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Mini Case: Phillips Petroleum

Mini Case

Phillips Petroleum is an integrated oil and gas company with headquarters in Bartlesville, Oklahoma, where it was founded in 1917. The company engages in petroleum exploration and production worldwide. In addition, it engages in natural gas gathering and processing, as well as petroleum refining and marketing primarily in the United States. The company has three operating groups: Exploration and Production, Gas and Gas Liquids, and Downstream Operations, which encompasses Petroleum Prooducts and Chemicals.

In the mid-1980s, Phillips engaged in a major restructuring following two failed takeover attempts, one led by T. Boone Pickins and the other by Carl Ichan. The restructuring resulted in a $.5 billion plan to exchange a package of cash and debt securities for roughly half the company's shares and to sell $2 billion worth of assets. Phillip's long-term debt increased from $3.4 billion in late 1984 to a peak of $8.6 billion in April 1985.
During 1992, Phillips was able to strengthen its financial structure dramatically. Its subsidiary Phillips Gas Company completed an offering of $345 million Seried A 9.32% cumulative preferred stock. As a result of this action and prior years' debt reductions, the company lowered its long-term debt-to-capital ratio over the past 5 years from 75 percent to 55 percent. In addition, the firm refinanced over a billion dollars of its debt ast reduced rates. A company spokesman said, "Our debt-to-capital ratio is still on the high side, and we'll keep working to bring it down. But the cost of debt is manageable, and we're beyond the point where debt overshadows everything else we do."

Highlights of Phillips's financial condition from 1986 to 1992 are found in the accompanying table. These data reflect the company's financial restructuring following the downsizing and reorganization of Phillips's operations begun in the mid-1980s.
Phillips's managers are currently developing it financial plans for the next five years and want to develop a forecast of its financing requirements. As a first approximation, they have asked you to deveop a model that can be used to make "ballpark" estimates of the firm's financing needs under the proviso that existing relationships found in the firm's financial statements remain the same over the period. Of particular interest is whether Phillips will be able to further reduce its reliance on debt financing. You may assume that Phillips's projected sales (in millions) for 1993 through 1997 are as follows: $13,000; $13,500; $14,000; $14,500; and $15,500.

a. Project net income for 1993 to 1997 using the percent of sales method based on an average of this ratio for 1986 to 1992.

b. Project total assets and current liabilities for 1993 to 1997 using the percent of sales method and your sales projections from part a.

c. Assuming that common equity increases only as a result of the retention of earnings and holding long-term debt and preferred stock equal to its 1992 balances, project Phillip's discretionary financing needs for 1993 to 1997. (Hint: Assume that total assets and current liabilities vary as a percentage of sales as per your answers in part b. In addition, assume that Phillips plans to continue to pay its dividends of $1.12 per share in each of the next five years.)

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Solution Summary

Mini Case

Phillips Petroleum is an integrated oil and gas company with headquarters in Bartlesville, Oklahoma, where it was founded in 1917. The company engages in petroleum exploration and production worldwide. In addition, it engages in natural gas gathering and processing, as well as petroleum refining and marketing primarily in the United States. The company has three operating groups: Exploration and Production, Gas and Gas Liquids, and Downstream Operations, which encompasses Petroleum Prooducts and Chemicals.

In the mid-1980s, Phillips engaged in a major restructuring following two failed takeover attempts, one led by T. Boone Pickins and the other by Carl Ichan. The restructuring resulted in a $.5 billion plan to exchange a package of cash and debt securities for roughly half the company's shares and to sell $2 billion worth of assets. Phillip's long-term debt increased from $3.4 billion in late 1984 to a peak of $8.6 billion in April 1985.
During 1992, Phillips was able to strengthen its financial structure dramatically. Its subsidiary Phillips Gas Company completed an offering of $345 million Seried A 9.32% cumulative preferred stock. As a result of this action and prior years' debt reductions, the company lowered its long-term debt-to-capital ratio over the past 5 years from 75 percent to 55 percent. In addition, the firm refinanced over a billion dollars of its debt ast reduced rates. A company spokesman said, "Our debt-to-capital ratio is still on the high side, and we'll keep working to bring it down. But the cost of debt is manageable, and we're beyond the point where debt overshadows everything else we do."

Highlights of Phillips's financial condition from 1986 to 1992 are found in the accompanying table. These data reflect the company's financial restructuring following the downsizing and reorganization of Phillips's operations begun in the mid-1980s.
Phillips's managers are currently developing it financial plans for the next five years and want to develop a forecast of its financing requirements. As a first approximation, they have asked you to deveop a model that can be used to make "ballpark" estimates of the firm's financing needs under the proviso that existing relationships found in the firm's financial statements remain the same over the period. Of particular interest is whether Phillips will be able to further reduce its reliance on debt financing. You may assume that Phillips's projected sales (in millions) for 1993 through 1997 are as follows: $13,000; $13,500; $14,000; $14,500; and $15,500.

a. Project net income for 1993 to 1997 using the percent of sales method based on an average of this ratio for 1986 to 1992.

b. Project total assets and current liabilities for 1993 to 1997 using the percent of sales method and your sales projections from part a.

c. Assuming that common equity increases only as a result of the retention of earnings and holding long-term debt and preferred stock equal to its 1992 balances, project Phillip's discretionary financing needs for 1993 to 1997. (Hint: Assume that total assets and current liabilities vary as a percentage of sales as per your answers in part b. In addition, assume that Phillips plans to continue to pay its dividends of $1.12 per share in each of the next five years.)

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