America's domestic petroleum industry has, in recent years, become a battleground for speculative stock raids, hostile takeovers and forced breakups. Since the Federal Trade Commission, the Internal Revenue Service and the Justice Department have thus far taken essentially a hands-off attitude about these events, I am hopeful that Congress will step forward and address this serious national issue.
The full extent of the recent industry turmoil can be illustrated by noting that in 1980 there were 15 major integrated companies, almost all with conservative debt burdens, competing with each other in exploration, production, refining and marketing. But in less than five years, five of these companies have disappeared as independent entities, three others have taken on large debts and another one (Phillips) has been seriously disabled with a burden of debt of record proportions. And now Unocal has been put "in play" (as they say on Wall Street), with the possibility of a takeover or liquidation staring us in the face.
While some economists may support such moves in the name of "capital efficiency," I believe they are misunderstanding what is actually going on in our industry. In particular, I believe they fail to understand the possible adverse impacts on the nation.
The disappearance of so many major competitors will lead to a concentrated industry dominated by a few giants--and to one that, as in the early 1970s, is dependent upon the whims of foreign oil producers. Other industries that have followed this pattern (autos and steel, for example) have tended to become bureaucratic, inefficient and short on innovative drive--and they have found themselves at the mercy of foreign competitors.
This last point is especially important. If the oil industry is going to successfully explore America's frontier regions--particularly in Alaska and in deep offshore waters--and also develop needed alternative energy sources, such as oil shale, it will need all the centers of creativity and entrepreneurship it can muster. In short, it will need as many strong competitors as the nation can possibly support.
Even when it is unsuccessful, the threatened takeover of a large company forces management to focus on short-term results and defensive tactics. Exploration, research and development, long-term planning and even its rational decision-making are victims of the raid.
Substantial increases in debt, incurred either to finance an acquisition (Chevron) or to defend against one (Phillips), are not healthy in an industry that has high fixed costs and is vulnerable to price swings due to forces beyond its control. Companies burdened with excessive debt service lack the cash for aggressive exploration and innovation. Companies without borrowing capacity may be unable to make needed expenditures for expansion. Companies with excessive debt are liable to failure and prone to avoid risks.
The nation's banking, savings and loan, and securities firms are greatly overextending themselves by financing highly leveraged multibillion-dollar oil company takeovers. And it's not really their money. It's entrusted to them by depositors, by taxpayers, by the American people.
Clearly, our banks, S&Ls and securities firms should be concentrating on loans that create jobs and add to the nation's real output, not on loans that benefit only speculators, takeover artists and their lawyers.
A further major drop in world oil prices, coupled with an increase in high interest rates--not unlikely events--could throw many of these high-interrest, low-security "junk" loans into default or "workout" status. That could push many large banks and S&Ls to the brink of failure, forcing a new round of federal bail-outs.
Henry Kaufman of Salomon Brothers has pointed out that such deals removed between $80 billion and $90 billion of equity securities from the U.S. marketplace in 1984 alone--more than 4% of the total value of all U.S. stocks outstanding.
Why is this especially happening to large oil companies?
It is not because this entire group of U.S. integrated oil companies suddenly need to be "restructured," as claimed by T. Boone Pickens in his testimony before another House committee on Feb. 27.
Damaging to Economy
If we carry that line of reasoning to its extreme, we end up with every one of the companies either being merged, liquidated, or "decapitalized" (that is, forced into a massive conversion of equity to debt, a la Phillips). This is obviously not only an impossible result with impossible demands on the credit system, but a result that, even if partly achieved, would be severely damaging to the national economy and our nation's energy security. It removes our capability to respond if--or when--the next crisis occurs.
I believe this wave of mergers and takeovers is happening for several reasons: