Energy to Burn

If Wayne Allen exudes a certain restlessness in describing the challenges of running an oil company in the 1990s, it [...]

January 1 1996 by Chief Executive


If Wayne Allen exudes a certain restlessness in describing the challenges of running an oil company in the 1990s, it may be because it takes longer to get his product to market than most other businesses. Mother Nature requires millions of years to pressure-cook organic remains into crude oil-the mother of petroleum products. Hence the words the chairman and CEO of $12.4 billion Phillips Petroleum uses to describe himself: “I may be calm, but I’m not patient.”

With a soft drawl and an even temper, Allen is a marked contrast to such 1980s cowboys as Mesa‘s T. Boone Pickens Jr. and David Batchelder. These oilmen thrived in a firestorm of hostile takeovers and volatile markets where the price of a barrel of oil once plunged from $26 to $10 practically overnight. Nowadays, with prices relatively firm and the massive reserves of developing nations entering the market, a CEO’s priorities tend toward cost control and productivity improvements. Less glamorous, to be sure, but requiring unparalleled technical proficiency in a global business.

“The oil business always had a herd mentality,” says Allen, 59, who joined Bartlesville, OK-based Phillips as an engineer in 1961 and took the reins as CEO a little more than a year ago. “We continually built excess capacity and chased after the high margin. But we’re not counting on the market to save us anymore. The winners in this business will be those that drive costs down and add volume through superior technology and efficiency.”

Allen, tall and lanky with hair swept back with a dollop of Brylcreem, faces a spate of challenges: dealing with the cyclical nature of both the oil and chemical businesses, for example, and restructuring to streamline operations. But positives abound. At $2.9 billion and falling, debt is less than one-third the level of 1984, when Phillips recapitalized to deflect the forays of Pickens and Carl Icahn. Chemical and crude-oil prices have been strong, driving the company’s nine-month net operating income to $450 million, up a hefty 45 percent from the year-earlier period, though the pace slackened a bit in the third quarter. Longterm, Allen strives for 15 percent growth in shareholder value, measured through a combination of dividend- and share-price appreciation.

“Phillips’ foreseeable earnings outlook is enhanced by firm domestic natural-gas prices, continued cost controls, and solid oil and gas production,” says Eugene L. Nowak, senior analyst and head of the energy research group in New York with Dean Witter Reynolds. “The company also has done an excellent job reducing its debt and is well-positioned in chemicals, though in line with industry trends, earnings in that sector have peaked.” Dean Witter expects a strong turnaround in natural-gas liquids, Nowak adds, with an estimated loss of $12 million to $15 million last year reversing to income of around $35 million this year.

Overall, Allen expresses cautious optimism about the prospects for Phillips, the nation’s eighth-largest oil company. “The economy is showing signs of slowing. And refining, marketing, and transportation profits are still a concern for the long term,” he says. “But in a commodity business such as ours, the low-cost producer wins. With the lowest finding-and-development costs in a 13-company peer group over the last five years (see chart, next page), we’re close to where we want to be.”

Perhaps Allen comes by his cautious optimism honestly: The company itself has a history of rebounding just as its luck ran out. Born in 1873 in Nebraska, Phillips founder Frank Phillips began his career as a barber in Creston, IA. He heard about the oil boom in Indian Territory from a friend who had been doing missionary work near Bartlesville, and set up the Anchor Oil and Gas Co. in 1903. After a string of bad luck, Anchor tapped a gusher in September 1905. Phillips and his younger brother, L.E., went on to hit 81 proven oil wells in a row, incorporating under the Phillips name in 1917. Burgeoning automobile production through the 1920s kicked the business into over-drive. And in the wake of World War H, Phillips expanded chemicals operations and moved aggressively overseas.

These days, Phillips operates four businesses: petroleum exploration and production; natural-gas gathering, processing, and marketing in the U.S.; petroleum refining and marketing; and global chemicals and plastics production and distribution. International operations are increasingly important, comprising 16 percent of annual revenues and 31 percent of assets as director of drilling and production for Phillips’ Europe-Africa division and operations manager in the Ivory Coast. With interests in Norway, Canada, and the U.K., Phillips recently expanded into China, Algeria, and the Zone of Cooperation (the area between Indonesia and Australia). The company declines to do business in Russia, citing the problems other oil companies have experienced there.

With technology costs escalating, alliances play a critical role in the energy business. Amoco and Phillips recently joined in a specialized drilling technology partnership that will test and develop emerging technologies. Using imaging technology designed by Phillips’ engineers which is able to evaluate petroleum formations beneath salt deposits-the company is teaming with Anadarko Petroleum and Amoco Production Co. to develop a major reserve in the Gulf of Mexico. Phillips also forged an exploration agreement with the McMoRan Oil & Gas Co. in which the two companies will become joint-venture partners in a project area in south Terrebonne Parish, LA.

While quieter than a decade ago, the oil business hardly lacks for excitement. The Texas General Land Office recently filed suit against eight major oil companies (Phillips included), charging they had underpaid the royalties on state land use that help fund public schools. With private royalty owners seeking to enter the battle, liabilities could skyrocket, oil industry experts maintain. The defendants also include Amoco, Chevron, Exxon, USX’s Marathon Oil unit, Mobil, Royal Dutch/Shell Group’s Shell Oil subsidiary, and Texaco. Phillips argues it has calculated its royalties correctly.

Allen says his priority over the next several years is to consolidate far-flung holdings that have been “patched together over the last 80 years.” Rocked by layoffs with more potentially in the offing       the company’s current work force of 17,700 is about half its 1981 peak-Phillips’ culture may need time to regenerate.

“Oilmen always think about replacing their reserves,” Allen says. “But people resources need to be replenished, too.”


W.W. ALLEN

Chairman and Chief Executive

PHILLIPS PETROLEUM

Born: Fort Smith, AK.

Age: 59.

Education: Oklahoma State University,: bachelor’s degree in mechanical engineering and master’s degree in industrial engineering.

Family: Wife, Judith Ann; two sons.

Boards: Director, Federal Reserve Bank of Kansas City.

Industry affiliations: National Petroleum Council; American Petroleum Institute’s Public Policy Committee.

Leisure activities: Fly fishing.

Favorite flies: Green Drake (“It has large wings, and I can see r.”); San Juan Worm (“No more than a hook with a piece of red twine.”).

Creative accomplishment: Suggested Phillips advertising campaign showing a canary in a cage. The kicker: “You’d sing too if you had a sanctuary,” refers to Phillips’ efforts to foster wildlife and habitat protection.

Cars: Jeep Cherokee; Saab 900.

Mentor: His predecessor as Phillips CEO, C.J. “Pete” Silas.

Least favorite term for oil and gas products: Hydrocarbons.

Pet peeves: CEOs who sit on too many boards.