The current upheaval in the nation's oil industry didn't exactly begin with corporate raider Boone Pickens Jr. But in many ways, the philosophy of the chairman of Mesa Petroleum Co. is taking hold throughout the industry.
Pickens' argument is that oil companies are badly mismanaged by executives who have not changed the strategies and financial structures of their corporations to reflect today's world of declining oil prices and weak energy demand. As a result, oil company stocks are lower than they should be, and shareholders would be better off if companies sold unprofitable parts of their operations, Pickens maintains.
Now, an increasing number of big oil companies are doing just what Pickens said they should, either voluntarily or under the pressure of a takeover move by Pickens and other raiders.
Yesterday's announcement by Atlantic Richfield Co. that it will buy back $4 billion of its stock, write off $1.3 billion in assets and generally tighten its operations represented the most dramatic example yet of the restructuring that is shaking the oil industry. But it follows on the heels of similar moves by other oil companies.
Phillips Petroleum Co., under pressure from Pickens and financier Carl Icahn, has begun a restructuring of its own much like Arco's and will go deeply into debt to buy back about half of its stock from shareholders at a healthy price increase above the value before Pickens made his move last year.
Texaco Inc., acknowledging the poor performance of the energy sector, last year closed down all or parts of three refineries and marked down the value of tankers and other facilities on its books, knocking $765 million off its net income for 1984.
Exxon Corp. has begun taking steps to rid itself of its money-losing office-systems business, and Mobil Corp. has announced that it is taking a hard look at its operations in an effort to boost its profitability and the return to stockholders.
The goal in most cases is to boost stock prices to levels nearer the value of the companies' assets. Analysts say the changes in the oil industry are coming about because other oil executives have come to the same conclusions that Pickens reached a couple of years ago about the state of the industry.
The fundamental element is the fact that most oil companies' stocks trade on the stock market at prices well below the theoretical worth of the companies' assets. "The basic worth of these companies is still significantly more than the market price," said Eugene Nowak, an analyst with Dean Witter Reynolds.
Actions like Arco's, then, are attempts to correct the situation. Through the restructuring announced yesterday, Arco will trim unattractive operations, concentrate its resources on its most profitable areas and, through its massive stock repurchase, increase the value of its shareholders' stock.
Significantly, the share repurchase program greatly increases Arco's debt, to levels virtually unheard of in the oil industry -- at least until Phillips did the same thing.
The oil companies that made big acquisitions last year also vastly boosted their debt -- Texaco's rose fivefold, from $2 billion in December 1983 to $10.4 billion last December, for instance.
These companies will have to plow a large amount of cash into repaying that debt, analysts predict, leaving a lot less for operations and acquisitions. But if Pickens is right, that's a better deal for stockholders than what the companies had been doing -- at least in the short run.
Analysts were divided yesterday on Arco's move. But they said the restructuring of the industry is far from over, especially as there is no major rebound in sight for oil companies and Pickens is still looking for takeover targets. Possible candidates for restructuring listed by analysts yesterday included Sohio, Amoco (the former Standard Oil Co. of Indiana), Amerada Hess and Mobil. All have relatively low stock values, low to moderate debt loads, and room for improvement -- and would probably rather do it themselves than have somebody like Pickens force them into it.
"We're seeing some leadership here," Pickens said of Arco yesterday. "It's great."