Under stress from falling oil prices and under attack from corporate raiders, the nation's energy companies have been undergoing radical surgery in the past two years. And nowhere are the effects of the surgery more apparent than at Atlantic Richfield Co., the nation's seventh-largest energy company.
A few recent snapshots of the company show:
*Service stations all along the East Coast where Arco pumps are being pulled out, and for-sale signs on copper and platinum deposits in the West -- evidence of the deep, continuing cuts in major parts of Arco's business.
*Gasoline stations in the West that also sell groceries and soon will add hamburgers and hot dogs to an expanding fast-food sideline.
*Offshore drilling rigs in the South China Sea, as Arco expands internationally. And new technologies that turn chemical wastes into perfume fragrances or produce heartier, genetically engineered tomatoes for the food-processing industry, part of a search for new sources of growth.
These and other changes add up to one of the most sweeping transformations undertaken in the energy business. In Arco's case, however, the upheaval has been voluntary, not a defensive counterattack to hostile raiders.
"The advantage we had is that we were able to structure without being under pressure, and tailor it in a way that seems to fit our picture, the best we knew it," said Lodwrick M. Cook, Arco's new president and chief executive officer and a key figure in the restructuring.
"We did fundamental things. We cut our losses in businesses that were not performing well and which we didn't hold that much hope for -- hardrock minerals, the metals business, our East Coast refining and marketing."
Arco has regrouped around what it hopes are its strengths, businesses that promise stronger growth or larger profits than the industry will produce, Cook said. "All of this was with the idea that we'd certainly be facing an uncertain future, and it might be a much tougher future."
Rather than dribble the changes out, Arco has made them in a few big swings.
It has sold most of its 1,100 gasoline stations east of the Mississippi this year, in a calculated westward retreat to its nucleus of marketing strength in California and four other Western states, a region closest to its large supplies of Alaskan crude oil. The sale cuts Arco back to 800 of its own stations, plus 900 more independent stations that sell the Arco brand.
It has sold off or closed down its money-draining metal mining operations and disposed of other properties, writing off $2 billion in losses over the past two years -- almost one-tenth of its net worth.
To make itself less vulnerable to a T. Boone Pickens-style raid, Arco is spending $4 billion to buy back its own stock this year and next, reducing the shares in circulation by nearly one-third. This will boost Arco's debt by $3 billion. But the company expects to cover the additional interest costs by reductions in operating costs, including a voluntary retirement program that took 6,000 of its 39,000 employes off the payroll this year. It also has cut its exploration and production budget by one-fourth, a traumatic change for an energy company.
Arco's restructuring wins praise from John C. Sawhill, a director of McKinsey & Co. and a former top federal energy official.
"I think they're one of the leaders in the industry in trying to think through how the industry's going to change. They're trying to create the future rather than respond to it," Sawhill said.
Arco's strategy was prompted by the long slide in crude oil prices down to the current world price of about $28 a barrel and by the concern that further reductions lie ahead.
"They saw oil prices coming down and had to be able to live with $20-a-barrel oil, or $15-a-barrel oil," said Sawhill -- a collapse in prices that experts do not expect.
"They're pulling out where they don't have a significant market share in gasoline retailing and concentrating their efforts where they can be extremely competitive," said M. Craig Schwerdt, an analyst with the Los Angeles brokerage firm Morgan, Olstead, Kennedy & Gardner.
The restructing steps announced on April 28 by Arco pumped the company's stock up from $50 a share to $64 within a week. Since then, the price has ranged from the high 50s to the high 60s, a level that Arco should be able to hold next year, Schwerdt said.
The risk to Arco is the same faced by other oil companies whose debt has risen sharply, Schwerdt said: A steep fall in oil prices would leave them scrambling to cover their debt costs. Arco is less vulnerable than its neighbors, he asserted.
"We're a stronger company," Cook said. "That's not to say some dramatic drop in price, if it was to stay with us for awhile, wouldn't cause us to have to look hard at some of the things we're doing."
Arco's plan for the rest of the 1980s is to operate a leaner company that can be a strong survivor if oil prices do drop sharply, and one of the winners if they don't.
The Eastern service stations and its Philadelphia refinery were too far from Arco's prime source of crude oil in Alaska. So one large block was sold to Shell, and another to John Deuss, a Dutch oil trader.
The strategy for Arco's remaining service stations in the Western states is to offer travelers fast food, groceries and cash machines as well as gasoline and oil.
About 500 of Arco's Western stations have been converted to this combination of fuel and convenience items and carry Arco's "am/pm" brand name. Although gasoline sales provide most of the revenue from these stores, fully half the profit comes from groceries and other nonautomotive items, reflecting the travelers' willingness to pay a higher price for one-stop shopping on the road.
That kind of switch is consistent with Arco's determination to concentrate on its basic strengths, Cook said. "We don't plan to jump off the cliff in any kind of diversification," he explained. "We're going to stay close to the hydrocarbon business."
That means oil, gas, coal and chemicals, obviously all different forms of the hydrocarbon molecules.
But it also includes Arco's active investigation of new technologies, most of them growing out of its current expertise, Cook said.
In one of its processing operations, alfalfa plants are crushed and the resulting liquid distilled to make chemicals.
Another venture involves a creative use of a waste liquid from an Arco propylene oxide plant, where packaging materials are made. "We've learned how to purify the waste , and it smells as good as crushed rose petals; in other words, oil of rose. And we sell it to perfume companies -- which we don't talk a lot about -- because you can't tell the difference between that and the regular thing. They use it as a fragrance," Cook said.
"We have no idea how big that could be. It's mind boggling if you want to be a dreamer," he continued. "On the other hand, it's not going to turn around our business in the next 10 years."
A new technology that will pay off in the next 10 years is Arco's work on solar energy, he predicted. The company is considered a leader in developing photovoltaic materials, which produce an electrical current when exposed to the sun's energy.
Next year, wrist watches will go on the market coated with a clear photovoltaic film developed by Arco that will power the watch, eliminating the need for batteries.
By the mid-1990s, the long-delayed promise of solar electric power finally will be fulfilled, when photovoltaic units become cheap and efficient enough to compete with small electric generators that run on natural gas or diesel fuel, Cook predicted.
Farther off still are meaningful results from biotechnology. But the first fruits of that effort already are showing up for Arco, he said.
In one Arco biotech venture, strips of nuclear material from other plants have been inserted into tomato cells to make the resulting hybrid tomato plant less vulnerable to wilting.
For Cook, a 57-year-old petroleum engineer from Louisiana who rose through Arco's ranks managing pipeline and minerals operations, this foray into cell engineering is awesome.
"The first time I saw a plant that we had created in a lab that was different than what existed in nature, it was kind of a religious feeling," he said.
"I think it's going to be greater than the industrial revolution for society," he said. "The world's food problems will be impacted -- you can raise things where the people are," overcoming the distribution issues that he considers the greatest source of world hunger.
"It's an area where, over the next 10 to 20 years, we'll be creating a business for ourselves. . . . I don't know how to predict it," Cook said.