Diamond Shamrock Seeks Identity : Recent Expansion Into Oil Business Hasn’t Yet Paid Off
When Diamond Shamrock Corp. moved its corporate headquarters from Cleveland to Dallas nearly six years ago, it was viewed as an unimaginative, even plodding, chemical company that was trying to transform itself into a more exciting energy company.
Today, the Dallas-based firm does have a reputation as an aggressive energy company. But it has yet to shed its chemical company image. And it has come under harsh criticism for lacking direction, for mistiming its move into the oil and gas business and for its lackluster earnings performance.
“It’s a hodgepodge of different entities . . . with no clear definition as to where it’s going,” said Alan Edgar, an analyst with Schneider, Bernet & Hickman Inc., a Dallas-based brokerage.
“There’s a view (on Wall Street) that it’s a newcomer (to energy) at the wrong time,” said Katherine M. Stults, an analyst at Dean Witter Reynolds. “And (Chief Executive William H.) Bricker has been very severely criticized . . . because (Diamond’s earnings per share) have not grown for several years.”
For those reasons, Diamond Shamrock “is at the point where it has to do something,” Edgar said. “It either has to restructure from within or sell out to enhance its value.”
For a brief period, Diamond Shamrock’s game plan was to give up its independence through a merger with Los Angeles-based Occidental Petroleum Corp. But at midday Monday, just hours after the two companies announced an agreement to join forces through a tax-free exchange of stock worth more than $3 billion, they abruptly--and without immediate explanation--terminated their merger talks.
Little Shareholder Support
Industry analysts, who were caught by surprise by the initial announcement of a possible “business combination,” were overwhelmingly critical of the proposed union early Monday. These analysts speculated that the talks were halted at least partly because the companies came to realize that there was little shareholder support for such a merger.
Dismissing the proposed merger as a bad idea for all concerned, analyst Edgar summed up the reasons for his disapproval by saying: “Two ugly ducklings don’t make a beautiful swan.”
Even before the talks were terminated, some analysts also questioned how the talks ever reached the level they did, given the personalities and styles of the companies’ leaders. Armand Hammer, the 86-year-old chairman and chief executive of Occidental, and William H. Bricker, the 52-year-old chairman and chief executive of Diamond Shamrock, are both known as strong-willed, outspoken men accustomed to getting their way.
Bricker, for example, raised the ire of Cleveland city officials in 1979 for his handling of the company’s decision to move to Dallas, which he attributed in part to Diamond Shamrock’s desire to disassociate itself from Cleveland’s “declining image” and from the “anti-business attitude” of Cleveland’s city administration.
Given his “very forthright manner and very strong personality, I was quite surprised that the (proposed) combination got very far,” said Herbert Hart, an energy analyst with the brokerage firm of Rowe & Pitman Inc. in San Francisco. “I just couldn’t see him (Bricker) staying on as No. 2 or 3.”
After initial speculation that Hammer would remain as chief executive of the surviving company and that Bricker would become a vice chairman and perhaps Hammer’s successor, it had become much more likely by late Monday morning that Bricker would have played no role in the surviving company.
A Diamond Shamrock spokeswoman said she could not go beyond the two companies’ brief joint announcement Monday that the talks had been terminated.
Diamond Shamrock began life as a chemical company in 1910 and started its move into the energy business over the past decade, initially with the acquisition of some coal interests.
As its transformation into an energy company evolved, it became known as an aggressive acquirer of companies and assets. In 1983 alone, it acquired Natomas Corp., a major producer of Indonesian crude, and Sigmor Corp., principally a refiner and marketer of gasoline in Texas.
Largely through such acquisitions, it has aggressively built up its petroleum business at a time when the industry has been severely depressed. In 1983, for example, the last year for which full-year data is available, petroleum operations accounted for nearly 60% of operating profits.
About 60% of its oil and gas reserves are located in the United States, principally in the Gulf of Mexico and in the Southwest. The bulk of its overseas reserves are in Indonesia, mostly acquired in the purchase of Natomas. (Natomas’ Indonesian oil production accounts for over 80% of Diamond Shamrock’s total oil production.)
But Diamond Shamrock’s aggressive posture has not been without its pitfalls. In the fourth quarter of 1983, for example, the company was forced to take a net write-off of $112 million when the Mukluk site in the Beaufort Sea off the north coast of Alaska was found to be a dry hole.
Moreover, several of its acquisitions have hurt earnings and, much to shareholders’ dismay, the company’s earnings per share have remained stubbornly flat for much of the past decade. In 1983, the year of two acquisitions and in the depths of an industrywide slump, Diamond Shamrock lost $56.2 million.
For the first nine months of 1984, it reported a profit of $185.4 million, or $1.36 per share. Analysts’ forecasts for the full year predict earnings in the range of $1.80 to $1.90 per share, their lowest level in more than a decade, with the exception of the 1983 loss.
“They really haven’t made any progress in enhancing shareholder value,” analyst Stults said. “Their operations still are not earning as they should.”
Despite its heavy involvement in oil and gas, coal and geothermal (it operates a geothermal venture in Northern California with Los Angeles-based Unocal Corp.), the company is still best known for its chemical operations and is considered an industry leader in specialty chemicals used in the energy, pulp and paper businesses. Chemicals accounted for 24% of sales and only 7% of operating income in 1983 but are said to be highly profitable. For the first nine months of 1984, the chemical operations recorded an operating profit of $81.1 million.
Diamond Shamrock at a Glance A Dallas-based oil and gas producer with interests in coal, geothermal power and chemicals, Diamond Shamrock has moved aggressively to build its petroleum business despite the slowdown in that industry. Last year, it acquired Natomas Co., a producer of Indonesian crude, and Sigmor Corp., a Texas gasoline marketer. Assets: $11.65 billion Employees: 13,364 Common Stock: 126.2 million shares 12-month price range (NYSE): $22.625 - $16.750 Domestic and foreign reserves: Oil and natural gas liquids: 120.1 million barrels Natural gas: 915.1 billion cubic feet
