Seagull Energy Corporation
Seagull Energy Corporation
Incorporated: 1973 as Seagull Pipeline Corporation
Sales: $377.17 million
Stock Exchanges: New York
SICs: 4923 Gas Transmission and Distribution; 1311 Crude
Petroleum and Natural Gas
Seagull Energy Corporation is an energy company with operations in the southwestern United States, Alaska, and Canada. The firm is primarily engaged in natural gas exploration and production, but it also transports, distributes, and markets natural gas, liquid products, and petrochemicals and is involved in natural gas processing. In its first two decades in business, Seagull evolved from a tiny gas gatherer with virtually no gas reserves of its own into a billion-dollar diversified gas producer with over 1.2 trillion cubic feet of natural gas reserves. Two basic factors account for the company’s dramatic transformation: the deregulation of the natural gas industry and the leadership of Barry Gault.
Seagull Pipeline Corporation was created in 1973 as an interstate gas-gathering pipeline subsidiary of Houston Oil & Minerals Corp. Although not generally well known, Houston Oil & Minerals was a wildcatting legend among oilmen and investors in the 1970s. Under the leadership of Joseph C. Walter, Jr., Houston Oil & Minerals became a petrochemical industry prodigy. First, Walter created Seagull Pipeline Corporation to collect the “leftovers” from properties that larger gas and oil companies had determined were too small for them to waste time and money to explore. Using these wells as collateral, Walter borrowed money and embarked on his own exploration efforts. A combination of luck, skill, and audacity brought success: Houston Oil & Minerals, proved natural gas reserves doubled every year from 1970 to 1976. However, the company’s debt grew almost as fast, as Walter mortgaged the reserves of one property to finance exploration of another. Houston Oil & Minerals’ capital expenditures ran at two to three times its annual cash flow, and its long-term debt quintupled from 1974 to 1977.
When the company’s gas and oil reserves tumbled in 1978, its stock, which had increased from 74 cents in 1972 to $42 in 1977 (after numerous splits), lost 28 percent of its value in four days. Walter suffered a serious heart attack that November, and Executive Vice President F. Fox Benton, Jr. took charge. Benton (who advanced to president and chief executive officer shortly thereafter) reorganized Houston Oil & Minerals, cut its capital expenditures budget, and redirected the money to debt retirement. Exploration was severely curtailed as the company went from wildcatter to conservative within two years.
In September 1980, the company’s financial devaluation was acknowledged when Allied Chemical proposed a merger. Houston Oil & Minerals declined, but soon sought a partner in Tenneco Inc., a diversified conglomerate. The two companies combined late in 1980; Seagull was spun off from its parent and listed on the New York Stock Exchange the following year. M. Allen Reagan was Seagull’s first chairman and Dan H. Montgomery served as president. The firm’s 1981 revenues totaled $62.6 million.
Seagull was taken independent during a tumultuous period for the natural gas industry. Federal regulation of natural gas had commenced in the 1950s, but shortages during the harsh winter of 1976–1977 were blamed on the artificial market forces imposed by government controls. Residential and industrial customers switched from gas to oil in droves. The Natural Gas Policy Act of 1978 launched the decontrol of the industry by placing it under the administration of the Federal Energy Regulatory Commission (FERC). The FERC set an irregular schedule for deregulation. For example, so-called “new gas,” fuel discovered after 1977, was freed from price controls after 1985. The price of “old gas” was gradually increased during the interim until the two figures met. As a gas gatherer with comparatively low overhead and risk, Seagull was positioned to take advantage of changes in the industry. The newly independent company resumed the strategy that had made Houston Oil & Minerals’ fortunes in the 1970s—it collected gas reserves that were too small for big companies to lay a pipeline to, processed the gas into higher-value natural gas liquids, and transported it to the interstate pipeline system for delivery to utilities and industry.
In June of 1981—just three months after becoming an independent company—the firm formed Seagull Energy Corporation, a subsidiary that would begin exploration and production (E&P). Seagull brought its first producing gas well on line in 1983, the same year shareholders voted to change the company’s name from Seagull Pipeline Corporation to Seagull Energy Corporation. The subsidiary became known as Seagull Energy E&P Inc.
Another of Seagull’s major projects was the “Seagull Offshore System,” of which it owned 25 percent. Touted as “the largest intrastate offshore natural gas pipeline in the U.S.,” the $300 million, 258-mile project was renamed the Seagull Shoreline System, and construction started in 1982. By the time the system was completed five years later, its accent on gas gathering in general had given way to an emphasis on E&P. Eventually, Seagull’s interest in it was reduced to 19 percent.
E&P efforts, as well as acquisitions, accelerated after that year when Barry J. Galt, formerly of Williams Cos. (an Oklahoma pipeline and telecommunications company) became president, chief executive officer, and chairman. Although demand for gas in the United States declined steadily in the mid-1980s, Galt took a long view of the industry. For while domestic production capacity continued to slope downward in the second half of the decade, demand took a sharp turn upward. Other factors also augured well for natural gas. Many electric utilities, which traditionally burned coal to fire their generators, began to view natural gas as an economical option for new facilities. Growing governmental and public concern over air quality, acid rain, and the greenhouse effect also favored gas, which gives off far less carbon dioxide, nitrous oxide, and sulfuric oxide than oil or coal when burned. Research into the use of compressed natural gas as an automotive fuel, while still in experimental stages, also gave gas companies cause to look to the future with hope.
Galt anticipated an expanding market for natural gas and led Seagull’s investment of nearly $1 billion from 1985 to 1993 in the acquisition of natural gas producers and their reserves. One of Galt’s first moves was the 1985 purchase of ENSTAR Corporation, an Alaskan natural gas utility that had, at that time, 76,000 customers in Anchorage. The $65 million acquisition was financed, in part, with a stock offering and a bond issue. ENSTAR became Seagull’s largest division, and Galt soon began using the utility’s steady cash flow as an acquisition fund. Regulatory uncertainty and low demand during the decade motivated many companies to abandon natural gas, and Galt was able to pick up several “bargains.” It was often cheaper to buy others’ reserves than to invest in exploration and production to find your own.
Seagull traded $23 million in stock for Liberty Natural Gas Co., a Dallas gas gatherer, in 1987, thereby doubling gas volume on its pipelines to 280 million cubic feet per day. The company acquired former parent Houston Oil & Minerals Corporation’s 45 oil and gas fields in 14 states from Tenneco for $13.8 million cash in 1988. Before the end of the decade, Seagull added the assets of the Houston Oil Trust at a cost of 68.3 million. Wacker Oil Inc. was purchased in 1990 for $73.4 million, which increased proved gas and oil reserves by 62 percent. Seagull formed its Mid-Continent Division for exploration and production by acquiring a portfolio of gas and oil properties, reserves, and undeveloped land parcels from Mesa Limited Partnership in 1991. Galt’s largest purchase came in 1992, when Seagull took a controlling interest in Arkla Exploration Company (a subsidiary of Arkansas-Louisiana Gas). The Arkla acquisition doubled Seagull’s proved reserves for the second time in five years and pushed the energy company over the $1 billion mark in assets. Arkla became the Mid-South division of E&P.
Each of the acquisitions was followed by a stock offering: six flotations raised $327 million over the years and kept debt at a manageable level. In spite of the dilution of Seagull’s stock, cash flow per share more than doubled in the five years from 1988 to 1993. In fact, Seagull was able to offer stockholders a two-for-one stock split through a 100 percent dividend paid in 1993.
Growth during the 1980s also came from joint ventures. In 1983, a pact with Texaco saw the completion of a 280-mile, $80 million petrochemical pipeline on which Seagull transported others’ gas supplies for a fee, and which also helped fund the acquisition of ENSTAR. A 1987 partnership with Amoco Gas Company called Cavallo Pipeline Company resulted in a 60-mile on- and off-shore gas delivery system. In 1989 Seagull contracted with Quantum Chemical Corporation to construct and operate a 73-mile petrochemical pipeline system along Texas’ Gulf Coast. These joint ventures and the concurrent acquisitions fueled Seagull’s growth during Galt’s first decade at the helm, when the company’s annual revenues increased 4.5 times, from $83.81 million in 1983 to $377.17 million in 1993.
Seagull and Galt suffered some criticism when the company moved into Canadian exploration and production with the 1993 acquisition of Novalta Resources Inc. for $194 million. Seagull’s stock declined 30 percent in reaction to both declining oil prices (making that energy source more attractive) and news that the Novalta price tag totaled seven times its cash flow. Some analysts also worried that Seagull was following too closely in Houston Oil & Minerals’ footsteps: its mounting debt amounted to 60 percent of capital in 1994. Galt refused to finance new purchases with stock issues at this low market price. Unperturbed, Galt vowed to continue his acquisition efforts—even if it meant taking on more debt—expressing continued confidence in the future of natural gas.
Early in 1994, Galt hinted to a Forbes reporter that one of Seagull’s expansion targets was the burgeoning South American natural gas market. Deregulation and privatization of that country’s natural gas industry combined with economic growth in the early 1990s to make the region an attractive candidate for expansion. While Seagull has yet to pursue opportunities in this region, the company is involved in an exploration venture in the United Kingdom.
With deregulation complete, industry observers have noted that gas producers can no longer rely on commodity price increases to improve their financial results. Instead, reserve replacement and growth as well as production growth will mark successful producers. Accordingly, in his 1993 letter to shareholders, Galt hoped for small price increases but emphasized the goal of “amassing as many natural gas reserves as possible,” a plan that had begun as early as 1987, fueling the company’s growth.
Alaska Pipeline Co.; Arkoma Production Co.; Artex Exploration Co.; Cavallo Pipeline Co. (50%); Houston Oil & Minerals Corp.; Seagull Energy E&P Inc.; Seagull Industrial Pipeline Co.; Seagull Marketing Services, Inc.; Seagull Midcon, Inc.; Seagull Mid-South Inc.; Seagull Natural Gas Co.; Seagull Processing Co.; Seagull Transmission Co.; Wacker Oil Inc.
Deffarges, Etienne H., and Luiz T. A. Maurer, “Growing Brazilian Demand to Spur Gas Network in South America,” Oil & Gas Journal, January 18, 1993, pp. 34–38.
Keefe, Lisa M, “Sitting Pretty,” Forbes, October 5, 1987, p. 172.
Palmeri, Christopher. “Gas Pains,” Forbes, January 17, 194, p. 46.
“Seagull to Acquire Arkla Exploration,” Oil & Gas Journal, November 23, 1992, p. 30.
Shaw, Susan, “The Outlook for Natural Gas,” Gas Energy Review, September 1990, pp. 8–14.
Stuart, Alexander, “Why an Oil-Patch Legend Joined Tenneco,” Fortune, January 18, 1981, pp. 48–52.
“Summary of Significant Events in History of Seagull Energy Corporation, 1981–1993,” Houston: Seagull Energy Corporation, 1993.
Vogel, Todd, “Gas Is Cooking Now: The Long-Term Players Leap at Tenneco’s Sale,” Business Week, October 24, 1988, pp. 24–25.
Wagner, Stuart J., “Breaking Away,” Oil & Gas Investor, November 1992, pp. 45–48.
—April Dougal Gasbarre