The cargoes of low-priced oil streaming out of the Persian Gulf are fundamentally changing the structure of the U.S. oil industry, strengthening the largest, strongest companies at the expense of the smaller or weaker, according to industry officials and securities analysts.
"The big, strong companies are coming out fine," said Ted Eck, chief economist for Amoco Inc. The fourth-largest international oil company, Amoco is one of three companies that would prosper most during an extended period of lower oil prices, industry analysts say. The others are Exxon Corp. and the Royal Dutch/Shell Group.
"These are the preeminent companies in the industry. If anything, they should widen that lead over the next five years," said Barry Good, an oil analyst with Morgan Stanley & Co. Inc. "Nobody else is quite in that position."
"The industry is going through some restructuring in a dramatic way," said C. J. (Pete) Silas, chairman and chief executive officer of Phillips Petroleum Co.
The severity of that restructuring will depend upon where oil prices bottom out this year and how soon they head upward again. Each dollar that crude oil falls drives a wedge deeper between the haves and have-nots in the industry.
Since November, crude-oil prices have plummeted, with "spot," or cash, prices falling at times below $16 a barrel. Average U.S. prices -- including long-term contracts -- have declined one-third, to about $22 a barrel, and further cuts of $1 to $2 in contract prices were announced yesterday.
The decline puts a tourniquet around the cash flowing into the oil companies, and at the same time it slashes the value of their inventories of crude oil and refined petroleum products.
In greatest jeopardy are the several thousand independent oil drilling companies and small oil producers, many of them already struggling with heavy debts. The Chapter 11 bankruptcy petition filed last month by Global Marine Inc., a Houston offshore oil driller, will be repeated many times, the energy industry acknowledges.
As those assets are put up for sale, the U.S. oil business will become a bargain basement for those companies with enough cash to buy out their failing competitors, said Paul Mlotok, an analyst with Salomon Brothers Inc. The bidding for those assets will further separate the strong from the weak.
"You'll find that companies that are cash-rich can buy properties at fire-sale prices -- entire independent companies, or pieces of the majors that are sold off to weather the storm," Mlotok said. The cash-rich companies' "time horizon is the 1990s, and they'll move into that decade in a stronger position."
But only the oil companies with light debt loads and ample cash will be able to take full advantage of the bargains, he added.
Half of the six international oil companies -- Mobil Corp., Chevron Corp. and Texaco Inc. -- still are channeling vast amounts of cash into reducing the billions of dollars in debt they took on earlier in the 1980s to buy other oil companies. Texaco also is fighting an $11.1 billion judgment imposed by a Texas court in its legal battle with Pennzoil Co.
"Chevron and Mobil survive quite handily at $20 a barrel for crude oil ," Mlotok said. "But they don't have the free cash to buy the firesale assets."
Other industry observers, such as John Lichtblau, president of Petroleum Industry Research Associates, believe the gap between the stronger and weaker of the big oil majors may not be so pronounced. "Mobil and Chevron are not exactly helpless," Lichtblau said. "If they see attractive buys, they will find a way to get them." That doesn't seem to be the prevalent view, however.
"There will be some great opportunities that open up (because) companies (that) are financially strapped will have to forsake leases or sell assets at low prices," said Frederick P. Leuffer, an analyst with C. J. Lawrence Inc. "The stronger companies will be in a position to take advantage of that and will emerge on a relative basis much stronger than before." Heading the list of haves are Exxon, Royal Dutch/Shell and moco, Leuffer agreed.
"The strong get stronger and the weak get weaker, probably," said Sanford Margoshes, an industry analyst with Shearson Lehman Brothers Inc.
The "walking wounded" are headed by Phillips Petroleum Co., Texaco and Unocal Corp., whose debt loads are heaviest, Leuffer said.
Phillips' debt, for example, is monumental. To fend off takeover attempts led by Mesa Petroleum Co. Chairman T. Boone Pickens Jr. and New York financier Carl Icahn, Phillips bought back about half its stock last year, tripling its debt from $2 billion to more than $6 billion.
Its strategy since then has been to pare operations back so that it can defend profitable niches in its strongest markets. "Where you're strong, you're going to protect your market share, and where you're not, you're going to get out," Phillips' Silas said.
"We're not anxious to have the oil price drop like it's dropping, but we feel we can meet our commitments," Silas said.
But Phillips and most of the industry face a painful dilemma on how to finance the search for oil -- a search that can't be abandoned for long even though prices are falling, Margoshes said. "In the oil business, you must run fast to stand still because it's a rapidly depleting resource," he asserted.
The fall in oil prices means that many companies will be lucky simply to stand still, Amoco's Eck predicted. The sudden plunge in oil prices since November has caused an abrupt change of view within the financial community about investing in energy, accentuating the gap between the haves and have-nots, Eck said.
"I think there will be a massive redistribution of assets in the industry because of the big shift in capital costs," he said.
Companies with heavy debt loads and strained cash flows will be hard-pressed from now on to raise capital from financial markets for additional exploration and production efforts. Investors -- now on edge because of the fall in prices -- will regard these companies as much riskier investments than before, boosting the cost of capital if those companies try to issue new stock or debt securities, he said.
"I think the shock is so serious that those companies dependent upon external capital won't be able to get it . . . ," Eck said. For marginal companies, capital may not be available on any terms.
Phillips' dilemma is an example, Leuffer said. "If we end up with oil prices in the high teens, Phillips either cuts their spending to continue to pay a dividend . . . or they cut their dividend," and see their stock price slammed even harder, he said. If they don't add to their oil reserves, they are robbing their future, he said.
Many smaller or weaker companies will have no choice but to do just that.
There are some 8,500 small "stripper" wells in Texas, producing less than 10 barrels a day of crude oil, noted William Fisher, director of the Bureau of Economic Geology at the University of Texas at Austin. He estimated that one-quarter of those wells will be plugged if oil prices fall below $20 a barrel and remain there. "When the value of that oil falls below the lifting cost, the well gets plugged and abandoned," Fisher said.
The result is likely to be a more concentrated industry with fewer competitors at each level -- production, refining and marketing.
"You might see the majors achieve much more importance than they've had. Whether or not that's bad remains to be seen," said Joseph Egan, an analyst with Wood, Mackenzie & Co. Inc. in New Orleans. "Usually, when things turn around in the industry, you see a lot of independents spring up, as money from outside the industry becomes available."
While the strength of the major oil companies seems certain to grow, they will have to contend with new strategies on the part of the producing nations, who have begun investing in U.S. and European refineries to gain a guaranteed outlet for their crude oil.
The upheaval, after all, is not just in this country, Margoshes said. "You have a restructuring on a global basis."