Maxus Energy Corporation
Maxus Energy Corporation
Incorporated: 1910 as Diamond Alkali Corporation
Sales: $718.4 million
Stock Exchanges: New York Pacific Basel Geneva Zurich
SICs: 1311 Crude Petroleum & Natural Gas; 1381 Drilling Oil & Gas Wells
Maxus Energy Corporation is an independent crude oil and natural gas exploration and production company based in Dallas, Texas, with international activity in Indonesia and 13 other countries and domestic activity primarily in the mid-continent and Gulf of Mexico regions of North America.
Maxus was created in April 1987 from the domestic and international exploration, production, and geothermal operations of Diamond Shamrock Corporation, which traced its history to the Diamond Alkali Corporation, a chemical operation founded in 1910. However, Maxus bears little if any resemblance to that earlier organization due to the restructurings, acquisitions, and divestitures of the 1970s and 1980s.
The Diamond Alkali Corporation was founded in 1910 by four Pittsburgh-based glass makers who wanted to manufacture their own soda ash, the major raw material in glass production. They incorporated the Diamond Alkali Corporation on March 21, 1910, and with a capitalization of $1.2 million built a soda ash plant in Painesville, Ohio, on the Lake Erie shore. They planned to sell the plant’s excess capacity to large glass producers, but before the Painesville plant began operation in 1912 they were blocked by the established soda ash manufacturers, who signed long-term, lucratively priced contracts with the major glass manufactures. This action might have bankrupted Diamond Alkali but for World War I which dramatically increased the demand for glass.
After the war, the company, under the direction of president T. R. Evans, the son of two of the company’s founders, expanded. This expansion seemed at times haphazard but it usually took into account synergies in different industrial processes. The company began making bicarbonate of soda in 1918. In 1920 it built a silicate of soda plant in Cincinnati and in 1925 it expanded the Painesville plant to produce calcium carbonates, cement, and coke. Diamond waltzed successfully through the Depression. In 1929 it inaugurated chlorine production and in 1933 it reported profits of $3 million on sales of about $13 million.
The company continued to be profitable after T. R. Evans died suddenly in 1931. Even so, Evans’s son, Raymond F. Evans-then a senior chemistry major at Princeton and a major stockholder—was worried that Diamond was stagnating and without a research department would eventually lose its place in the market. He moved to address these concerns. In 1936 he organized—with the help of sympathetic directors—a project to substitute dolomitic limestone for ordinary limestone in soda ash production and produce a new by-product, magnesium oxide. The project was a success, and when World War II increased magnesium demand for use in incendiary bombs, Evans was recruited to run a government magnesium plant. In 1942 he established Diamond Alkali’s first research laboratory. The following year he was named the company’s general manager and shortly thereafter executive vice-president and then president and CEO.
As CEO Evans decentralized the company. In 1946 he broke ground for a second chlorine/caustic soda plant in Deer Park in Houston. He added detergents to Diamond’s product mix and in 1948 moved its headquarters from Pittsburgh to Cleveland. In the decade that followed, Diamond Alkali entered several new markets, producing chromic acid, perchlorethelyne and chlorinated methanes like carbon tetrachloride. It entered the agricultural chemicals market with the acquisition of Kolker Chemical Works, established itself in the production of methylchloride, methylenechloride, and chloroform by acquiring Belle Alkali Company in West Virginia, and built an agricultural chemicals plant in Mexico. Most importantly, it also launched itself into the plastics business with the manufacture of poly vinyl chloride (PVC) at Deer Park.
Evans continued to back this expansion with a strong commitment to research. In 1951 he inaugurated the Technical Center at Painesville and in 1961 inaugurated the Diamond Research Center at Concord.
In the 1960s Diamond made several major acquisitions and expanded into new operations. It acquired Chemical Process Company, Fiber Chemical Corporation, Harte & Company, and Nopco Chemical; it bought and then sold iron ore manufacturer and Great Lakes shipper Piclands Mather. It organized a specialty chemical division and expanded its production of bulk industrial chemicals and plastics and built a new chlorine/ caustic and PVC plant in Delaware City, Delaware.
In the mid-1960s, Evans recognized that petrochemical combines were the wave of the future. Since he did not want Diamond Alkali, like so many other mid-sized chemical companies, to be acquired by an oil colossus, he approached Shamrock Oil & Gas with a merger plan and in 1967, the two companies joined.
Like Diamond Alkali, Amarillo-based Shamrock Oil & Gas had been nourished by Pittsburgh money. Banker Henry Fownes had provided financial stability while engineer and oil economist J. Harold Dunn had guided the company into becoming a sizable petroleum producer and refiner with its own string of service stations in the Southwest. Before its merger with Diamond Alkali, Shamrock had been too small to diversify into chemicals but profitable enough to be a takeover target for the major oil producers.
Raymond F. Evans ran the renamed Diamond Shamrock Corporation with help from C. A. Cash of Shamrock Oil & Gas. In the first half of the 1970s, the company expanded its oil and gas exploration efforts, built a manganese dioxide plant in Baltimore and a chrome chemicals facility in North Carolina.
But while the company was quite successful—it earned $140 million on sales of $1.4 billion in 1976—its leadership was aging. In 1976 senior management selected 44-year-old William H. Bricker to lead Diamond Shamrock into the 1980s and beyond. Trained as a horticulturist, Bricker had joined the company in 1969 after a brilliant sales career with California Spray and Chem-Agro. Once on board at Diamond Shamrock, he had risen quickly, first turning around the company’s ag-chemicals business and then becoming a group vice-president in 1971, president of Diamond Shamrock in 1974, and CEO in 1976.
Before becoming CEO, Bricker had been well liked and perceived as a team player. That perception soon changed. In 1979 he set out to make Diamond a major energy company. Over Evans’s objection, he acquired Falcon Seaboard Inc., a coal producer, for $250 million. When, that same year, he moved the corporate headquarters to Dallas from Cleveland, Evans resigned in protest. “I had the feeling from personal contact,” Evans later told Business Week, “that he wasn’t going to listen to anyone.” Diamond Shamrock was still doing very well at this time. In 1981 when Bricker laid out $220 million for Amherst Coal, the company posted record earnings of $230 million on sales of $3.4 billion. An impressed market boosted Diamond’s stock near its all-time high of $40 per share.
The events of the following year, however, were a portent of things to come. Though recession and lower energy prices caused earnings to fall 35 percent, the company spent $161 million to buy drilling rights in Alaska’s Beaufort Sea. By year’s end the price of a Diamond share had fallen to $17. In 1983 Bricker made what both Business Week and The Wall Street Journal called one of the worst oil acquisitions of the decade. He acquired Natomas, a struggling San Francisco-based oil company, for $1.5 billion. According to Business Week, that price amounted to $12.50 a barrel for Natomas’s oil, twice what reserves were fetching in the open market. Later it was discovered that Natomas’s price was being manipulated by arbitrager Ivan Boesky and Diamond Shamrock’s investment advisor Kidder, Peabody. At year’s end a dry hole in Diamond’s Beaufort Sea drilling venture led to a big write-down and its first ever loss of $60 million.
After retrenchment in 1984, Bricker tentatively agreed to sell Diamond to Occidental Petroleum in 1985 for Oxy stock worth $28 a share. Bricker later backed away from the deal. Instead, he restructured the company and instituted a massive stock buyback which he financed by jettisoning whole divisions, including the chemical business. Falling energy prices, which had devalued Natomas, led the company to take $891 million in write offs. Losses for the year totaled $605 million.
Dogged by losses and debt caused both by poor investment and by falling energy prices, Bricker struggled to maintain share prices through buybacks. In 1986 he refused a $16-per-share acquisition offer from T. Boone Pickens. After Pickens offered to buy 20 percent of Diamond stock for $15 a share early in 1987, he announced a last reorganization and then resigned. The company would split into Maxus Energy and Diamond Shamrock. Maxus would hold oil, natural gas, and coal production assets while Diamond Shamrock would include refining and marketing. Prudential Insurance agreed to buy $300 million in Diamond convertible preferred stock for which it would get an annual dividend of 9.75 percent, three seats on Diamond’s board, and veto power over takeover. Diamond would use Prudential’s investment to buy back 20 million shares of common stock.
After Bricker resigned, Business Week published an article which laid Diamond Shamrock’s troubles squarely at his feet. The article questioned many of his decisions—especially the Natomas deal—explored the possibility of conflicts of interest, gave evidence of his inability to listen to directors or other senior management, and described a lavish corporate culture out of step with a debt-ridden company.
Charles L. Blackburn, a Shell Oil executive who had recently joined Diamond Shamrock, became Maxus Energy’s chairman, president, and CEO. Blackburn aimed to make Maxus lean and profitable and to set clear goals: divest non-exploration and production operations, cut $20 million in overhead costs, eliminate non-essential activities, confine North American exploration to proven basins, and broaden international exposure commensurate with resources.
Maxus took the first steps toward all of these goals in Blackburn’s first year. It sold its coal company for $135 million, signed a letter of intent to sell its geothermal assets and divested several non-oil and gas businesses. It sold its British North Sea properties as part of an effort to divest properties it had little control over. It cut more than $20 million in administrative costs—closing offices, eliminating non-essential activities, and consolidating departments such as oil trading and natural gas marketing.
Divestment of the coal company led to a $51.1 million first quarter loss while a write-down of geothermal assets and Alaskan coal reserves caused a second quarter non-cash charge of $380 million. For 1987, Maxus reported a loss of $539.6 million, compared to a restated $115 million in 1986. The 1987 loss without discontinued operations and write-offs was $106.9 million compared to $193.1 million in 1986. Cash flow rose while long-term debt declined. At this point Maxus’s activities encompassed four North American divisions, including: holdings in the Anadarko Basin of the Texas Panhandle and western Oklahoma; the Williston Basin of North Dakota and Montana; the Powder River Basin in Wyoming and Montana; the Permian Basin in west Texas and eastern New Mexico; the Texas and Louisiana Gulf coast areas; and the Western Canadian Sedimentary Basin. Its international operations were primarily in Indonesia and the Dutch North Sea, with ongoing exploration activities in Africa, Asia, Europe, and South America.
Early in 1988, Blackburn outlined a plan for the future which included continued cost cutting, aggressive sales, sales of non-strategic assets, and most importantly the application of new conceptual plays in proven basins in order to reduce risks and operations costs while exposing the company to the possibility of finding reserves that went beyond replacement of production. This strategy proved successful despite accounting changes and weak oil prices which led to a 1988 loss of $131.6 million. To cut costs, Blackburn refinanced some debt and reorganized the U.S. exploration and production staff, closing offices and relocating approximately 120 employees to Dallas. He sold its Dutch North Sea holdings for more than $22 million and selected U.S. properties for $38 million. Most importantly, a new conceptual play rewarded Maxus with its largest oil discovery ever in the Intan and Widuri fields of the Southeast Sumatra area of Indonesia.
Clearly Blackburn was on the right track. The Wall Street Transcript gave him its 1988 Gold Award in the Oil & Gas Industry and described him as a “nonconformist executive with the conviction and confidence that inspires creativity and enthusiasm.” Regarding the Indonesian discoveries the paper’s analyst commented that he “took a subbase that had been condemned and went back with a new and different geological concept and made two significant discoveries. I think it takes a person like Blackburn at the top of an exploration company to give the people in the field the freedom to take a whole different look at the property.”
In 1989 Blackburn made significant progress toward rectifying Maxus’s balance sheet problems. He sold oil and gas assets (including its Canadian operations and a 10 percent share of its leases in Northwest Java) for $310 million and used some of the proceeds to reduce debt balance by $123 million and replace $80 million of senior debt with a subordinated zero-coupon convertible debt issue.
With Maxus’s balance sheet problems behind it, Blackburn turned to the company’s basic business—finding and selling oil and gas. He sped exploitation of Intan production and created the Frontier Group, a team of geologists and geophysicists dedicated to developing new plays worldwide. In North America, he narrowed the focus to the Gulf Coast and mid-continent areas and confined exploration to prospects with at least 12 billion cubic feet of gas and finding costs of $2 per barrel of oil equivalent. Finally, he focused marketing efforts and aggregated supplies to realize premium prices for volatilely priced natural gas.
In 1990 higher Indonesian production combined with lower debt and depreciation costs carried Maxus to its first ever profitable year when it earned $7.3 million on revenues of $685 million. Revenues continued to grow in 1991 when they reached a record $791 million. But because of falling energy prices the company lost $11.2 million. Blackburn continued to focus the company on areas which could be most profitable. He sold Maxus’s Rocky Mountain and Permian Basin assets and acquired reserves that made it the second largest natural gas producer in the Texas Panhandle. International revenues exceeded domestic revenues for the first time. In terms of production Maxus had become a domestic natural gas producer and an international oil producer.
In 1992 the company continued to strengthen its position despite the unpredictability of energy prices. In October of that year Maxus and Kidder, Peabody & Company settled a suit in which Maxus alleged that Kidder executive Martin A. Seagal had provided inside information that arbitrager Ivan Boesky had used to run up Natomas’s price before Diamond Shamrock had purchased that company. Kidder agreed to pay Maxus $125 million in cash plus an additional $40 million for warrants to buy Maxus stock.
Bricker, W. H., Diamond Shamrock Corporation, Newcomen Society Number 1064, 1977; Mason, Todd and G. David Wallace, ‘The Downfall of a CEO,” Business Week February 16, 1987.