NEW YORK — Phillips Petroleum Corp. disclosed Friday that as part of its $3.5-billion recapitalization program it plans to reduce overall expenses by 10% to 15% in the next three years by such steps as suspending pay increases this year for most of its 28,400 employees.
In a proxy statement mailed to shareholders in advance of their scheduled Feb. 22 vote on the vast restructuring, Phillips disclosed a number of other areas in which its spending plans have been recast.
The recapitalization, the company said, will depress net earnings for at least the next two years to below 1984's profit of $810 million.
Spending on oil and gas exploration and on other capital items in 1985 and the next two years will exceed the $1.4 billion spent in 1984, the company said, but will be less than Phillips had planned before it decided to refinance.
The company's disclosure, filed late Thursday with the Securities and Exchange Commission and released to the public Friday, also said oil and gas reserves could decline at an annual average rate of 5% to 10% from 1985 to 1987.
May Hamper Efforts
That revelation could serve to reinforce the impression among some Wall Street analysts that the recapitalization will hamper Phillips's efforts to maintain its reserves of oil and gas. The partial reason is that the company needs to raise $2 billion this year, after taxes, by selling assets to counter its difficulty in arranging new debt because of the heavy borrowing needed for the plan.
Phillips designed the recapitalization as part of its settlement of a takeover bid mounted by T. Boone Pickens, the Texas oilman who has made a practice of forcing large oil companies into mergers. Pickens ended his month-old assault on Phillips last Dec. 23 when he and his partners agreed to sell their 8.9 million shares for $53 each, or almost $472 million. The deal gives the Pickens group an estimated profit of $89 million.
In the settlement, Pickens agreed to vote his shares in support of the plan, which is ostensibly designed to prop up the company's share price at $53.
However, the Phillips statement also disclosed that, as late as Jan. 7, Pickens, discontented with the poor reception that the recapitalization plan received on Wall Street, was proposing a leveraged buy-out to the Phillips board at the $53 price.
At the time, Phillips shares had slid to about $44.50 from the $55 price reached just before Pickens withdrew his bid. In a meeting Jan. 14, the board rejected the proposal.
Phillips' stock closed Friday on the New York Stock Exchange at $47.75, down 25 cents a share.
Big Underwriting Fees
The settlement plan was assembled by Morgan Stanley & Co. and First Boston Corp., the company's investment bankers. Morgan Stanley has already been paid $6 million and will receive another $14 million if shareholders approve the proposal. First Boston has received $4 million and stands to be paid another $11 million.
Both firms also are in line to earn further underwriting fees if they perform such services in connection with selling Phillips stock and debt under the recapitalization plan.
As previously disclosed, Phillips is seeking shareholder approval to reduce its outstanding common shares to about 100 million from 154.6 million by converting 38% of the outstanding stock to debt securities worth $3.5 billion.
Each holder of a Phillips share would get debt securities valued at $22.80, and a new common share corresponding to 62% of the value of an old share.
Phillips also plans to sell to a newly formed Employee Stock Ownership Plan a retirement plan that can buy the company's shares--about 24 million freshly issued shares. The transaction will probably be financed with part of the proceeds of $1.5 billion in privately placed debt here and overseas.
The company will also buy up $1 billion worth of its shares on the open market at prices of up to $50.
The transactions would give the new ESOP and existing employee stock plans between 33.5% and 42% of the company, depending on how much stock the ESOP actually acquires, compared to the 8.9% currently in the hands of employee incentive funds.
The point of placing such a large block under control of the employee plans' is to create an obstacle to takeovers such as the one Pickens contemplated. During the Pickens bid, Phillips workers expressed solid support for management.
Still, the workers will not get the stock for free. Phillips said its costs in issuing shares to the ESOP will be offset by eliminating planned wage and salary increases in 1985 for workers eligible to join the ESOP.
Whether the company can take that step unilaterally may be subject to dispute. George Surles, business representative of Local 351 of the Operating Engineers union, which represents 1,100 employees of Phillips's refinery in Borger, Tex., said: "The reaction here is that if the employees can get something better, they'll forgo the wage increase." In any event, the matter would have to be put to a union vote, he said.
Financial projections incorporated in the proxy statement anticipate that Phillips' net income will decline to $713 million in 1985 and $675 million the next year before rising to $859 million in 1987.
The drain on earnings is expected to come from a sharp increase in interest expenses associated with the recapitalization, to $778 million this year from $314 million last year.
Long-term debt would rise by $4.73 billion this year if the plan is approved, making Phillips the most debt-laden major oil company in the United States.