The way Phillips Petroleum Co. is rebuilding after repelling back-to-back takeover attempts may provide a blueprint for what major oil companies will look like for years to come, according to industry analysts and executives.
They say the new breed of oil company, as exemplified by Phillips, will rely much more heavily on debt financing than has been traditional in the industry. It also will concentrate on improving short-term stock performance and will choose energy exploration prospects and other investments much more carefully than in the past, in an effort to keep costs down.
This fundamental change in the industry's structure could even result in virtual extinction of the big integrated oil company that does everything from finding oil to pumping gasoline, according to one school of thought.
Instead, this theory goes, oil companies would specialize in oil and gas production, or refining and marketing, but not in all these operations.
"Phillips is part of the industry trend of facing up to the '80s," said Alan Edgar, an energy industry analyst at Schneider Bernet and Hickman in Dallas. "I think to some extent this will be a model voluntary restructuring for the industry."
But analysts also warn that this trend has its negative side. They fear that oil companies will become so obsessed with improving short-term stock performance that they will neglect the long-term investments needed for economic survival -- particularly spending for petroleum exploration, thus raising the risk of energy shortages.
"It is a strong orientation on short-term performance and rewards at the peril of dramatically reducing future benefits," said Eugene Nowak, an oil industry analyst at Dean Witter.
"If it continues, I think there are very dire consequences for the long-term energy supplies of the United States, and perhaps [the trend could bring] on an energy crisis sooner, rather than later," he said.
Phillips' restructuring comes in the wake of successive assaults on the company by investor groups led by Mesa Petroleum Co. Chairman T. Boone Pickens Jr. and New York financier Carl Icahn. To dodge them, and any future raiders, Phillips is buying back about half of its stock with a package of debt securities.
The transaction will add $4.5 billion to Phillips' debt, resulting in total debt of $6.4 billion, which is equivalent to about 75 percent of its total capitalization. It's a monstrous debt-equity ratio by any standards, and triple the debt-equity ratio held by Phillips previously.
Phillips has committed itself to working down that pile of debt over the next several years. First, it plans to sell $2 billion in assets, then it will redirect some of its huge $2 billion-a-year cash flow toward retiring debt rather than toward exploration investment and other activities. The company hopes to have its debt-equity ratio down to about 60 percent by 1987, and close to 50 percent by the end of the decade.
At 50 percent, Phillips' debt-to-equity balance still will be unusually high for the oil industry. But there seems to be a growing perception in the oil patch that major oil companies have been remarkably underleveraged for years -- debt ratios usually have run in the 16 to 18 percent range -- and haven't taken advantage of their huge cash flow to make use of greater debt.
"The 75 percent doesn't bother Phillips because we see how we can get it down in a hurry," Phillips Chairman William C. Douce said in an interview last week. "We currently have cash flow of over $2 billion a year, and you can pay off a lot of debt with that."
Douce himself confesses that he is a "born-again debtor." Just a few months ago, his company was apologizing to shareholders for running its debt-equity ratio as high as 35 percent after its $2 billion acquisition of Aminoil, the oil and gas division of R. J. Reynolds Industries Inc.
Douce now says he sees nothing wrong with a debt-equity ratio of 50 percent. "We can handle 40 or 50 percent as a way of life," he said.
And he's not alone in the oil industry.
Iconoclastic Occidental Petroleum Corp. has traditionally had a high debt-equity ratio that now looks downright trendy, Chevron Corp. still is carrying a huge debt load as a result of its $13.2 billion acquisition of Gulf Corp. last year. And other oil companies have become a little more adventurous about their debt-equity ratios in recent months.
Phillips believes that by using debt to buy back its stock, it is buoying its stock price -- an increasing concern in the oil industry in the wake of the raids on Phillips and other companies by the likes of Pickens and Icahn.
Pickens, in particular, has struck under the banner of increasing shareholder values. He complained that the price of stock at Phillips and at his previous target, Gulf, did not nearly reflect the high theoretical value of the companies' assets.
To head off Pickens and other critics, oil companies have begun taking steps to push stock prices higher and give shareholders a bit more for their investment. Exxon Corp. has quietly been repurchasing its own shares on the open market for some time now, bolstering the stock price. Mobil Corp. has begun an aggressive self-examination in an attempt to determine how the company's assets could be better deployed to maximize shareholder values.
Experts say this pro-shareholder fever is likely to spread quickly through the oil industry. "I think there will be a tendency to increase the equity holding of the shareholder, as we have done," Douce said.
One increasingly common industry ploy to strengthen stock values has been a stringent reevaluation of expensive oil-drilling programs -- often resulting in a retreat from more expensive high-risk petroleum-exploration programs, under the rationale that the money can be spent better elsewhere.
To reduce its debts and keep its stock price up, Phillips is tightening its exploration budget and all other corporate operating expenses.
Douce said that, although the company's exploration spending in upcoming years will stay even with the 1984 level, it is unlikely to rise much above that for a while.
That's not to say that the company will shy away from needed investments. "We're going to find that we can't dance with all the girls, but we're still going to be out on the dance floor dancing," Douce said.
"We'll be more critically examining the return that an investment will bring us. . . . We won't go into some of those riskier, more expensive areas that we might have gone into before," he said.
Analysts and many oil industry executives worry, however, that this new devotion to the short-term interests of shareholders could cause companies to lose focus on longer-term plans while they try to mollify stockholders and raiders. The raiders "want something up front," Nowak said. "Well, the only way to do that is to partially mortgage your future."
That future, experts worry, lies in some of the more daring exploration efforts, without which the industry will not find nearly enough oil in coming years to replace what is already coming out of the ground. A cutback in risky long-term investments could stunt development of some of these projects.
"We're looking at, in aggregate, a reduced amount of exploration activity in the United States," Nowak warned.
Should oil companies take the notion of maximizing short-term return on investment a step further, the result could be a profound revolution: the death of the integrated oil company.
Analysts say that as large oil companies try to increase their financial efficiency, they may begin to shed operations that are less profitable and to retreat into more lucrative areas of the industry. For most of the major oil companies, that would mean abandoning "downstream" gasoline and oil refining and marketing operations to smaller independent companies, thus leaving the bigger companies free to concentrate on exploration and production.
"We're certainly questioning the benefits and economies of being integrated today," Edgar said. "I think to have 20 integrated companies in the U.S., all competing . . . that's not the way to go."
The problem is, with the current depressed state of oil prices in general, and profits on refining operations in particular, few large oil companies could find a market for their less financially productive divisions. So, the large integrated oil companies seem likely to remain whole for a while.
Phillips is learning firsthand what operations can and can't be sold in the current market. It has committed itself to selling $2 billion worth of assets in the next year to pay off its new debt. And although Douce said that his company has made absolutely no decisions on what to sell, analysts speculate that Phillips will try to unload its refining and marketing operations, its recently acquired Aminoil division or its North Sea holdings.
About the only thing analysts believe could put Phillips' rebuilding efforts out of kilter would be an unexpected drop in the price of oil.
In setting up its restructuring, Phillips has assumed an average oil price for the next few years of about $27 a barrel, and a worst-case scenario of about $20 a barrel. Few analysts would be much more pessimistic than that. "If the price of oil holds, I think they'll come through this in a little better shape than some people are willing to admit," Nowak said.
As Phillips goes through the throes of recovery from the Pickens and Icahn raids, the rest of the industry will be watching it closely for clues on how to undertake such a massive restructuring -- although its competitors certainly would rather make their own changes under somewhat less duress.
"If it makes sense to do what Phillips has done, it makes even more sense to do what Phillips has done [but] not under the gun," said analyst Bruce Lazier of Prescott Ball & Turben.
But being forced to restructure under these circumstances makes Pickens and other raiders, in a sense, the architects of the oil industry's new order -- something that no doubt rankles most oilmen.
As Edgar said: "Pickens certainly put a bee in [Phillips'] bonnet and made them do some things they should have done anyway."