Oil fields are supposed to deteriorate as they get old, and oil companies are supposed to head for cover and yell for help when prices tumble. Both notions have generally held up over the past year, and the exception that proves the rule is Shell Oil.
Almost alone among the major oil companies, Shell--the Houston-based giant now completely owned by the Royal Dutch Shell Group of London and Amsterdam--has maintained a vigorous exploration and drilling program in the face of the price collapse.
Shell's performance is especially noteworthy because it has been romping through Uncle Sam's overworked Oil Patch, especially California, where decades of intensive drilling have made a pin cushion of the landscape and where the onshore prospects draw barely a mention in the debate over the nation's energy security.
While the industry's retreat from exploration last year caused California's first production decline since 1978, Shell boosted its overall crude oil output by buying more oil fields and stepping up its exploitation of Kern County's reservoirs of heavy oil, which have been producing for at least three-quarters of a century.
Pumping steam underground to coax the oil to the surface, it has turned one dogeared field near Bakersfield into the most prolific in the 48 contiguous states, surpassing even the fabled East Texas field.
Shell's diligence on its home turf enabled it to leapfrog Exxon to become the leading driller of oil and gas wells in the United States last year as well as the nation's leading wildcat driller in unproven fields, according to Petroleum Information Corp. of Denver. In domestic oil and gas reserves, Shell surpassed Atlantic Richfield to become No. 2 behind Exxon.
Of course, if oil prices decline over the long haul, Shell might look silly. But hardly anyone expects that. Shell's performance last year is only the latest bit of evidence cited by some analysts and others to suggest that Shell might be the smartest of the big oil companies. In any case, it has taken a different road from others with comparable resources, notably Exxon.
"Shell tends to take a long-term view of the business. The worse it looks, the more they want to go ahead," says Paul D. Mlotok of the Salomon Bros. investment firm in New York. "It's a deeply ingrained corporate philosophy. Exxon has the resources, too, but they have chosen to pull back. Exxon really is more pessimistic."
Who's right? British Petroleum in effect bet with Shell last week when it announced that it will spend $7.4 billion to buy the rest of Cleveland-based Standard Oil. Mlotok agrees: "I've got oil prices at $24 (per barrel) by 1990. I agree with Shell. They will move up in their relative standing in the business when all is said and done."
Shell and its parent have long been held in high regard by the investment community. The two have been affiliated for 75 years, and Royal Dutch Shell in 1985 acquired the 30% of Shell Oil it did not already own.
By most accounts, the management of the U.S.-based firm--led since 1976 by a thoughtful, independent-minded geologist from Louisiana named John F. Bookout--has been largely given a free rein. But industry observers often paint the two with the same rosy brush: as lean, forward-looking corporations that have tended to resist the lure of short-term profits in favor of holding to long-term strategies.
No Common Strategy
"The culture of Shell Oil management unquestionably over the past 75 years would have to be influenced by Royal Dutch Shell," Bookout says. "It stands to reason. . . . But despite what the analysts might say, our strategies are not coordinated. There's not a common strategy. The companies don't even face the same kind of problems."
Shell has hardly escaped damage during the past year: Earnings plummeted by nearly half, to $883 million. In its annual report made public last week, Shell confessed that again this year it probably won't achieve its usual annual target of a 5% increase in real net income and a 15% return on equity.
(A fully consolidated subsidiary of Royal Dutch/Shell Group, Shell Oil says it continues to report earnings because it has public debt-holders and there is interest in the financial community.)
Unlike such firms as Unocal, Chevron and Phillips, the company has made it through most of the 1980s without the financial burden--or even the serious specter--of a costly takeover battle.
But a more fundamental reason that Shell Oil looks so smart today is that it decided in 1978, during a pause in the great 1970s run-up in prices, not to use the gusher of oil revenue to diversify but instead to tend to its knitting. The company gradually rationalized its oil and gas properties by buying some and selling others, stepped up exploration, trimmed its total work force, closed half its service stations and nearly tripled sales at the ones it kept.