Phillips Petroleum Company

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Phillips Petroleum Company

Phillips Building
Bartlesville, Oklahoma 74004
U.S.A.
(918) 661-6600
Fax: (918) 661-7636

Public Company
Incorporated: 1917
Employees: 22,400
Sales: $13.98 billion
Stock Exchanges: New York Pacific Toronto

Phillips Petroleum Company is one of the largest oil companies in the United States. In addition to its core businesses— which include producing crude oil and natural gas, oil refining, and marketing gasoline—Phillips is a leading producer of petrochemicals. As the result of two hostile takeover attempts in the 1980s, Phillips has streamlined its operations to help pay off a substantial debt burden.

Phillips is named after brothers Frank and L.E. Phillips, and was organized in 1917 to acquire their original venture in the oil business, Anchor Oil and Gas Company. Raised on an Iowa farm, the Phillips brothers left Iowa after Frank heard rumors of vast oil deposits in Oklahoma, then part of the Indian Territory. Along with others Frank Phillips founded Anchor Oil and Gas in 1903. After a struggle, Frank Phillips, joined by L.E., finally began to make money from oil in 1905. They reinvested their profits, founding a bank. Eventually, the brothers decided to leave the uncertain oil business for good and concentrate on banking. They were forestalled, however, when World War I broke out and the price of crude jumped from 40 cents to more than $1 a barrel. The brothers founded Phillips Petroleum in 1917, headquartered in Bartlesville, Oklahoma.

From the very beginning, the Phillips brothers found much natural gas while drilling for oil. Most drillers considered the gas useless and burned it off at the wellhead, but the Phillips brothers sought to turn it into a cash crop. In 1917 Phillips opened a plant near Bartlesville for extracting liquid byproducts from natural gas. The by-products could be used in motor fuels. The company’s research into the uses of natural gas received further impetus in 1926, when it won a patent infringement suit brought against it by Union Carbide over Phillips’s process for separating hydrocarbon compounds.

Phillips prospered throughout its first decade. By 1927, it was pumping 55,000 barrels of oil a day from over 2,000 wells in Oklahoma and Texas. Its assets stood at $266 million, compared to the $3 million that it had when founded. The company also decided to enter the refining and marketing businesses in 1927, in response to automobile sales and as an outlet for its growing production. In 1927, it began operating a refinery near the Texas town of Borger. It also opened its first gas station, in Wichita, Kansas.

Phillips’s entry into retailing presented it with the problem of finding a brand name under which to sell its gasoline. According to company lore, the solution presented itself as a Phillips official was returning to Bartlesville in a car that was road-testing the company’s new gasoline. He commented that the car was going “like 60.” The driver looked at the speedometer and replied, “Sixty nothing . . .we’re doing 66!” The fact that the incident took place on Highway 66 near T\ilsa only strengthened the story’s appeal to Phillips’s executives. The company chose Phillips 66 as its new brand name and retains it to this day.

In 1930 Phillips added to its refining and retailing capacities when it acquired Independent Oil & Gas Company, which was owned by Waite Phillips, another Phillips brother. The Great Depression hit the company early and hard. In 1931 Phillips posted a $5.7 million deficit in its first ever lossmaking year. As a consequence, it cut salaries and laid off hundreds of employees. Phillips stock plunged to $3 a share, down from $32. The company quickly regained its profitability, however, posting a modest surplus the next year.

Before the decade was out, Phillips would also make two personnel changes to help secure its future for the longer term. In 1932 a promising young executive named K.S. (Boots) Adams was promoted to assistant to president, Frank Phillips. Six years later, he succeeded Phillips as president when the company’s founder assumed the post of chairman. Boots Adams— a boyhood nickname, inspired by his affection for a pair of red-topped boots—was 38 years old when he became president, and he and Phillips made rather an odd couple at the top of the chain of command. They often disagreed as to how the company should be run, but Phillips seems to have known that the future ultimately belonged to his protege. “Mr. Phillips liked me, but not my ideas,” Adams later recalled. “He said to me: “I’m going to object to everything you do, but you go ahead and do it anyway.”

Phillips’s strength in research and development paid off during World War H. In the late 1930s, the company developed new processes for producing butadiene and carbon black, two key ingredients in synthetic rubber, which became all the more crucial to the United States after Japanese conquests in Indonesia and Indochina cut off the supply of natural rubber in 1941. Phillips also developed high-octane aviation fuels, an early version of which powered British fighters in the Battle of Britain. The fuels were widely used by the Allied air forces.

In the years immediately following the war, Phillips began to reap in earnest the harvest of its research and commitment to natural gas. It generated substantial income by licensing its petrochemical patents to foreign companies. At home, the company was eminently positioned to take advantage of the sudden growth of cross-country pipelines in the 1940s and the consequent surge in natural gas prices. By the middle of the next decade, its reserves would total 13.3 trillion cubic feet, worth an estimated $931 million. Phillips also invested heavily in oil exploration, refining, natural gas drilling, and petrochemical plants. In 1948 it formed a new subsidiary, Phillips Chemical Company, and entered the fertilizer business when it began producing anhydrous ammonia.

While Phillips had the advantage over its competitors in natural gas and chemicals, it fell behind in the postwar foreign oil rush because of Frank Phillips’s opposition to overseas ventures. Although his company had begun drilling in Venezuela in 1944, Phillips was determined to keep the company a mainly domestic enterprise and turned down the exclusive rights to the lucrative concession in the neutral zone between Saudi Arabia and Kuwait in 1947. The company eventually acquired a one-third stake in American Independent Oil, which took the Middle East concession, but it required all of Boots Adams’s persuasive powers to get his boss to agree to it.

Frank Phillips died in 1950 and Adams, long his heir apparent, succeeded him as chairman and CEO. Under Adams, Phillips continued to focus on its interest in natural gas, and was the nation’s largest producer in the 1950s. Its program of capital expansion was ambitious, with expenditure reaching a peak of $257 million in 1956. Phillips also began to break out of the constricting mold that its late founder had built for it. In 1952 the company started expanding its marketing network beyond the Midwest, opening Phillips 66 stations in Texas and Louisiana. Phillips continued to march through the deep South, then up the Atlantic seaboard, as far as it could extend its supply lines from its refineries. It was also becoming apparent that Frank Phillips had erred in refusing to develop overseas sources of oil, as the cost of finding and pumping crude in the United States increased. Finally, as the decade neared its end, Adams went on an around-the-world fact-finding trip. When he returned, he set a five-year timetable for expanding Phillips’s international operations.

Phillips’s practice of licensing its patents overseas without acquiring an interest in the new ventures had yielded royalties but no growth; so in 1960 the company took a 50% interest in a French carbon black plant using Phillips technology. Petrochemical joint ventures in Asia, Africa, Europe, and Latin America followed. Phillips also acquired drilling concessions in North Africa, the North Sea, New Guinea, Australia, and Iran. These foreign ventures were still not profitable when Boots Adams retired in 1964 and handed the reins to president Stanley Learned, but the company had begun to make up for lost time.

Under Learned, Phillips continued to diversify and expand. In 1964 it acquired packaging manufacturer Sealright Inc. as part of its move into plastics. Two years later, Learned himself broke ground on a petrochemical complex in Puerto Rico that would produce chemical raw materials, and motor fuels. Phillips also expanded its domestic oil operations. In 1960, it had tried to break into the California market by acquiring 15% of Union Oil Company of California, but litigation by Union Oil and the Justice Department prevented Phillips from pursuing a takeover; and in 1963 Phillips sold its stake to shipping magnate Daniel K. Ludwig. Instead, Phillips acquired the west coast properties of Tidewater Oil Company in 1966 for $309 million. The deal took four months to complete and required great secrecy. When the purchase was announced, the Justice Department filed an antitrust suit to dissolve it, but a U.S. District Court allowed the acquisition to stand, pending an appeal to the Supreme Court. By 1967 there were Phillips 66 stations in all 50 U.S. states.

Learned retired in 1967 and was succeeded as CEO by William Keeler. In addition to his career with Phillips, Keeler, who was half Cherokee, was named chief of the Cherokee nation by President Harry S Truman in 1949. Keeler used this position to campaign on behalf of Native American causes. Now he assumed responsibility for the eighth-largest oil company in the United States, and one in which some serious problems were beginning to manifest themselves. Foremost among these problems was dependence on outside sources of crude oil. For years, Phillips had not pumped enough to supply its refineries, so it had to buy crude from other producers. In 1969 Phillips made an unsuccessful offer to acquire Amerada Petroleum Corporation, a major crude producer with no marketing operations. Phillips was more successful with its new exploration strategy, under which it slowed considerably exploring onshore in the continental United States, the most thoroughly prospected area in the world, and concentrated on Alaska and overseas locations. This paid off in 1969, when Phillips discovered the massive Greater Ekofisk field under the Norwegian North Sea. Phillips joined with several European partners to develop the field. The discovery of a major field in Nigeria soon followed. In the early 1970s, Phillips joined with Standard Oil Company of New Jersey, now Exxon Corporation; Atlantic Richfield Company; Standard Oil Company of Ohio; Mobil Oil Corporation; Union Oil Company of California; and Amerada Hess Corporation to form Alyeska Pipeline Service Company. Alyeska would build the trans-Alaska pipeline, which allowed the exploitation of the massive deposits in Prudhoe Bay, Alaska.

During this time Phillips suffered from overexpansion and ailing chemical ventures. Some petrochemical projects fared badly because of falling propane and fertilizer prices. In plastics, Phillips found that it could not compete with smaller companies that had lower capital costs. Keeler addressed these problems by installing tighter controls on corporate planning. Phillips executives also found that having gas stations in all 50 states was no advantage when the company’s presence in many markets was too small to ensure a profit. In 1973 Phillips divested most of its stations in the Northeast. A price war in California had drained the 3,000 stations acquired from Tidewater from the start, and it never made money; in 1973 the Supreme Court finally ordered Phillips to divest the Tidewater assets, and two years later the company sold most of its Pacific Coast properties to Oil Shale Corporation.

Keeler retired in 1973 and was succeeded as CEO by president William Martin. The remainder of the 1970s would be turbulent years for Phillips. In 1973 Phillips was one of the first and most prominent U.S. corporations to be accused of making an illegal contribution to President Richard Nixon’s re-election campaign. Phillips pleaded guilty and admitted donating $100,000 illegally. Over the course of the next two years, Phillips would admit that the company had made illegal contributions to 65 congressional candidates in 1970 and 1972, as well as to Lyndon B. Johnson’s 1964 presidential campaign and Nixon’s 1968 campaign. The money came from a secret $1.35 million fund set up by Phillips executives for that purpose and channeled through a Swiss bank account. The company paid $30,000 in fines.

In 1975 the Los Angeles-based Center for Law in the Public Interest filed a class-action suit against Phillips on behalf of several small shareholders. In settling the lawsuit, the company agreed to give up the strong majority that its executives had always held on its board of directors. The board was reconstituted, with 9 of the 17 directors coming from outside the company.

In turn, these legal difficulties were followed by even greater disasters. In 1977, Phillips’s Bravo platform in the Ekofisk field blew out during routine maintenance and spewed oil into the North Sea for eight days. Two years later, 123 people were killed when a floating hotel for Ekofisk workers capsized in a storm. Also in 1979, an explosion at Phillips’s Borger, Texas, refinery injured 41 people. Meanwhile, William Keeler’s strategy of exploring in foreign lands began to backfire as it produced more dry holes than reserves, while other oil companies were discovering new fields in the Rocky Mountains and in Louisiana.

William Martin retired in 1980 and was succeeded by William Douce. In 1982 Phillips’s fortunes revived somewhat when a joint exploration venture with Chevron found substantial reserves under the Santa Maria Basin, off the coast of California. The company added even further to its crude supplies in the following year, when it acquired General American Oil Company, for $1.1 billion, stepping in as a white knight to thwart a takeover bid from Mesa LP. It would not be Phillips’s last encounter with Mesa and its chairman, T. Boone Pickens Jr. In 1984 Phillips acquired Aminoil, Inc. and Geysers Geo-thermal Company from R.J. Reynolds Industries for about $1.7 billion. Observers noted that the deal made Phillips, now the subject of takeover rumors, a less attractive buyout candidate because of the debt it would have to assume.

The takeover rumors became reality early in December 1984, when Pickens announced that his company had acquired 5.7% of Phillips’s stock and intended to try for a majority stake. Douce, though scheduled to retire shortly, had prepared for such an event and was determined to fight. “Boone Busters” T-shirts appeared in Bartlesville, which feared for its life should Phillips ever be taken from it, and the company launched a barrage of lawsuits. One suit charged that Mesa was violating a pact it had signed before withdrawing its bid for General American Oil, in which it promised never again to attempt to take that company over. When the dust cleared a month later, Phillips had driven Pickens away and preserved its independence, but Phillips agreed to buy out Mesa’s holdings as part of a restructuring that would ultimately cost $4.5 billion, loading itself with debt and requiring the disposal of $2 billion’s worth of assets. For his part, Pickens conducted an orderly retreat laden with spoils—$75 million in pretax profits plus an additional $25 million to cover his expenses.

No sooner had Pickens left the field, however, when other attacks began. In January and February 1985, financiers Irwin Jacobs, Ivan Boesky, and Carl Icahn all bought up large blocks of Phillips stock. Then, on February 12, Icahn struck, launching a $4.2 billion offer to buy 45% of the company. Combined with the 5% he already owned, this would give Icahn a controlling stake. In early March, faced with shareholders willing to sell to Icahn owing to dissatisfaction with the Pickens deal, Phillips executives came up with a plan to exchange debt securities for half of its outstanding stock, including Icahn’s 5%, at $62 per share, compared to the $53 per share it had paid Pickens. Icahn accepted and he, too, left with his spoils.

The task of rebuilding the battered company was left to C.J. (Pete) Silas, who succeeded William Douce as chairman in May 1985. Under Silas, Phillips sold off the necessary $2 billion’s worth of assets within 18 months of Icahn’s repulse. Among those to go were Aminoil and Geyser Geothermal. The company also cut 9,000 jobs by 1989. As a result of its forced restructuring, Phillips gave up becoming an integrated, worldwide energy company, and refocused on its core oil and gas businesses. In the late 1980s, unexpectedly strong earnings from its petrochemical businesses more than offset the effect of lower oil prices and raised hopes for Phillips’s long-term recovery.

These hopes received a setback in October 1989, however, when an explosion occurred at Phillips’s plastics plant in Pasadena, Texas, killing 23 people and causing $500 million in damage. The disaster temporarily eliminated Phillips’s U.S. capacity to manufacture polyethylene, which is used to make blow-molded containers and other products. In 1991 Phillips still had $3.9 billion in debt from its battles with corporate raiders. It may want to retain a certain debt burden to deter further takeover attempts however, the new, lean Phillips may be a shadow of its former vigorous self, and may be lacking the ambition it showed in the post-World War II period, but not many of its competitors are riding as high as they used to.

Principal Subsidiaries

N.V. Phillips Petroleum Chemicals S.A. (Belgium); Phillips 66 Co.; Phillips 66 Natural Gas Co.; Phillips Driscopipe, Inc.; Phillips Fibers Corp.; Phillips Petroleum Co. Europe-Africa; Phillips Petroleum Co. (Norway); Phillips Pipe Line Co.; Phillips Puerto Rico Core Inc.; Philtankers Inc. (Liberia); Phillips Petroleum Co. (UK) Ltd. Provesta Corp.