NEW YORK -- Royal Dutch/Shell Group, the world's third-largest oil company, has come up with a new U.S. strategy, says Reuters report, citing several industry analysts. As reported last week in CSP Daily News, Royal Dutch/Shell agreed to purchase Pennzoil-Quaker State Co. for $1.8 billion, adding the No. 1 and No. 2 U.S. motor oils to its stable of products.
Once the deal is completed, Pennzoil-Quaker State will follow the path of rival Castrol and give up its independent lubricant marketer status to become a brand of a major global oil company. BP acquired Castrol in July 2000, giving it a major position in lubricants, said business consulting firm Kline & Co. in a separate report.
The acquisition could have Shell accounting for more than 500 million gallons of branded lubricants in the U.S., according to Kline & Co. Three players--Shell/Pennzoil-Quaker State, ChevronTexaco and ExxonMobil--will account for more than 40 percent of the total U.S. branded lubricant sales volume, according to Kline & Co. data.
Some analysts say Shell shifted its focus away from the U.S. in the last decade, Reuters says. In the late 1990s, Shell Oil Co., Royal Dutch/Shell's U.S. affiliate, went through three chief executives in little more than a year, and key departments such as exploration and chemicals began reporting directly to senior managers in Europe. The company then started to cut jobs and sell North American oil fields.
"They have been trying to fix the U.S. business forever. But they didn't really have a focused strategy of what they wanted to be and what they wanted to do," said Fahnestock & Co. analyst Fadel Gheit.
Critical fire fell most heavily on Shell's U.S. refining and marketing business, or the downstream segment of the oil industry. Until recently, Shell ran its U.S. downstream operations through a joint venture with Texaco and the Saudi national oil company. But the business routinely missed out on the profits Exxon Mobil Corp. and others, analysts claim, because of its high costs and bureaucracy. "Bottom line: Shell Oil has been an underperforming asset base for the company for a number of years," said Michael Young, an analyst with Gerard Klauer Mattison & Co.
But by late 2001, Shell had agreed to buy Texaco's share in the downstream business, giving it 8 percent of the total U.S. oil refining capacity and more than 21,000 retail outlets. Shell plans to spend more than $500 million to rebrand thousands of gasoline stations it acquired from Texaco, which pulled out of the Saudi joint venture to get regulatory approval for its merger with Chevron.
Royal Dutch/Shell has also brought in 30-year company veteran Rob Routs to run its U.S. downstream unit. Most industry observers expect it to become a more streamlined and less costly business, Reuters says. "They saw that clearly Exxon Mobil and BP were cleaning their clocks in the U.S.," said Gheit. "Now they are starting to chip away at them."
The acquisition gives Shell the two best-selling motor oils in the U.S., Pennzoil and Quaker State, as well as Jiffy Lube, the world's largest quick oil change franchise. Shell will also get brand names such as Fix-A-Flat tire inflator and RainX wiper blades with the deal.
Shell currently has only 3 percent of the market for automobile motor oil. Since it gives the company a consumer brand name and leading position in U.S. lubricants and auto care products, Gheit believes that the deal will be "good for the ego, good for the pocketbook, good for the image."
It also underscores Shell's determination to make it in the U.S. downstream. "The question was whether they would build or look for an exit strategy," said Howard Weil Labouisse analyst Gene Gillespie. "It appears they are trying to build."
Now Gillespie believes Shell will focus on strengthening its U.S. exploration business, after failing in its bid for independent oil company Barrett Resources last year. "I would expect them to make one or more acquisitions in the U.S. upstream," he told Reuters.
Meanwhile, Shell's purchase of Pennzoil-Quaker State will cost about 1,200 U.S. workers their jobs, adds Reuters. Skinner said Shell will cut the combined workforce of 800 Shell employees and 7,400 Pennzoil staff in the lubricants sector by 15 percent.
Shell Managing Director Paul Skinner said the $1.8 billion deal, announced late on Monday, would catapult Shell to market leadership through the combination of Pennzoil's 36 percent share in passenger car lubricants and its own 20 percent share of the diesel engine oils market. "These are two very strong complementary positions which would give us a market leadership position in the U.S.," he told reporters in a telephone briefing last week.
Pennzoil is the world's largest independent marketer of lubricants, but with only three percent of the global business compared to Shell's nine percent, it is heavily focused in the U.S.
