Conoco and Phillips – a merger of equals

The board of directors of Conoco and Phillips Petroleum have signed a definitive merger agreement. The new company, which will be named ConocoPhillips, will be the third-largest integrated US energy company based on market capitalisation and oil and gas reserves and production. Worldwide, it will be the sixth-largest energy company based on hydrocarbon reserves and the fifth-largest global refiner.

Under the terms of the agreement, Phillips shareholders will receive one share of new ConocoPhillips common stock for each share of Phillips they own and Conoco shareholders will receive 0.4677 shares of new ConocoPhillips common stock for each share of Conoco they own.

Based on the closing market prices for the shares of both companies on Friday, November 16th, 2001, and their debt levels as of September 30th, 2001, the new company would have an enterprise value of $53.5 billion ($34.9 billion of equity; $18.6 billion of debt and preferred securities).

At inception, Phillips shareholders will own about 56.6% and Conoco shareholders will own about 43.4% of the new company. The transaction is structured to be tax-free to the shareholders of each company.

The transaction is expected to be accretive to earnings and cash flow per share of each company after achieving anticipated annual cost savings of approximately $750 million. The companies expect to achieve the annual rate of synergies within the first year after closing.

Upon completion of the merger, Archie W. Dunham, Conoco chairman and chief executive officer, will serve as chairman of ConocoPhillips and will delay his scheduled retirement to 2004. James J. Mulva, Phillips chairman and chief executive officer, will be president and chief executive officer of the combined company, and also become chairman upon Mr. Dunham’s retirement. The ConocoPhillips board of directors will consist of 16 directors, eight designated by each of the two companies, including Mr. Dunham and Mr. Mulva. ConocoPhillips will be headquartered in Houston, with a significant and continuing presence in Bartlesville and Oklahoma.

The combined company will have pro forma year 2000 hydrocarbon reserves of 8.7 billion barrels of oil equivalent (BOE) and daily production of 1.7 million BOE, based on the companies’ estimates for 2001 year-end production.

ConocoPhillips will have numerous legacy asset positions, including those in Alaska, Canada, the Lower 48, the North Sea, Venezuela, China, the Timor Sea, Indonesia, Vietnam, the Middle East, Russia and the Caspian area.

In the refining and marketing segment, ConocoPhillips will operate or have equity interests in 19 refineries in the United States, the UK, Ireland, Germany, the Czech Republic and Malaysia, with a refining capacity of 2.6 million barrels a day. It will also have a marketing presence in the US.

In addition, ConocoPhillips will continue Phillips’ equity participation in the natural gas gathering and processing joint venture, Duke Energy Field Service, and in the chemicals and plastics joint venture, Chevron Phillips Chemicals.

The companies expect the combined enterprise to achieve annual cost savings of at least $750 million within the first full year after closing. These savings will result from more efficient exploration, production and downstream activities, and the elimination of duplicate corporate and administrative positions, programs and operating offices.

A transition team led by Philip L. Frederickson, Conoco’s Senior Vice President, Corporate Strategy and Business Development, and John E. Lowe, Phillips’ Senior Vice President, Corporate Strategy and Development, will begin work immediately to ensure integration occurs quickly and smoothly.

It is anticipated that upon closing of the transaction, the ConocoPhillips board of directors will adopt a competitive dividend policy. Currently, Conoco pays an annual dividend of $0.76 per share and Phillips pays an annual dividend of $1.44 per share.

The merger is conditioned upon, among other things, the approvals of the shareholders of each company and customary regulatory approvals. The transaction is expected to be completed in the second half of 2002.

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