocoPhillips in 2002
In November 2001 Phillips Petroleum and Conoco agreed to merge. The $15.12 billion deal, completed in August 2002, combined two midtier U.S. players into the sixth largest publicly traded oil company in the world and the third largest in the United States. The new corporation, named simply ConocoPhillips (an entity incorporated in 2001), started with 8.7 billion barrels of proven reserves, 1.7 million barrels of daily production, and 2.6 million barrels per day of refining capacity--the latter making the firm the largest U.S. refiner and the number five refiner in the world. The refining capacity would soon be trimmed slightly because the U.S. Federal Trade Commission (FTC), in approving the merger, forced the sale of a Conoco refinery near Denver and a Phillips refinery near Salt Lake City. The FTC also ordered the new company to sell more than 200 gasoline stations in Colorado, Utah, and Wyoming to address antitrust concerns in the Rocky Mountain region. ConocoPhillips nevertheless retained a worldwide network of fuel outlets totaling more than 17,000. Conoco's headquarters in Houston was retained as the base for ConocoPhillips. James Mulva, the head of Phillips, became the CEO and president of the new firm, while Archie Dunham, head of Conoco, served as ConocoPhillips's first chairman.
Upon announcing the merger, the executives cited the potential for annual cost savings of $750 million. By late 2002 they raised their savings goal to $1.25 billion, concentrating primarily on the downstream side of the business. High oil prices were hurting refining and marketing margins at this time, and ConocoPhillips had a higher proportion of downstream assets than most of its major integrated oil company competitors. The company announced that it planned to sell $3 billion to $4 billion of assets by the end of 2004 to rein in costs and to cut the heavy long-term debt load of nearly $19 billion. Late in 2003 ConocoPhillips said it would cut another $1 billion in assets, or approximately $4.5 billion in total, and raised its cost savings goal to $1.75 billion. The biggest divestment came in December 2003 when the company sold Circle K Corp., an operator of more than 1,650 convenience stores/gasoline stations that had come to Phillips through its acquisition of Tosco. Circle K was sold to Montreal-based Alimentation Couche-Tard Inc. for $821 million. In January 2004 ConocoPhillips announced that it would sell 1,180 Mobil-branded gasoline stations in two separate deals. The stations also had come to Phillips through Tosco. These divestments not only fit with the program of asset sales, they also were consistent with two other company aims: reducing the number of stations it owned and operated and focusing the U.S. retail operations on three main brands--Phillips 66, Conoco, and 76. The sales also significantly reduced ConocoPhillips's workforce, which dropped from 55,800 employees to around 39,000.
After reporting a net loss of $295 million during the transitional restructuring year of 2002, ConocoPhillips posted 2003 profits of $4.74 billion on revenues of $105.1 billion. Debt was reduced to $17.8 billion by the end of 2003. For 2004 the company set a capital spending budget of $6.9 billion, more than three-quarters of which was earmarked for the exploration and production operations. This was in line with ConocoPhillips's shift in emphasis away from the downstream and toward the upstream.
Principal Competitors: Exxon Mobil Corporation; BP p.l.c.; Royal Dutch/Shell Group; ChevronTexaco Corporation; TOTAL S.A.