Can Oryx Energy Cap Its Gusher Of Red Ink?

As a case study of how bad timing can cripple a company, it's hard to top the recent saga of Oryx Energy Co. The largest independent oil producer in the U.S. when it was spun off from refiner Sun Co. in 1988, Oryx seemed full of promise. Packed with experienced management and the financial muscle to develop far-flung wells, it earned a reputation as an aggressive player in a field not known for timidity.

So after Saddam Hussein's 1990 invasion of Kuwait sent oil prices--and oil stocks--soaring, CEO Robert P. Hauptfuhrer barely blinked when the trust representing Sun's founding Pew family announced plans to sell most of its 27% stake in Oryx. Hauptfuhrer figured his high-flying company could afford the $1 billion block--even at $54 a share, an all-time high. Never mind Oryx' recent $1.1 billion purchase of British Petroleum Co. oil fields. Although the deals pushed debt to $3.2 billion, Hauptfuhrer wagered that rising crude prices and divestitures would cut it tm a manageable $1.5 billion.

"PATHETIC." But the bet didn't pan out, and the Dallas-based company has never recovered. Oil stocks sank almost as fast as Saddam's military fortunes, driving Oryx shares down 68%, to $17, within two years. And as volatile crude prices dove as low as $13 a barrel earlier this year, Oryx continued to stagger under its debt. It has made constant efforts to raise cash and restructure operations--including a layoff of 40% of employees in one day in 1990, a $19-per-share stock offering in 1992, and furious cost-cutting. But Oryx' financial plight has worsened, and in October, as its stock slid to $14, the 63-year-old CEO resigned.

Even in the battered oil patch, Oryx' poor showing stands out. Says CEO Raymond Plank of independent Apache Corp.: "Their timing was bad, and there but for the grace of God go many oilmen." But critics say Oryx' problems go far deeper. "They're totally pathetic," says Alan D. Gaines of New York-based brokerage Gaines, Berland Inc., who for three years has given Hauptfuhrer his "Jack Kevorkian award" as the executive most likely to aid a corporate suicide. "Lots of people thought oil prices would rise, but how many bet the ranch?"

Hauptfuhrer dismisses the criticism from Gaines, who has shorted Oryx stock, arguing that he was "interested in doing what was of biggest benefit to the corporation." But while rivals such as Apache are prospering despite low oil prices, Oryx' restructuring has largely been ineffective. Although Hauptfuhrer cut employees from 4,200 to 1,100 since 1988 and sold more than $1 billion in oil properties, a turnaround remains distant. Revenues, at $1.08 billion in 1993, have been hacked in half since 1990; earnings have slid from $225 million to a loss of $100 million. And despite eliminating the dividend, freezing salaries, and cutting the exploration budget by 20% this year, Oryx lost $180 million in 1994's first half.

With debt stuck at $1.7 billion for the past two years and low oil prices hurting cash flow, last summer both Standard & Poor's and Moody's Investors Service downgraded Oryx' debt. "Despite all their initiatives, it just wasn't enough," says Robert A. Weiss, S&P's energy analyst.

The question now is whether Oryx can reverse its slide. Insiders say little pressure for improvement is coming from Oryx' mild-mannered board, which did not push for Hauptfuhrer's ouster. Instead, the blue-blooded Philadelphian--who worked his way to president of Sun Co. after marrying the chairman's daughter--says he moved up a retirement planned for early next year .

The board has turned the job of revving Oryx up to 30-year company veteran Robert L. Keiser, a low-key operations man who remains well respected. Keiser's strategy won't be a big change: While paring debt to $1.5 billion, Keiser will continue to shift from costly development projects into operating wells that boost cash flow.

So far, that's the one part of Oryx' strategy that's working. Though it once invested heavily in long-term fields requiring heavy development spending, it is now shifting to ongoing wells where it can increase production. In September, for example, it swapped promising long-term fields in the North Sea with Conoco Inc. in exchange for nearby fields already pumping oil. The move saves $200 million in development costs and gives Oryx immediate cash flow. The company has also sold a slew of small, inefficient wells around the globe.

FIRE SALE? Still, things are likely to stay tough. A disappointing dry hole in Indonesia could lead to a bigger loss than expected in the third quarter. And with the obvious cost-cutting already done, Keiser is pressed to pinpoint further savings. "Every cost has more room for saving," he says. "Anyone who doesn't think so isn't looking hard enough."

Maybe so. But with only $10 million in cash on its balance sheet, Oryx has little margin for error. If prices don't improve, it will probably have to sell more fields, but such sales hurt long-term prospects. Already, Oryx' reserves have dropped 26% since 1990, and its reserve replacement rate--the rate at which oil companies replenish their reserves--has fallen from 119% to 97%, well below the 130% industry average. Competitors clearly smell blood: Oryx now receives roughly 15 unsolicited offers a month to buy fields. Though Keiser insists Oryx isn't running a fire sale, other problems loom: It may owe its employee stock-ownership plan $17 million for lost value due to the debt downgradings.

Ultimately, Keiser may have to seek a suitor or face a forced takeover if Oryx stock continues to tumble. "There are a lot of companies out there in a buy-or-get-bought mode," says W.B. Cline, an oil consultant with Gaffney Cline & Associates Inc. in Dallas. With reserves now worth three times its stock price, "Oryx is on everyone's list."

Chief Financial Officer Edward W. Moneypenney insists the company is not for sale--and the massive debt keeps almost any buyer at bay. "The best antitakeover weapon they've got is the debt," agrees Apache's Plank, a takeover specialist who has evaluated Oryx' financials. Adds Douglas Miller, president of rival Coda Energy Inc.: "This is not a takeover candidate. It'll drift until someone comes who can manage it properly." Or until someone figures out how to take back that one bad bet.

The Long

Slide At Oryx

NOVEMBER, 1988 Sun exploration unit spun off to create Oryx. Debt tops $1 billion.

AUGUST, 1990 Oryx buys back $1 billion in stock from Pew family trust as shares reach $54, an all-time high. Debt hits $3.2 billion.

SUMMER, 1991 Falling oil prices force Oryx to sell assets and lay off 40% of employees to cut debt to $2.3 billion.

FALL, 1993 Plummeting crude prices force more cost-cutting as Oryx struggles to raise cash. Debt is $1.7 billion.

FALL, 1994 S&P and Moody`s downgrade debt. CEO Robert Hauptfuhrer swaps promising North Sea fields for current production, but after stock slides to $14, Hauptfuhrer resigns.

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