Unocal Corporation

1201 West Fifth Street
Los Angeles, California 90017
U.S.A.
(213) 977-7600
Fax: (213) 977-7813

Public Company
Incorporated: 1890 as Union Oil Company of California
Employees: 17,518
Sales: $11.81 billion
Stock Exchanges: New York Midwest Pacific

Unocal gasoline service stations dot the metropolitan area of Los Angeles and the entire Pacific coast as well. Baseball fans who follow the Los Angeles Dodgers by radio and television eventually come to know Unocal’s advertising jingles by heart. Commuters who drive past the company’s refinery near Long Beach Harbor, California, in late October see one of its huge storage tanks painted to look like a jack o’lantern. This comfortable corporate omnipresence in its home area belies the precarious history of Unocal. Unocal has survived three major hostile takeover battles, as well as a parochial corporate strategy that threatened its status as one of the nation’s largest producers of both crude oil and its by-products in the years immediately before and after World War II.

Unocal was founded in 1890 as Union Oil Company of California from the merger of three California oil companies: Sespe Oil and Torrey Canyon Oil, both of which were owned by oil-and-land baron Thomas Bard of Ventura County, and Hardison & Stewart Oil. Hardison & Stewart began as a gentlemen’s-agreement partnership between Lyman Stewart and Wallace Hardison in 1883 and incorporated later that year. In constant need of cash to finance exploration, Hardison and Stewart were referred to Bard by their bankers in 1885. Bard became their partner and operated his companies in an informal alliance with theirs. Hardison & Stewart frequently ran short of cash, however, and Bard finally proposed that they merge their companies. Hardison and Stewart consented, and Union incorporated in Santa Paula, California, as a mining company, with Bard as president, Stewart as vice president, and Hardison as treasurer. The Santa Paula plant was, in 1891, the site of the first petroleum-research facility in the western United States.

The merger proved to be anything but stable. Hardison, who had been gradually losing enthusiasm for the oil business, sold out his interest in 1892 and left Union to engage in fruit growing. His shares found their way into the possession of Stewart’s family. This, in turn, bred in Stewart a conviction that the company was his by rights and led to a conflict with Bard. Although both were Pennsylvania-born wildcatters who had been drawn to California by geologist Benjamin Silliman’s predictions of vast oil deposits there, Lyman Stewart and Thomas Bard differed in temperament. Stewart had lost his savings in a youthful oil venture in his native state, and as a result he flung himself into the oil business with the zeal of one who believed that worldly success was a sign of God’s salvation. Bard was a calm and shrewd negotiator who would later become a U.S. senator. Stewart wanted Union to put more effort into marketing petroleum products; Bard wanted it to remain a producer and wholesaler of crude.

In 1894 Bard resigned as president to protest an expansion of Union’s refining capacity that Stewart initiated and that was approved by other directors. Bard was succeeded by D.T. Perkins, his hand-picked successor. Stewart, however, faced Perkins down at an annual meeting several months later, and Stewart assumed the presidency himself. Bard, still a director, continued to object to Stewart’s free-spending expansion schemes, but was outvoted time after time. Finally, he sold out his interest in Union in 1900 and began his political career. In 1901 Union moved to Los Angeles.

With Stewart as president, his son Will Stewart, a former University of California football star, became general manager. Under the Stewarts, Union continued to expand both its production and retailing operations. Union spent much money on technological advances, organizing the first petroleum-geology department in the U.S. west in 1900, launching a prototypical tanker in 1903, and completing the first successful cemented oil well in 1905. In 1913 it opened its first service station, at the corner of Sixth and Mateo streets in Los Angeles. In time, Union came to miss Thomas Bard’s fiscal sobriety. As Lyman Stewart continued to buy up real estate with alarming aggressiveness, the company remained poor in cash. To keep up bond payments Union had to borrow ever-larger sums from local banks and financiers. As the situation worsened, creditors forced the elder Stewart to resign in 1914, and the board of directors elected his more conservative son to succeed him.

Under Will Stewart, Union continued to expand. In 1917 it acquired Pinal-Dome Oil, a local company that added 20 service stations in Los Angeles and Orange County to its retail network. Union also opened a refinery in Wilmington, California, near Long Beach Harbor, in 1917, just as U.S. involvement in World War I increased the demand for fuels. The company emerged from the war still in vulnerable financial condition. A speculative scramble for Union shares in 1920 generated takeover rumors, and the next year a foreign syndicate headed by what later became Royal Dutch/Shell Group formally launched an acquisition attempt. In response, Lyman Stewart and two other directors, banker Henry Robinson and retired Borden executive Isaac Milbank, organized Union Oil Associates, the sole purpose of which was to accumulate Union shares and prevent them from falling to Shell’s grasp. The contest took on jingoistic overtones and came down to a proxy vote at a stockholders meeting in March 1922. When the votes were counted, Union Oil Associates won. Union Oil Associates began to merge with Union itself, and two years later, Shell dumped its Union shares on the open market.

The last great battle of his life over, Lyman Stewart died in 1923. Winning that same fight had left Union in stronger financial condition than ever, and the company continued to prosper. In 1928 it joined with Atlantic Refining to form Atlantic-Union Oil, a marketing venture in Australia and New Zealand. By the end of the decade, Union’s annual sales had reached $90 million, and it was pumping more 18 million barrels of oil per year. The Great Depression abruptly ended the good times for Union. Will Stewart died suddenly in 1930. He was succeeded as president by vice president Press St. Clair, who pursued a cautious strategy in response to the worsened business climate. In 1931 Union sold its interest in Pante-pec Oil, which held leases for exploration in Venezuela. Two years later, the company sold its share of Atlantic-Union.

Union emerged from the Depression with the advertising motif that has identified it ever since. In 1932 the company was looking for a distinctive brand name for its gasoline. Robert Matthews, a director and British national who was studying U.S. history to qualify for citizenship, suggested “Union ’76,” as in “The Spirit of ’76” for its patriotic connotations. The octane rating of Union’s most potent gasoline also happened to be 76, and the marketing department adopted Matthews’s idea.

Press St. Clair retired in 1938 and was succeeded by Reese Taylor, president of Consolidated Steel and a Union director. Taylor, who was something of a regional chauvinist, would run Union with an iron hand for 24 years. Under this direction, the company would take St. Clair’s caution to an extreme and remain tucked into its geographical niche, rejecting expansion. It would eventually pay for this provincialism, falling behind in the game when other major oil companies embarked on worldwide expansion. First, however, World War II broke out, and Union boosted its crude production in response to increased demand for petroleum products. The production of aviation fuels was increased to seven times prewar levels. The company was well located to keep U.S. Navy ships operating in the Pacific Ocean supplied with fuel. It was after the war that most of the U.S. oil giants began to develop overseas sources of crude, while Union concentrated its operations in North America. In 1949 Union acquired Los Nietos Company, an oil and gas concern the holdings of which were concentrated in California. It also discovered and began exploiting substantial fields in Louisiana. Nevertheless, Union could not find enough crude to keep up with increasing demand for petroleum products, and it had to dip into its reserves to keep customers happy.

Union made some sporadic attempts to find oil in Latin America, North Africa, and Australia. It got nothing but dry holes for its trouble. Injecting steam into abandoned California wells added 70 million barrels to its reserves, but by 1956 the company was strapped for both oil and cash. That year, Taylor turned to his friend, Gulf Oil president William Whiteford, and swung a deal to acquire Gulfs surplus crude in exchange for convertible debt securities. Those debentures, however, could be exchanged for enough Union stock for Gulf to control Union. Gulf, cash and oil rich, sought entry into the western market and Union once more became a takeover target, all the more so because it accounted for more than 10% of gasoline sales in the Pacific Coast market. As Gulf mulled over the possibilities, in 1959 Oklahoma-based Phillips Petroleum began acquiring Union stock and became Union’s largest shareholder the next year with 15%. Union bought back the Gulf debentures for $120 million—$50 per share—and got a federal court to bar Phillips from acquiring any more of its stock, ending the second major threat to Union’s independence.

None of this, however, addressed the problem of expanding the company’s oil reserves and marketing presence. At the end of the 1950s, two-thirds of Union’s production was still coming from California, including the Torrey Canyon field discovered by Lyman Stewart in 1889, but a prolonged management shuffle prompted by Reese Taylor’s sudden death in 1962 distracted the company from finding a solution. Union’s board brought back Albert C. Rubel, who had retired as president in 1960—Taylor had become chairman in 1956—to take over until a permanent successor could be found. Under Rubel, Union entered into merger talks with Atlantic Refining in 1963, but Atlantic called off the deal because it did not want Union to be the surviving company, losing as it would then its own identity in its East Coast markets. Finally, in 1964, Rubel appointed senior vice president Fred Hartley to take over as CEO.

Blunt and outspoken, Hartley was a chemical engineer by training but had shown good business instincts as head of the marketing division. His first actions as CEO were to improve Union’s bottom line through layoffs and closing unprofitable service stations. The company also broke out of its provincialism in 1965 by acquiring Pure Oil Company, a struggling oil concern that nonetheless had an extensive distribution network in the Midwest and Southeast. Hartley concluded the deal over the objections of shipping magnate Daniel Ludwig, who had become a Union director when he bought Phillips’s 15% stake in 1963. The company quickly raised $146 million and bought up all of Ludwig’s shares at $36.50 per share.

Hartley saw the need for increased exploration. “If we don’t explore we’ll go backward and if we don’t explore with success we’ll go backward and broke,” he was fond of saying at the time, as quoted in Fortune in April 1967. Union cast a wide exploration net, but it mostly dredged up dry holes. In 1969 the company suffered a public relations disaster when one of its drilling platforms off the coast of California leaked hundreds of thousands of gallons of oil into the water and onto the beaches of Santa Barbara. It took months for Union to get the seepage down to a manageable level. The company maintained that it responded to the leak promptly and had minimized environmental damage, but the incident helped turn public and political opinion against offshore drilling. Various governmental authorities sued Union, Mobil, Gulf, Texaco, and Peter Bawden Drilling, and in an out-of-court settlement reached in 1974, the defendants agreed to pay a total of $9.7 million in damages to the state of California, the Santa Barbara County and the cities of Santa Barbara and Carpintería.

The Santa Barbara spill and Union’s peppery response to criticisms stemming from it gained the company a bad reputation among environmentalists. Throughout the 1970s, even before oil prices began to skyrocket, Union had charted an aggressive course in research and development of alternative energy sources. Union has spent substantial sums on developing geothermal power and liquified natural gas as an automotive fuel. Hartley stopped using a Cadillac as his company car in favor of an Audi, complaining about U.S. automakers’ unwillingness to build cars with better gas mileage. In 1974 Union began building an experimental oil-shale processing plant in Colorado. Many oil companies turned to shale in the 1970s as a potential source of crude. It was an old enthusiasm of Hartley’s; he had written a thesis on it while a student at the University of British Columbia. In 1980, while others were still marking time, Union announced that it would begin constructing a commercial-scale oil shale plant in Parachute Creek, Colorado.

In the 1970s Union joined with Standard Oil of New Jersey, Atlantic Richfield, Standard Oil of Ohio, Mobil, Phillips, and Amerada Hess to form Alyeska Pipeline Service, which would build the Alaska pipeline. Union, which was already drilling in Alaska’s Cook Inlet, would thus participate in the exploitation of the immense deposits lying under Prudhoe Bay. Union entered a niche of the metals industry in 1977 when it acquired Molycorp, a producer of rare-earth metals used in high-tech applications.

After 15 years under the guidance of Fred Hartley, Union approached the 1980s in a state of financial strength, giving its shareholders a higher-than-average return on assets. Its exploration efforts had begun to pay off, making it rich in oil and gas reserves. At the same time, Hartley’s age—he turned 65 in 1980—and the lack of an heir apparent made Union the subject of takeover speculation on Wall Street. To thwart any such attempts, it reorganized in 1983, creating Unocal Corporation as a holding company and reincorporating in Delaware, where incorporation laws made it harder for outsiders to gain control of a company without approval by its directors.

None of this, however, deterred Mesa Petroleum chairman and corporate raider T. Boone Pickens Jr., who launched the third major threat to Unocal’s independence. Pickens began acquiring Unocal shares in late 1984, even as he was beginning a separate takeover bid for Phillips Petroleum, and eventually accumulated a 13.6% stake of Unocal. The Phillips bid failed, but when Pickens walked away from it in January 1985 he did so with a hefty greenmail payment and more than $1 billion in unused credit lines and potential margin loans on his Unocal stock. In the meantime, Hartley refused to sacrifice the money Unocal was pumping into exploration to initiate a stock buy-back and inflate its price, although institutional shareholders were clamoring for such a move. Observers speculated that it was only a matter of time before Pickens and Mesa pounced.

Hartley knew that something was up. In early April, the two met by chance as they waited to testify in congressional hearings on the recent spate of hostile takeover bids for major oil companies. Business Week, April 15, 1985, reported that Pick-ens extended his hand in greeting but Hartley refused it, growling, “Go away.” “Fred, you’re talkin’ to your largest stockholder,” Pickens said. “Isn’t that a shame,” Hartley shot back.

Later that month, Mesa announced that it was offering $54 per share in cash for the 37% of Unocal stock that it would need for a controlling interest, and the same amount in debt securities for the remaining shares. Unocal responded with an offer to buy back 49% of its stock for $72 worth of debt per share, but only if Mesa reached its target of 37 million shares. Any shares in Mesa’s possession were excluded from this deal, meaning that Pickens could not sell them back to Unocal at a hefty profit. Pickens challenged this last provision in court and initiated a proxy battle to delay the company’s annual meeting until he could field his own slate of candidates for the board of directors. Loyal shareholders, however, voted Pickens down in May and re-elected Hartley as chairman.

Several days later, the Delaware Supreme Court ruled that Unocal had no legal obligation to include Mesa’s holdings in its partial buyback offer. Unocal had stalemated Pickens. To get rid of him, the company agreed to buy back one-third of Mesa’s shares at $72 per share; other stockholders would be allowed to sell back some of their holdings as well. Pickens admitted that he would do well to break even on the deal. The most ambitious attempt in his campaign to restructure the oil business—and his first genuine failure—had ended. For its part, Unocal was anything but triumphant in victory. To finance the stock buy-back, it had increased its debt load from $1.2 billion to $5.3 billion. Cuts in capital outlays would be necessary.

Fred Hartley retired in 1988. He had built Unocal into the 14th-largest oil company in the United States, but it was left to his successor, CEO Richard Stegemeier, to cope with the bulk of the debt load incurred in the battle against Pickens. Under Stegemeier, Unocal closed unprofitable production and refining facilities and sold off real estate that did not hold oil or gas, including its headquarters building in downtown Los Angeles. By the end of the decade, the company was ready for further expansion. In 1989 Unocal joined with Petröleos de Venezuela to form Uno-Ven, a marketing and refining partnership in the midwestern United States. In May 1990 Unocal added to its gas reserves by acquiring Prarie Holding Company from gold-mining concern Placer Dome.

When Fred Hartley died in October 1990, the company that he had whipped into shape and which had nearly been bought out from under him stood ready to resume the capital-intensive business of exploring for and producing oil. In the aftermath of the Mesa takeover bid Unocal had allowed its own crude supplies to dwindle, so that it once again had to buy large quantities from outside sources. After a century in which its existence had often been precarious, Unocal had proved itself tough. Like the patriotic ideal for which it named its gasoline, it continues to show an inextinguishable spirit.

Principal Subsidiary: Union Oil Company of California.

Further Reading

Hutchinson, W.H., Oil, Land and Politics: The California Career of Thomas Roben Bard, Norman, University of Oklahoma Press, 1965; Welty, Earl M., and Frank J. Taylor, The 76 Bonanza, Menlo Park, California, Lane Magazine and Book Company, 1966; O’Hanlon, Thomas, “Fred Hartley and His Weil-Oiled Multiplying Machine,” Fortune, April 1967; “The Luck of the Drill Bit,” Forbes, January 15, 1970.

—Douglas Sun