Sales: $2.82 billion
Stock Exchanges: New York Pacific Midwest
The history of MAPCO Inc. provides ample evidence that great size is not a requirement for success in the U.S. energy field. Founded in 1960, MAPCO has leapfrogged from one energy niche to the next, using its gas-pipeline earnings to finance an entrance into coal and oil production and then shifting downstream to become a sizable refiner and marketer of oil and gas. MAPCO has retained a foothold in all of these areas, with oil refining and marketing supplying the bulk of revenue but pipeline operations still generating exceptionally large amounts of cash for use in further investments and upkeep.
MAPCO was founded by Robert E. Thomas, who graduated from the University of Pennsylvania’s Wharton School of Finance in the 1930s with a degree in accounting and corporate finance. Thomas made a name for himself as manager of railroad investments for Keystone Custodian Fund, a Boston investment firm, and subsequently was hired by Pennroad Corporation to untangle a host of problems left behind by its former railroad holdings. When Pennroad bought the Missouri-Kansas-Texas Railroad (Katy) in 1956, it named Thomas as chairman of the railroad’s executive committee. Katy was in poor financial condition, with Thomas looking for possible diversification, when he was told of a proposed scheme to run a liquid-propane gas pipeline along railroad rights-of-way from Texas to Albany, New York. Katy’s lines covered a good part of that route, and Thomas pursued the pipeline concept as a possible investment for the railroad. It became clear that Katy did not have the cash or borrowing power to finance the deal and in 1958, Thomas and a group of partners organized a company, called MAPCO Inc., to build and operate the Mid-America pipeline system. MAPCO raised $71 million in capital, some of it from Prudential Insurance Company of America, and much of it from a public stock offering, and was in business by 1960. Thomas also kept his position at Katy, which took an 18% interest in the Mid-America pipeline.
Mid-America was the first U.S. pipeline built specifically to carry only one type of liquid natural gas, that being propane. Propane is used widely in the upper Midwest as a heating fuel, and until the construction of Mid-America most of the propane shipped from sources in the South and West traveled by railroad car to its midwestern destinations. While it is cheaper and faster to pipe natural gas liquids than to carry them by rail, a pipeline cannot run properly without a volume of product sufficient to keep it physically full and financially able to repay the considerable debt incurred by the cost of its construction. MAPCO therefore secured commitments from a group of 13 propane producers, consumers, and traders before embarking on construction of its 2,184-mile initial route between New Mexico and the Illinois-Wisconsin region. As the man most responsible for assembling this team of future customers and the needed financing, Robert Thomas virtually guaranteed the eventual success of Mid-America and MAPCO, as it generally is more difficult to create a pipeline than to run one profitably. Though subject to Interstate Commerce Commission rate regulation, pipelines nevertheless take advantage of limited competition, low labor costs, and healthy depreciation allowances to generate large amounts of cash and excellent net income. Once well underway, MAPCO immediately returned a profit and has continued to do so.
The pipeline faced certain problems, however. As a supplier of heating fuel, its business was naturally seasonal, with the first and fourth quarters of each year showing strong sales while the intermediate months were slack. The need to better balance this lopsided earning pattern has determined much of MAPCO’s diversification. In 1963, for example, the company first entered the oil-and-gas field with the purchase of existing wells in the Texas panhandle, and in the following year added 17 more sites in Oklahoma and Texas. In 1965 MAPCO tripled its gas production with the acquisition of no less than 480 oil and gas wells in the lower Midwest. Not only were the wells sound investments in their own right, but sales of crude energy are fairly uniform throughout the year, helping to offset MAPCO’s summer slowdown, and by securing a source of liquid natural gas, the purchases were a first step toward MAPCO’s vertical integration.
In 1966 MAPCO took a second step toward integration with the acquisition of the Thermogas Company, a retail and wholesale distributor of propane and butane as well as of gas-burning appliances. With hundreds of sales outlets throughout the midwestern and southern United States, Thermogas more than doubled MAPCO’s revenue and completed integration of the company’s liquid-propane gas system from wellhead to retail sale. It also provided a comprehensive sales network for MAPCO’s next new product, liquid plant fertilizer and food. In 1968 MAPCO bought the leading U.S. manufacturer of such liquid fertilizers, Indian Point Farm Supply, Inc., of Athens, Illinois. Indian Point synthesized fertilizers from a mixture of ammonia, potash, and phosphoric acid, and MAPCO wasted no time in buying two major suppliers of these raw materials, AnAmo Company and Poly P, Inc., makers respectively of anhydrous ammonia and a fertilizer base known as 10-34-0. With MAPCO’s Thermogas outlets marketing its fertilizers, Indian Point’s sales rose dramatically in the next five years to $12 million annually, or about 9% of the parent company’s revenue in 1973. Because fertilizer is sold primarily in the spring and summer, most of the $12 million helped to offset MAPCO’s preponderance of winter pipeline revenue from heating fuel.
By that time, however, MAPCO’s oil-and-gas production had developed into a booming business in its own right. When its earlier wells began to run dry in the late 1960s, MAPCO made a series of important new purchases from Bradley Producing Corporation in 1969, in a single year raising its oil production by almost 50%. For the first time, MAPCO began its own program of oil and gas exploration, acquiring interests in some 125,000 acres in the United States and Canada. Although by world standards these energy holdings were miniscule, they soon had a powerful positive effect on MAPCO’s balance sheet. In 1970, of MAPCO’s $83 million sales, oil and gas production accounted for only $17 million, but so lucrative is the crude oil business that nearly one-third of MAPCO’s net income was contributed by that relatively minor percentage of sales. Such results encouraged further investment, and in 1971 MAPCO entered another energy field with its purchase of two coal companies with reserves exceeding 41 million tons. The new coal mines were immediately modernized and expanded, and—operating under a non-union, production-incentive system—turned in outstanding performances.
Robert Thomas had not only balanced the revenue tilt of MAPCO’s original propane-pipeline holdings but also moved the company into energy resources in time to take advantage of the oil crisis and inflation of the 1970s. When the OPEC embargo of 1973 quadrupled oil prices overnight, MAPCO’s modest energy assets became far more valuable than its earlier pipeline and Thermogas holdings. From sales of $110 million in 1973, company revenue escalated to $425 million three years later, the bulk of which was supplied by oil, gas, and coal production. The energy crisis was particularly good for domestic U.S. oil producers, who could then afford to spend the extra dollars required to keep mature and limited wells pumping. The 1970s OPEC embargo led to a boom in domestic U.S. production and along with the rest of the U.S. oil industry, MAPCO rode the boom to unprecedented prosperity and was soon expanding its exploration efforts as far away as Indonesia and Australia. The company also continued to add to its coal stock, picking up mines in Illinois, Kentucky, Maryland, and Virginia.
With the gradual decline of energy prices beginning around 1980, however, MAPCO’s largely domestic oil and gas production rapidly became far less attractive. Small domestic oil concerns are the first to be pinched by falling prices, and within a few years MAPCO’s properties were running at a loss and had to be sold. In 1984 James E. Barnes replaced Thomas as chairman, president and CEO of MAPCO. By 1985 the last of MAPCO’s significant oil and gas production capacity had been disposed of, for an aggregate receipt of $290 million, but in the meantime MAPCO had shifted into a more stable segment of the oil business, refining and marketing. In late 1980 it outbid a number of other parties for Earth Resources Company, paying around $250 million for its oil refinery and gas station-convenience stores located throughout the South. As middlemen in the oil business, refiners and marketers are far more flexible than oil producers and generally earn a less spectacular but more reliable return on investment. MAPCO thus eased out of production as crude prices were dropping and bought a chain of marketers which in 1989 accounted for the bulk of company revenue—$1.3 billion—and the largest share of operating income—$85 million. Its gas station-convenience store holdings had grown to over 300 by 1989, a handful of them located as far away as Alaska, and the company had two refineries with a combined capacity of 170,000 barrels per day.
MAPCO has retained its position in coal production and marketing, which, though a much smaller division, is more profitable than oil and gas. The company in 1989 had proven reserves of 434 million tons in eight U.S. mines, all of them located between southern Illinois and West Virginia. MAPCO has tried to protect itself from sudden downturns in its coal revenue—$313 million in 1989—by producing metallurgical and steam coals in various grades of volatility and sulfur content. Metallurgical coal is the type of coal used to fuel smelters, while steam coal is burned to produce steam. The company markets most of its metallurgical coal overseas, and all its steam coal in the United States.
Equal in providing revenue but much less profitable than coal is MAPCO’s gas-products division, which still sells propane under the Thermogas brand name. The 136 Thermogas retail stores, located mostly in the Midwest, also continue to sell liquid fertilizers made by MAPCO’s own facilities. Much of the propane sold via the Thermogas chain arrives by means of MAPCO’s fourth and last operating unit, its original Mid-America pipeline system, now greatly expanded. The earlier propane-only lines running between the Texas area and the upper Midwest have been extended into the overthrust belt of Wyoming and Utah, and MAPCO also pipes anhydrous ammonia and crude oil via two other, smaller systems. What is remarkable about MAPCO’s original pipeline division is not its size, however, but the consistency with which it continues to earn high levels of operating income. As when Robert Thomas first put together the pipeline in 1960, Mid-America and its related adjuncts routinely make profits of more than 50% on annual revenue. In 1989 MAPCO’s transportation division enjoyed operating profits of $75.5 million on revenues of $145.9 million. MAPCO’s original business is thus the smallest of its many parts but remains the star performer of the group, with each year demonstrating anew why MAPCO was created in the first place.
MAPCO Coal Inc.; MAPCO Gas Products Inc.; MAPCO Petroleum Inc.; MAPCO Transportation Inc.
Aydin, Jack N., “MAPCO Inc.,” Wall Street Transcript, June 3, 1974.