Though dwarfed by the behemoth that would result from the proposed merger of Exxon Corp. and Mobil Corp., Baltimore-based Crown Central Petroleum Corp. says it intends to stay independent.
"We're a niche player in this business, and have been a niche player since 1930. And that's served us well," said Joseph M. Coale, director of corporate communications for the independent refiner. "We think there's a place in the market for medium-sized niche players and we intend to maintain that position for the foreseeable future."
Exxon agreed yesterday to buy Mobil for a record $79.3 billion, a match that would create the world's largest company. Analysts say the merger figures to raise the stakes for oil companies, which are struggling as oil has fallen to its lowest price in a quarter-century. Indeed, analysts and other industry experts expect the Exxon-Mobil deal to kick off another round of mergers in a business that's already seen deals such as the pending $60 billion buyout of Amoco Corp. by British Petroleum Corp.
Mergers among commodity producers of all types "will be the hot scene for 1999," said Kathleen Camilli, chief economist for Tucker Anthony in New York.
One question is whether that push to consolidate will touch independent refiners such as Crown Central or Stamford, Conn.-based Tosco Corp., which is often viewed as a peer of Crown's despite its considerably larger size. Independent refiners tend to be smaller operators that lack the global reach and economies of scale of the big players such as Exxon, Mobil or BP. Also, the bigger companies tend to be "vertically integrated," meaning they explore and drill for oil as well as refine it and often have their own shipping fleets.
Tom Burnett, an analyst with Merger Insight, said yesterday that any conjecture about the independents was premature. He believes there could be competing bids for Mobil and -- even if there aren't -- that there will be other marriages among the oil industry's biggest players. Only after that dust has settled will the fates of the Crowns and Toscos be decided.
"I can't talk about the Crowns -- they're just so far down there," Burnett said. "There's going to be a lot of the big guys making deals. We haven't finished talking about them yet."
Even so, other analysts predict that the independents will get squeezed. For instance, Crown last year had sales of about $1.6 billion and Tosco $13.3 billion, while Exxon and Mobil had combined sales of $203 billion. Gasoline is selling at its lowest inflation-adjusted price since analysts started tracking the figure.
"Certainly it's going to make it a lot harder," said Philip L. Dodge, an analyst with Southeast Research Partners. "The refining and marketing sector has had a very poor 1998 despite low raw-material costs, and [profit] margins have really declined to the low end of the range."
A big piece of the problem is classic Economics 101: higher supplies and lower demand. Where about two-thirds of the world's oil once came from the Middle East, where the OPEC cartel held sway, now oil is coming out of the Pacific Rim, Russia and even from deep-sea rigs where the crude was once inaccessible. In addition to the bigger supply of oil, there's more refining capacity than before. But the real kicker is that, at a time when there's such a huge supply, economic meltdowns in Asia, Latin America and Russia have depressed global demand for oil and gasoline.
Indeed, in inflation-adjusted dollars, oil has not been this cheap in 26 years, according to one report.
Independents such as Crown and Tosco once were able to smooth out the ebbs and flows of gasoline prices thanks to their chains of convenience stores. But even that's gotten much more competitive: The major industry players have opened or franchised stores and now "category killer" retailers such as Wal-Mart Stores Inc. are experimenting with the sale of gasoline just as they added milk and eggs to their traditional offerings of clothes, toys, tools and film.
The stores "helped the first guy who did it," said Southeast Research's Dodge. "Now, with all the players in, it tends to be a zero-sum game."
And all this uncertainty has hurt the stock prices of the publicly traded independents. Tosco even adopted a "poison pill" last month to guard against hostile takeovers. Tosco's stock closed yesterday at $25.375, down 75 cents a share and well down from its 52-week high of $38.25. Crown closed yesterday at $9.0625, down 12.5 cents a share, and far below its 52-week high of $22.
Crown reported a 72.5 percent drop in earnings and a 25 percent decline in revenue for the third quarter that ended Sept. 30, although it was the first profitable quarter the company has reported this year. The company said it was pleased with the results considering the tough market, and remains undeterred longer-term.
"For the time being, we certainly want to maintain our strategy," said Crown Central's Coale. "But with the wave of industry changes happening so quickly, it's hard to predict" just how the industry will shake out.
Pub Date: 12/02/98