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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 Products 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 Icahn. The restructuring resulted in a

$4.5

billion plan to exchange a package of cash and debt securities for roughly half the? company’s shares and to sell

$2.0

billion worth of assets.? Phillips’ 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 of Series 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

55percent.

In? addition, the firm refinanced over a billion dollars of its debt at 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’ financial condition from 1986 to 1992 are found in the accompanying? table:

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. These data reflect the? company’s financial restructuring following the downsizing and reorganization of? Phillips’ operations begun in the?mid-1980s.

?Phillips’ managers are currently developing its financial plans for the next 5 years and want to develop a forecast of its financing requirements. As a first? approximation, they have asked you to develop 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’ projected sales? (in millions) for 1993 through 1997 are as? follows: