Moody's Investors Service confirmed the Aa1 long-term and Prime-1 commercial paper ratings of BP Amoco plc and its guaranteed subsidiaries. It also placed under review for possible upgrade the A2 long-term rating of Atlantic Richfield Company (ARCO) and its guaranteed subsidiaries, and the Baa1 and Prime-2 commercial paper ratings of Vastar Resources, Inc. The Prime-1 commercial paper ratings of ARCO and its guaranteed subsidiaries are confirmed. These rating actions follow today's announcement that BP Amoco intends to take over ARCO in a all-equity transaction. Both boards have agreed to the proposed terms of the acquisition, which remains subject to shareholder and regulatory approvals.
Moody's believes that the combination of BP Amoco and ARCO will have meaningful operational and financial benefits as the two entities are largely complementary in their activities, enhancing BP Amoco's market positions and providing scope for significant cost efficiencies. While the $26.8 billion take-over raises integration concerns for the newly-formed BP Amoco, and materially increases debt levels, Moody's views the transaction as a reinforcement of BP Amoco's Aa1 rating.
On the upstream side, the take-over of ARCO will strengthen BP Amoco's operations in North America (BP Amoco is already the largest oil producer in the US), the North Sea, the Caspian region, and South East Asia (above all in Indonesian gas production). Combined proved liquid reserves will total some 12.1 billion barrels, proved natural gas reserves almost 43 trillion cubic feet, while production will exceed 2.6 million barrels of crude and liquids per day and almost 8 billion cubic feet of natural gas. The only substantial operational overlap is in Alaska, where BP Amoco is the largest producer and where it and ARCO jointly operate the massive Prudhoe Bay field, together owning over 70% of the trans-Alaska pipeline. Combining their operations, if regulatory approval is granted, would enable the enlarged group to reduce Alaska's comparatively high production costs.
Downstream, the two companies are a good geographic fit, with BP Amoco's Eastern US bias offsetting the West of the Rockies focus of ARCO. The combined entity will become the leading refiner in the US, and have total global daily throughput (including BP Amoco's refineries in Australia and Singapore) of over 3.1 million barrels. While BP Amoco's marketing operations already extend internationally, ARCO's 1,760 stations in the Western US will complement BP Amoco's 15,700 outlets, predominantly in the East and MidWest.
Financially, the debt protection measures of BP Amoco will be dampened by the transaction in the near term, but Moody's expects (primarily E&P) cost efficiencies, estimated by BP Amoco at $1 billion pre-tax by 2001, and non-core or regulatorily mandated disposals to compensate for this over time. Despite the addition of the more highly geared ARCO, the enlarged BP Amoco remains within its announced leverage parameters.
The impact of the ARCO take-over on Vastar Resource's shareholder and liability structure is as yet unclear. Moody's review of Vastar's Baa1 long-term and Prime-2 commercial paper ratings could have several outcomes ranging from confirmation at their current level in the case where there is no change in its debt support and ownership structure, to an upgrade equivalent to BP Amoco's Aa1 senior unsecured debt rating in the event of assumption or legal guarantees. Vastar Resources is currently 83% owned by ARCO, with operations concentrated in the onshore U.S. and Gulf of Mexico. However, it has always been rated on a standalone basis, with no explicit or implied support from ARCO.
BP Amoco plc, headquartered in London, is the third-largest publicly-held petroleum company in the world. It was formed in December 1998 when British Petroleum PLC merged with Amoco Corporation. Atlantic Richfield Company is a major US integrated petroleum company headquartered in Los Angeles, California. Vastar Resources, Inc. is located in Houston, Texas.
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