When Mobil Oil bought Marcor, the holding company that owned Montgomery-Ward, in September 1974, a hue and cry began that still has not died down.
The oil industry had been reaping huge profits, courtesy of the Organization of Petroleum Exporting Countries price increases earlier that year, and had been defending its right to keep that extra money on the grounds it needed that cash to explore for more oil.
But instead, the second largest company was squandering some of those profits to buy a mail-order and department store chain, leaving the U.S. in the cartel's clutches, Big Oil's critics charged.
The critics were already having a field day with such arguments when news hit that Gulf Oil was considering buying the Ringling Bros., Barnum & Bailey circus. The disparity between the need for more oil and the frivolity of the circus instilled such doubt that oil companies could be trusted to use their earnings "wisely" that it has become a permanent part of the oil profits debate.
President Carter intends to begin to decontrol U.S. crude oil prices next month, an action that will increase the industry's profits, and once again the skeptics want assurances how those profits will be used.
"Why predudge the issue without waiting to see what the companies would do with the money?" asks Alfred De Crane, a Texaco executive vice president. "Why presume fault?"
Perhaps becuase of announcements such as the one made last week by Exxon that it wants to acquire Reliance Electric Co., which had $966 million in sales last year, in order to manufacture a new energy-saving device for motors. Exxon obviously could finance a new company if it chose, and antitrust experts are asking why the oil giant is seeking instead to buy out a potential competitor.
But Marcor and the fairly long list of other acquisitions not withstanding-the circus was not bought and Gulf officials say they never came close to considering it seriously-the record of the last 10 years ought to give oil critics some assurance if what they want is to have oil profits reinvested in the search for more oil.
The performance of the 26 largest oil companies during the decade indicates that about 40 percent of the higher profits will go to stockholders as dividends, and that capital investments will continue to be about twice the level of profits.
On the other hand, it does not necessarily follow, as many industry executives argue, that no new taxes should be levied on those higher profits just because they mostly may be reinvested.
How much of the profits should be taxed away is a complex question involving competing goals of energy production and social equity, political judgments of whether a tax imposed now might not lower the chances that a bigger bite will be taken in the future, and some outright guesses about how much oil and gas might not be found because no one looked.
The real problem from the public's point of view is that not enough oil has been found, even with much higher profits, to ensure that OPEC cannot cause shortages. That is what the fuss is really all about. The difficulty is that no incentive or restriction on acquisitions is likely to break the cartel.
A detailed look at the 26 companies-all of which had sales of $1 billion or more last year-over the decade, discloses the following:
Their after-tax profits totaled $94 billion.
Capital investments-even with a substantial understatement due to counting some investments as a current expense-added up to $175 billion.
The companies had a total of $260 billion available to spend for all purposes-the sum of the $94 billion in after-tax profits, a $20 billion increase in long-term debt, and $146 billion from other sources, such as depreciation (the annual diminution in value of earlier capital investments, which is a cost reducing current profits but which does not require a current cash outlay), deferred income taxes and sale of property.
Out of those funds, the companies made their capital investments and paid $39 billion in dividends.
Most of the companies' acquisitions were in the energy field-oil and gas, coal or uranium-or related activities, such as chemicals, but with a few major exceptions, including Mobil's takeover of Marcor and Container Corp. of America, and Atlantic Richfield's purchase of Anaconda Corp.
A separate study by the Treasury Department covering essentially all large publicly owned corporations in the oil and gas industry found that from 1971 to 1977 the firms spend $8.1 billion in cash on all acquisitions.
The large integrated oil companies-those with refining and marketing operations as well as oil and gas production-spend an average of only about 4 percent of their total cash available each year buying other companies. But that included purchases of oil and gas producers as well as the small number of companies in other fields, such as Ashland Oil buying the Levingston Shipbuilding Co. of Orange, Texas, for $30 million in 1975 and Atlantic Richfield spending $700 million for Anaconda.
The study did not cover any acquisitions, including a portion of the Marcor deal, that involved an exchange of securities instead of cash.
This record of the last 10 years suggests that decontrol of domestic prices, which will mean higher incomes for the companies with or without added taxes, likely will lead to higher levels of investments in energy, primarily in oil and gas.
For its part, the industry is fond of pointing out that it has been investing about twice its income in recent years. Last year, for example, the 26 companies earned $13.6 billion and invested $26.4 billion. That's hardly surprising, though, given that enormous flow of cash from depreciation and deferred income taxes.
Nor is it particularly surprising that oil executives such as Pennzoil Chairman Hugh Liedtke are willing to promise they will use any extra income for investment. After all, for the most part that's what they've been doing right along.
Said Liedtke at his company's annual meeting:
"If, as the months go by, our available cash flow is higher than anticipated, we will increase our oil and we will cut them back. Any additional cash flow we receive from the coming oil decontrol and 'windfall exploration and development. This statement holds regardless of whether there is or is not a plowback provision."
Each company views its own situation differently, of course, and some, like Pennzoil, have tapped their total available resources-including borrowing-to a much greater extent than others.
Gulf Oil Chairman Jerry McAfee says, for instance, "What we've done is to spend all that we could legitimately lay our hands on. We have drawn down our cash balance. . . We have reached the point that cash availability is the governing criteria."
However, Gulf has a relatively modest long-term debt of $1.5 billion that is equal to only 19 percent of its stockholders' equity. This debt-equity ratio is one key criterion for judging a company's credit-worthiness.
"We have very modestly increased our long-term borrowing," McAfee agrees, "so there we have some additional muscle to flex if the circumstances permit"-that is, when the right investment opportunity comes along.
Pennzoil, on the other hand, already has $918 million in long-term debt, substantially more than its $664 million in stockholders' equity.
Some of the companies, such as Standard Oil Co. (Indiana), the sixth biggest, already have borrowed up to the limits their managements believe consistent with maintaining a top credit rating.
John Swearingen, chairman of Standard of Indiana, declares, "We judge our (investment) programs and our expenditures by the amount money we have available to spend. There are limits to what kind of money we can borrow, and there are practical limits to the sale of equity (new stock)."
Adds Swearingen, "Our own view is that the 25 percent long-term debt in our capital picture. . . is about the maximum we can carry and still maintain a triple-A rating." Such a designation from bond-rating houses is necessary if his company is to be able to borrow large amounts of money, he explained.
"Our capital and exploration expenditure budget this year is set at $2.9 billion," Swearingen continues. "The last time we went to the market to borrow . . . a year and a half ago. . . we borrowed $400 million at one crack." To borrow like that, he says, "We have to keep our debt-equity ratio within the bounds of what we have."
Other corporations within the 26 have much higher debt-equity ratios. Atlantic Richfield's long-term debt is about half as large as its stockholders' equity, a 50 percent ratio. Four others out of the group have about the same.
Some of the smaller companies, like Pennzoil have far higher debt loads. The debt of Standard Oil (Ohio) is almost twice as great as its stockholders equity, primarily because of its large ownership share in the Trans-Alaska Pipeline. Much of its pipeline debt is guaranteed by BP, the British oil giant, which now owns a controlling interest in Sohio.
Texaco's De Crane, like officials from every company, says Texaco has exploration and development projects it would launch if it had more money.
But, also like other big oil companies, Texaco would not channel any increase in profits exclusively into the search for more oil and gas. Exxon, Texaco and Standard Oil Co. (California)-to say nothing of Mobil and Atlantic Richfield-are chemical companies, energy companies producing coal and uranium as well as oil and gas, transportation companies and mineral-extraction companies, too.
Gulf's McAfee describes his company's investment program this way:
"We have mounted a very aggressive program, concentrating on the business we know best, oil and gas and related activities. . . When you get into something besides strictly oil and gas, we want to bring to the party something besides money. The things that we now regard as related to our business are chemicals and coal and shale and uranium and shipping, and other minerals, all of which really branch out from what is our core business."
In 1978, Gulf spent $1.3 billion on exploration and development of oil and gas production and about $400 million on other petroleum investments such as refineries. It spent about another $400 million on other capital investments.
Exxon's total capital and exploration investments hit $5.3 billion, with about $800 million going for things other than oil and gas.
Even with all their diversification out of strictly oil and gas, these 26 large corporations except for Tenneco, which makes no bones about being a true conglomerate-are still primarily integrated oil companies, and they are making most of their investment accordingly.
In fact, it even can be asked whether the oil industry has had so much cash available that its attempts to step up the search for oil and gas since 1973 have generated as much inflation in drilling and production costs as in additions to oil and gas reserves. CAPTION:
Graph 1, no caption; Graph 2, Big Oil's 10-Year Record, By Alice Kresse - The Washington Post