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British Seek Full Ownership of Standard Oil

March 27, 1987|MICHAEL A. HILTZIK | Times Staff Writer

NEW YORK — British Petroleum, apparently confident that OPEC has regained control of world oil prices, Thursday offered $7.4 billion for the 45% of Standard Oil Co. of Ohio it does not already own.

Oil industry observers treated the bid as a clear signal that BP, the world's third-largest oil producer, expects prices to stabilize at roughly $18 a barrel or higher, a level at which its offer for Standard Oil appears to be financially prudent. They said it demonstrates also a growing belief in the oil business that members of the Organization of Petroleum Exporting Countries, under pressure from Saudi Arabia, are finally abiding by an accord designed to prevent a new price collapse.

The OPEC nations agreed in December on a system of production quotas meant to fix the price of oil at about $18 a barrel--roughly $4 higher than the average price last year. So far, the goal appears to have been met.

"OPEC has demonstrated that it is back in command," said Sanford L. Margoshes, oil industry analyst for the investment firm of Shearson Lehman Bros. in New York. "We've seen the low for oil prices, and they're likely to go higher."

The purchase, at $70 a share, will solidify BP's position as the world's third-biggest producer, after Royal Dutch-Shell and Exxon. Standard Oil is the ninth largest U.S. oil producer, ranked by assets.

BP said few layoffs are contemplated as a result of the merger and that the U.S. company's headquarters will remain in Cleveland, where Standard Oil was founded in 1870 as part of John D. Rockefeller's oil trust. Other parts of Rockefeller's trust were the companies now known as Chevron, Amoco, Mobil and Exxon.

Offer Starts April 1

BP, founded in 1909 to explore for oil in Iran, is 31.6% owned by the British government, which has announced plans to sell its stake to the public. BP's offer for Standard, which is not conditioned on any minimum number of shares being tendered, will commence April 1. It will be reviewed first by a committee of Standard's non-management directors, with the advice of the investment firm of First Boston.

Some industry analysts had regarded the offer as inevitable, given BP's controlling 55% stake of Standard. Still, many said BP's move came unexpectedly soon.

"Nobody sits around with 55% of a company's stock and just waits for the dividend checks to come in," said Andrew Gray III, oil analyst for the Pershing Division of Donaldson, Lufkin & Jenrette.

BP's dividends from its Standard Oil stock came to about $361 million last year. A consolidation of the two companies would give BP the use of Standard's cash flow, which was $1.8 billion in 1986, a notably poor year, but $3.5 billion in the banner year of 1985.

'Sweeter' Bid Hoped For

The price of Standard Oil shares soared to $71.125, a gain of $6.25, in trading Thursday on the New York Stock Exchange, where the stock was the second most heavily traded. That indicates that investors expect BP to slightly "sweeten" its bid from $70, perhaps to around $75, in order to forestall lawsuits from shareholders asserting that the offer is too low. Similar lawsuits hampered Royal Dutch's 1984 bid for the 30% of Houston-based Shell Oil it did not own; the company ultimately had to raise its offer to $60 per share from the original $55.

British Petroleum executives tried Thursday to throw cold water on any expectation of a "sweetener."

"We don't see this as a progressive bidding game," said David A.G. Simon, a managing director and the chief financial officer of the company. He said BP and its financial advisers at the investment banking firm of Goldman, Sachs & Co. consider the offer "fully valued."

Geoffrey Boisi, head of mergers and acquisitions at Goldman, Sachs, said the BP offer exceeds the prices of the oil-industry takeovers of the early 1980s in several measures, including its ratio to the value of Standard's reserves as computed by John S. Herold Co., a widely used oil-company evaluation firm. BP's offer is 56% higher than the Herold valuation, he said, while most oil takeovers have come at discounts to the targets' Herold values.

BP executives said the merger will be financially prudent even if oil prices dip slightly in the future. "As a result of management changes made in 1986 and the subsequent operations of Standard, BP feels confident that Standard can operate successfully, even in a lower oil price environment," BP Chairman Sir Peter Walters said in a statement issued from London.

$10 Oil Called Unlikely

"Most analysts see $15 to $20 per barrel as the range in which oil prices are going to be," Simon added, speaking in New York. Because supply and demand lose their equilibrium at price extremes, he said, "we don't believe a $10-a-barrel oil world is able to be maintained, just as we don't see a $40 oil world being able to be maintained."

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