Atlantic Richfield Co. announced a sweeping financial reorganization yesterday that will include the purchase of $4 billion worth of its stock, a cutback in its search for oil and gas, a $1.3 billion write-off of assets, and the abandoning of the company's gasoline marketing efforts east of the Mississippi.
The actions will leave Arco much leaner and bolster its stock price -- but vastly increase its debt.
The Los Angeles-based company's officials said they were taking the actions to adapt the company to "major structural changes" taking place in the U.S. oil industry -- including what they called "diminished expectations" about oil prices in the near future.
But analysts also saw the restructuring as a preemptive strike to prevent a raid on the company such as those mounted in recent months against Phillips Petroleum Co. and Unocal Corp. by maverick oilman T. Boone Pickens Jr.
"I think that they did what they are doing because they felt they had to do a certain amount so that they would no longer be deemed attractive to a predator," said Sanford Margoshes, an oil-industry analyst at Shearson/Lehman Brothers.
Pickens was elated by Arco's announcement. "I take my hat off to them," he said. "It shows that they have really gone in and studied the situation. . . . This management has some real interest in how the stockholders come out."
The restructuring echoes the one undertaken by Phillips earlier this year to thwart back-to-back takeover attempts by Pickens and financier Carl Icahn, as well as more modest belt-tightening and reevaluations under way at other oil companies. But Arco's actions are the most dramatic yet.
The stock market indicated its approval, with Arco stock rising $5.25 to $58.25 in very active New York Stock Exchange trading after the announcement. But industry analysts gave the company mixed marks.
"What they've done is almost mind-boggling. . . . This is a highly dramatic and positive development," said Eugene Nowak, an oil-industry analyst for Dean Witter Reynolds. "The corporation is preparing itself to deal with the continuing lackluster industry environment."
"They will perform radical surgery on their balance sheet and wind up in a much weakened position," said Margoshes, who said he was concerned with the huge amount of debt Arco would have to assume to buy back the $4 billion worth of shares. "In an uncertain crude oil situation, this could be asking for trouble."
Under the complicated plan, Arco will begin on Wednesday to spend $4 billion over the next year to buy back its own shares. At yesterday's closing price, that would allow the company to purchase about 68.7 million of its shares, more than half the 127 million that are outstanding.
Arco also will increase its stock dividend by one-third, to $4 a year, and take a one-time charge to earnings of $1.3 billion to cover writeoffs on the anticipated sale or phase-out of some parts of the company, including some exploration projects and a refinery complex in Houston.
The areas being written off are part of a series of cuts planned by the company, including completion of the company's withdrawal from the mining business, begun last year; reductions of corporate and divisional overhead; and a reduction of Arco's petroleum exploration and production activities. The company said it would reduce its capital spending next year to $2.8 billion from $3.6 billion in 1985.
Arco also will stop refining and marketing gasoline and other products in eastern markets. Arco is not a large factor in gasoline marketing in the eastern half of the nation, and its costs are increased by the long distance to those markets from its primary crude-oil sources on the West Coast and in Alaska.
Arco said it hoped the restructuring would allow it to concentrate on its most profitable endeavors, including West Coast gasoline marketing, coal production, chemicals and oil and gas production. And despite the cuts in its petroleum exploration and development plans, it said it hoped to purchase additional oil and gas reserves in the future, use technology to increase production from existing wells, and better select its future oil and gas exploration efforts.
Arco estimated that the collective effect of the actions announced yesterday would increase its after-tax profits by $250 million a year, and it said it had increased its earnings projections for budgetary purposes by 50 percent or more to between $8.80 and $9.70 per share from $5.85.
"The petroleum industry . . . is undergoing major structural changes which were not widely anticipated. By the steps taken we are solving the problems created and exploiting the opportunities generated," Arco President William F. Kieschnick said in a statement. "We believe that our continuing tactics are optimally positioning the company to maximize shareholder value both now and in the future. This program will continue to provide the strong financial structure required to exploit the right mix of petroleum investments, reserve purchases and share repurchases."
But some analysts questioned that mix, suggesting that Arco might have done better with a less-ambitious stock-repurchase plan that would have required less debt. Some analysts estimated yesterday that the borrowing needed to buy back the shares would more than double the company's debt-to-equity ratio to 55 percent, high by any standards and extremely high for an oil company.
"I don't see why somebody, if they really thought the price of oil was going to collapse, would want to be taking on mountains of debt," said one analyst, who asked not to be named.
But Nowak said he believed Arco could manage the debt and would take steps to keep it from becoming excessive. "I'm confident on the basis of our dealings with this management over the years that they will not overleverage themselves," he said. "I think when all is said and done they will see themselves in pretty good balance."
And Nowak argued that Arco's plan is more than just a stock buyback. "This goes beyond trying to hype the stock," he said. "This is aggressive, this is imaginative. It's not a defensive move. It's an offensive move to help the shareholders."