Opinions in the investment community about Petro-Lewis Corp., a Denver-based energy production company that has spent $1.5 billion this year buying oil and gas properties, range from caution to wild enthusiasm.
"It's a special kind of animal," says securities analyst Lincoln Werden of Thomson McKinnon Securities in New York.
"It's a lean machine. Their marketing is fantastic," exclaims Douglas J. Kracht, a broker-analyst with Blunt Ellis & Loewi in Milwaukee.
On the other hand, a major financial rating service downgraded a Petro-Lewis debt issue in June to a level just above that of a company in default.
The reason for the disparate views, put simply, is that Petro-Lewis is a trend bucker. With oil prices down and with the expectation that they will remain that way, the industry has been pulling in its horns.
But not Petro-Lewis. Last week it put together its biggest deal ever when it agreed in principle to pay $772 million to Conoco Inc. for interests in 29 producing oil and natural-gas fields. For E. I. duPont de Nemours & Co., the sale was a big step toward reducing the $3.9 billion debt it incurred acquiring Conoco last year.
If it goes through, the Conoco purchase would mark the fourth major acquisition of producing oil and gas properties--totalling $1.5 billion--announced by Petro-Lewis so far this year. In January, Petro-Lewis paid the Hunt family $410 million to acquire producing oil and gas properties from the Hunts' Placid Oil Co. It paid $109 million in May for producing oil and gas properties from Clayton W. Williams Jr. of Midland, Tex. Last month, it reached tentative agreement to pay $174 million to Fluor Corp. of Irvine, Calif., for producing oil and gas properties.
Why does Petro-Lewis do it?
According to Petro-Lewis' chief financial officer, his company is just smarter than all the rest. "The oil industry is an investment business, but it's run by people with no financial training," says Dwight C. Moorhead, 49, vice chairman and a Petro-Lewis founder, who maintains oil companies are run mostly by technicians he calls "oilies."
"The oil and gas industry hasn't done anything intelligently in financial terms. We have," asserts Moorhead.
There are those who say that Petro-Lewis is not so much an oil company as it is a highly leveraged, highly aggressive marketing operation. What Petro-Lewis does is to finance the acquisition of proven and producing oil properties by selling limited partnerships to the investing public. Petro-Lewis Funds Inc. is the general partner, with investors in the limited partnerships putting up a minimum of $2,500 each.
From 1970, when it sold its first limited partnership, through this month Petro-Lewis has raised $1.8 billion from the investing public. The average investment is $8,600.
Petro-Lewis, the general partner, uses the limited partnership holdings as leverage to borrow from a group of participating banks -- led by Security Pacific National Bank -- for further acquisitions. As of March 31, Petro-Lewis had $227 million of long-term debt and $242 million of subordinated debt -- totalling about $7 of debt for every equivalent barrel of oil reserves.
To pay the service cost of this heavy debt load, Petro-Lewis plans to increase its sales of limited partnerships, although Moorhead says the company does not have to do so. "If we stopped selling partnerships tomorrow we could service all the debt we've got," he said.
However, he says the company is trying to avoid even higher levels of indebtedness.
So, for example, the closing date for the Conoco acquisition is not until January, but Petro-Lewis is thinking ahead. "We're gearing up to raise as much as we can by the time the deal closes," says Kathryn J. Chieger, director of financial relations at Petro-Lewis' headquarters here.
Founded in 1968 by Jerome A. Lewis, now the 55-year-old chairman and president, Petro-Lewis rode the crest of the energy crises of the 1970s. In the early years, it offered drilling programs as well as oil income programs.
In oil income programs, an investment manager divides interests in properties where wells already are producing oil and gas. Drilling funds have investors taking part in financing the drilling of wells.
The tax shelter aspects of owning an interest in an oil well are not as attractive as they once were. And with oil prices depressed, wells often are not producing enough oil to pay off the investors. Banks, moreover, have been tightening up on credit they once extended to investors in the aftermath of the collapse of Penn Square and Abilene National Bank, both of which were heavily involved in financing drilling programs.
But to the small investor, oil is still "black gold," as proven by Petro-Lewis' ever-increasing sales of limited partnerships in income programs. For the first eight months of this year, Petro-Lewis raised $300 million from investors, nearly double the sales of a year earlier.
New limited partnerships are being created at the rate of one a month, and recent partnerships have been attracting between $33 million and $87 million a month. And investors are reinvesting their earnings at an annual rate of about $100 million, says the company.
"Historically, we haven't been able to meet demand," says Lewis, a quiet spoken "oily" with a handlebar mustache.
Investment Search Inc., an Annapolis research firm that follows oil and gas funds, says that Petro-Lewis dominates the industry. The firm says that Petro Lewis' current sales are twice those of its nearest competitor, New York-based Damson Oil Corp., and its succcess has spawned a pack of copy-cat income programs.
According to Petro-Lewis' latest offering prospectus, which runs 100-plus pages, the limited partners put up all the money in the program. The general partner, that is, Petro-Lewis, takes 15 percent up front as a management fee from the limited partners' investment. "Thus the general partner essentially has none of its own money at risk in the venture," says a report by Investment Search.
One big selling point of the Petro-Lewis fund is that it offers to buy out limited partners at a fixed rate determined by the management. But the prospectus notes that 20 percent of a new limited partner's investment can be used to pay off partners who want to get out of the program. Moorhead says that redemptions are running about $7 million a month, considerably higher than in the past, but not high enough, he says, to force the company to use the 20 percent feature.
A number of analysts and competitors say that the price paid by Petro-Lewis for the Conoco property seems in line with the depressed oil market. But they say that in the past, Petro-Lewis paid top dollar for properties. Says one analyst with a major brokerage: "Somebody taking 15 percent off the top has less incentive to bargain for property than, say, a company like Mobil."
Petro-Lewis still has not sold large portions of its more expensive oil, so an investor in a limited partnership will get not only the cheaper Conoco oil but the more expensive oil in Petro-Lewis' inventory. And the more expensive the oil in a limited partnership, the lower the return to the investor.
Petro-Lewis is telling analysts that investors will get about 10 percent return on the Conoco properties. One analyst noted that relatively risk-free General Electric bonds earn 13 percent.
But Petro-Lewis and its supporters counter that they expect oil and gas prices to rise, which will mean their investments will be more valuable. Indeed, in its third quarter report to investors Petro-Lewis said: "We believe there is a 75 percent probability that oil prices will rise at the rate of inflation plus one or two percent after showing no significant increase or decrease in 1982."
Asked how he came up with the scenario, Moorhead says: "Right out of the air. I can't give a scientific basis for it. It represents a consensus view in the company."
But others are not so optimistic. In June, Moody's Investors Services Inc. lowered the rating of Petro-Lewis' senior subordinated debentures to B2 from B1. According to Moody's analyst Mark Walsh, the poor rating -- one step above a company in default, he says -- is a result of its high debt payments and the low price of oil.
Answers Moorhead: "They don't understand us very well. We're high leverage but we are essentially one of a kind. We've only been big enough to penetrate their consciousness in the past three or four years."
On Wall Street, meanwhile, Petro-Lewis' booming sales have not been reflected in the price of the company's stock, which is traded on the American Stock Exchange. Last week after the Conoco deal was announced, the stock remained at about $10 a share, off some 70 percent from its high of the year.
Ironically, some of the Street's major brokerages have been selling Petro-Lewis's income program in recent years -- and collecting handsome commissions for their effort.
But while investments in limited partnerships seem to make sense only if Petro-Lewis is correct in its prediction of higher oil prices, the company's sagging stock reflects the conventional wisdom that oil prices will remain static for a long time.