Occidental Petroleum Corp. and Diamond Shamrock Corp. said Friday that they may merge to
form the nation's ninth-largest oil company, with Los Angeles-based Occidental emerging as the surviving firm.
The two energy companies said in a terse announcement that their respective boards of directors will meet Monday to consider "a possible business combination" and that an announcement would be made following the meetings.
Wall Street sources said the firms were discussing a deal that would involve an exchange of stock without any cash changing hands. At Friday's closing price of $21 a share on the New York Stock Exchange, Dallas-based Diamond Shamrock had a market value of $2.65 billion.
Shares Actively Traded
Trading in the shares of both companies was held up for several hours Friday morning at the request of the firms. When trading opened, shares of the two companies were among the most actively traded of the day. Diamond Shamrock was up $3.25 to close at $21, while Occidental fell $1.75 to $25 a share.
One Wall Street source suggested that Occidental Chairman Armand Hammer would remain as chief executive of the surviving firm, while Diamond Shamrock Chairman and Chief Executive William Bricker would become a vice chairman of Occidental.
Analysts speculated that Bricker, 52, may hope to one day succeed the 86-year-old Hammer.
One source said the two companies first began informal discussions about a merger in mid-1983, about the time Ray R. Irani joined Occidental as head of its chemical subsidiary.
Irani, who became Occidental's president in August, is a former director of research at Diamond Shamrock, and one source said he has been conducting most of the negotiations for Occidental.
The source said Hammer also has a close social relationship with Italian investor Vittorio DeNora, a key stockholder of Diamond Shamrock, and that they have often discussed combining the two firms.
When rumors first surfaced about merger talks last spring, Occidental sources said the negotiations had never been serious and had broken off. The continued shakeout in the oil business, combined with worries of unfriendly takeovers, apparently led Occidental and Diamond Shamrock to resume their efforts to reach a deal, analysts said.
If the companies do merge, Occidental will probably put Diamond Shamrock's refining and marketing operations up for sale, analysts said. Diamond Shamrock operates two oil refineries in Texas and sells gasoline through 1,900 service stations, primarily located in the Southwest, the Rocky Mountain states and along the Eastern Seaboard.
Occidental has historically avoided the refining and marketing side of the oil business, choosing instead to concentrate on exploration and production while diversifying into chemicals, coal and agricultural products. After Occidental acquired Cities Service Co. in 1982 for $4 billion, it sold Cities' network of refineries and service stations for $962 million.
"My gut feeling is that if Oxy acquires Diamond Shamrock, the refining and marketing operations are up for sale," said Andrew Gray III, an oil industry analyst with the Wall Street firm of Pershing & Co.
However, he noted that Occidental could have trouble selling the properties because of the continued surplus of oil refining capacity in the United States and the general trend toward fewer gasoline service stations.
News of the possible merger came as a surprise to industry experts, who had thought Occidental was too busy restructuring its debt-laden balance sheet through the sale of assets to think up a new business deal.
Since the Cities Service acquisition, Occidental has sold a number of properties, repurchased millions of shares of preferred and common stock and issued more than $1 billion in new convertible preferred stock. The company still has about $4.5 billion in debt, making it one of the most highly leveraged oil companies in the industry.
Yet Occidental acquired oil reserves at the bargain price of $3.86 a barrel in the Cities Service deal, one of the lowest acquisition costs in the recent spate of oil industry mergers.
In an interview Thursday with the Associated Press, Hammer gave no hint of the pending deal with Diamond Shamrock but did say that "it is cheaper to buy new reserves on Wall Street than to discover them yourself."
John S. Herold Inc., a Greenwich, Conn., firm specializing in oil company analysis, said Occidental spent an average of $20.13 a barrel from 1978 to 1983 for the oil it discovered. When the Cities Service acquisition is added to its reserves, the average falls to $7.21, Herold analyst Charles Andrew said.
"Nearly 80% of all the reserves they added in those years came from Cities Service," Andrew said.
After several lean years, Occidental had excellent luck finding oil in 1984 with the discovery of a deposit estimated at more than 1 billion barrels in northeast Colombia, near the Venezuelan border.
Diamond Shamrock has been less successful, spending an average of $15.81 a barrel during the 1978-83 period, a figure that includes the acquisition of the oil and gas properties of San Francisco-based Natomas Co.
Diamond Shamrock posted a loss of $56.2 million in 1983 after writing off its $194.3-million share of the Mukluk well in Alaska. Diamond Shamrock and its partners lost $1.6 billion on the project.