[The New York Times]
Be patient. That is Diamond Shamrock’s request to investors as it continues to weigh an unsolicited $2.03 billion takeover bid from the oilman and corporate raider T. Boone Pickens. Today, the company said it had still not decided on its response but would meet again within a week.
But even before the Pickens bid, the Diamond Shamrock Corporation and William H. Bricker, the company’s determined chairman, chief executive and president, had been asking for shareholders’ indulgence. Ever since Mr. Bricker transformed the Cleveland chemical company into a Dallas-based oil and gas company in the early 1980’s, he has had trouble making the restructuring pay off.
That does not necessarily indicate, however, that Shamrock is interested in being acquired. Early in 1985, for example, the company pulled out of a purchase by the Occidental Petroleum Corporation, a deal that some on Wall Street viewed as a good deal for Shamrock, but not for Occidental.
In the intervening two years, Shamrock’s fortunes, like those of many energy companies, have not been good. It lost $97.9 million on revenues of $563.3 million in the third quarter and expects to report a loss this quarter as well. But Mr. Bricker has predicted a return to profitability as the company pares costs. He said recently that even at the current oil price of about $15 a barrel, the company would be profitable once its production costs were below $6 a barrel. It cut its cost to $6.30 a barrel in the first half of this year – down from $10 in 1985 – and the figure is continuing to decline.
Shamrock has also been working hard to strengthen its balance sheet, and a four-part restructuring announced in July 1985 appears to be paying off. The restructuring has included more than $1 billion in asset write-downs; a 25-million-share buyback program (about 20 percent of the stock outstanding); changes in dividend payments to include the distribution of notes as well as cash, and the formation of a master limited partnership, to which it spun off its offshore energy properties, to provide larger dividends to investors.
Shamrock also sold its chemical unit to Occidental in September for $861 million, and it is still seeking a buyer for the coal operations.
The company’s moves have had some positive results. Long-term debt has fallen to $1.1 billion as of Sept. 30, from $1.4 billion last year, even though the company has been losing money. Shamrock now boasts a debt-to-total-capital ratio of 38.6 percent, a somewhat lower rate than the current average for the industry. It also holds cash reserves of $350 million. And it can call on bank credit lines of $1 billion.
”They are in the process of making the right moves,” said an observer familiar with the company, who declined to be identified. ”Things are actually in pretty good shape.”
With the recent hiring of Charles L. Blackburn, the former head of the Shell Oil Company’s exploration and development division, the company has said that it is in a position to seek acquisitions of its own. And Mr. Bricker recently said the company would increase its exploration budget next year to nearly $400 million from this year’s $350 million. High Cost of Finding Oil
But Diamond Shamrock has not fared well in the last few years in replacing old reserves and finding new ones, according to John S. Herold Inc. of Greenwich, Conn., which produces publications for the oil industry. The average cost to the industry over the last three years for finding, developing or acquiring new property worldwide has been $6.89 a barrel. Diamond Shamrock’s cost has been $11.98 a barrel.
The driving force behind all of these moves has been Mr. Bricker. As chief executive since 1976 and chairman since 1979, Mr. Bricker is seen by some as a flashy deal maker who relishes his almost total control over the company. Others, however, describe the 54-year-old executive as a ”beneficent dictator.”
While Mr. Bricker had drawn some tentative applause for the clean balance sheet, critics point to the expansive corporate offices, the company-owned jets and ranch and the $135 million general selling and administrative costs annually. Mr. Bricker declined to be interviewed.
The current tack of the company is the outgrowth of a strategy initiated by Mr. Bricker and the board in the late 1970’s. At that time, the company said that it would begin selling its previously dominant chemical operations and concentrate in the oil and gas business. A Good Start
Initially, it appeared to be a sound strategy. The average price for a barrel of oil, according to the United States Department of Energy, jumped from $8.96 in 1978 to $31.77 in 1981. The company’s chemical division, facing lawsuits stemming from its production of dioxin and Agent Orange, had steadily falling sales.
The company was also betting heavily on the future of coal, and in 1979, the year it moved to Dallas from Cleveland, Diamond Shamrock purchased Falcon Seaboard Inc., a Houston-based coal company.
In the next few years, Diamond Shamrock made a number of acquisitions and divestitures, moving more heavily into energy-related businesses. While many of the moves were applauded as they were made, there have also been some missteps.
In 1982, for example, Diamond Shamrock acquired a major stake in the exploration of the Mukluk project in Alaska’s Beaufort Sea. Shamrock initially described it as ”a very exciting growth opportunity” with possible reserves of between 500 million and 4.7 billion barrels of oil, but the prospects proved dry in 1983. That year, the exploration unit posted an operating loss of $73.9 million, mainly because of the $194.3 million charge against earnings stemming from the unsuccessful gamble.
The next year, Diamond Shamrock took over the Natomas Company in a widely criticized acquisition valued at more than $1.4 billion. Natomas at the time had planned a 33 percent reduction in dividend payments to cope with mounting losses and had taken a $75 million write-down on its domestic operations.
The company had substantial holdings in shallow oil wells in Indonesia, which generated substantial cash but also large redrilling costs. Shamrock has since written down the value of the Indonesian assets by $810.3 million, which accounted for last year’s record loss of $604.7 million on revenue of $3.35 billion.
Then, on Friday, Jan. 4, 1985, Shamrock announced that it was considering a $3.3 billion takeover bid from Occidental. Three days later, after a tentative agreement had reportedly been reached, Diamond Shamrock rejected the proposal, leaving some Wall Street arbitragers with substantial losses and raising questions about the sudden shift in plans.
Analysts speculated at the time that the company rejected the offer because it had become clear that Mr. Bricker and other top executives would be asked to leave after the merger was completed.
Some people also thought that the price was too low. The deal would have exchanged each Shamrock share for a share of Occidental. The day before the negotiations were disclosed, Shamrock closed at $17.75 a share, and Occidental was at $26.75. But Occidental’s stock tumbled to $23.50 in the two days of trading, and so stockholders appeared to have lost much of their prospective premium.
The company also said at the time that it would be better off in the long run as an independent oil and gas company. Looking back on the Occidental proposal, a former company executive recently acknowledged, ”Of course, in hindsight, we probably would have been better off” accepting the offer.
The current offer is to exchange each Shamrock share for a newly issued Mesa Limited Partnership unit. The units closed today on the New York Stock Exchange at $16.125, down 25 cents, while Shamrock held steady at $13.875.
A source close to the Shamrock board pointed out the similarity between the Mesa and Occidental offers, and he suggested that Diamond Shamrock’s response to the latest offer might also be similar.