Union Texas Petroleum Holdings, Inc.

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Union Texas Petroleum Holdings, Inc.

1330 Post Oak Boulevard
P.O. Box 2120
Houston, Texas 77252-2120
(713) 623-6544
Fax: (713) 968-2771

Public Company
Incorporated: 1982
Employees: 1,000
Sales: $714.01 million
Stock Exchanges: New York Pacific
SICs: 1311 Crude Petroleum and Natural Gas

Union Texas Petroleum Holdings, Inc. is one of the largest independent oil and gas producing companies in the United States. Also engaged in oil and gas exploration overseas, the company conducts its principal operations in the United Kingdom sector of the North Sea, Indonesia, and Pakistan. Union Texas is also engaged in the manufacturing of petrochemicals.

Union Texas traces its corporate history to the Union Sulphur Company, a sulphur-mining firm founded in southern Louisiana in 1896. In 1926 Union Sulphur entered the oil business, completing its first oil well in Louisiana and then extending its exploration activities into the Rio Grande Valley of Texas. In 1953 the company discovered one of its first major oil finds in the Lake Aurthur South field in Louisiana, which soon became the companys biggest domestic oil producing property.

In 1960 the companythen called Union Oil & Gas Corporationmerged with Texas Natural Gas Corporation, combining the oil and gas production operations of Union Oil and the natural gas liquids processing and marketing facilities of Texas Natural Gas under the name Union Texas Natural Gas Corporation. The operations of the new company included oil and gas production facilities in the United States, Canada, Venezuela, and Argentina, as well as the propane marketing operations of Texgas, the former Texas Natural subsidiary. A year after the merger Union Texas Natural Gas expanded its oil and gas activities when it purchased an oil refinery and pipeline system from Anderson-Prichard Oil Corporation.

In 1962 Allied Chemical Corporation acquired the two-year-old Union Texas Natural Gas, renaming it the Union Texas Petroleum Division. In the transaction two former Union Texas Natural Gas executives, J. Howard Marshall, president, and A.M. Burden, chairperson, became directors of Allied Chemicals board. Over the next 23 years Union Texas Petroleum operated in the form of unincorporated divisions or wholly owned subsidiaries of Allied.

Union Texas expanded its principal business lines during the 1960s, participating in the joint venture construction of an ethylene manufacturing plant in Louisiana, broadening its propane operations through the acquisition of Southern Propane Company, and participating in joint venture exploration programs in the North Sea. During the 1970s Union Texas laid a foundation for long term activities overseas when it became actively engaged in exploration operations not only in the United Kingdom North Sea, but also in Indonesia, Pakistan, and Argentina.

In 1972 Union Texas and its partners became active in Indonesia and discovered a sizable gas field in East Kalimantan. During the early 1970s Union Texas and its exploration partners also made significant United Kingdom North Sea discoveries, including the Piper oil field and the Claymore oil field. Union Texas entered Pakistan in 1977 after receiving a government concession to explore for, develop, and produce oil and gas on a tract of land in southeastern Pakistan. Two years later Union Texas and its partners won a 25-year contract to develop oil fields in Argentina.

Between 1978 and 1980with the overseas operations of Union Texas expandingAllied began selling off domestic pipeline operations which had been losing money because of long term, fixed price contracts. In 1978 the 328-mile intrastate Winnie pipeline system was sold, and two years later two gas pipelines subsidiaries in Louisiana were sold.

In 1979 Allied, looking for new leadership, recruited Edward L. Hennessy Jr. to serve as its chair and chief executive. Hennessywho would move Allied in and out of over 50 different businesses during the next decadetook over the corporation at a time when more than 70 percent of the diversified companys profits were coming from oil and gas, while Allieds chemical businesses were either losing money or barely breaking even.

By 1980 the Union Texas division was participating in oil and gas ventures worldwide, operating a few gas processing facilities in Texas and neighboring states and serving as a retail and wholesale marketer of liquified petroleum gas in the eastern United States. In 1980 Union Texas launched a program to enlarge its natural gas processing operations, and during the next two years the company expanded its existing plants and acquired several other gas processing systems in Texas, Louisiana, and Oklahoma. During this period of expansion the company focused its domestic gas exploration activities in Texas and Louisiana, where the company made a number of discoveries between 1980 and 1982.

International operations also continued to expand during the early 1980s, and between 1980 and 1981 the company made oil and gas discoveries in the Canadian provinces of Alberta and British Columbia. In 1981 Union Texas acquired an exploration tract offshore the Ivory Coast, and a Union Texas-operated venture discovered the companys first oil in Pakistan. Union Texas solidified its presence in Indonesia in early 1982 when it signed a production sharing contract with the Indonesian state oil company.

In 1982 world oil prices began to decline, and while Allied began cutting corporate costs, it continued to pump increasing amounts of money into oil and gas exploration and development. In April 1982 Union Texas further expanded its domestic operations, acquiring a joint venture interest in Supron Energy Corporation, which substantially increased Union Texass exploration leaseholds in the western United States. Before the end of 1982, Union Texas Petroleum was incorporated as a wholly owned, Houston-based gas and oil subsidiary of Allied.

In 1983 A. Clark Johnson was named president and chief operating officer of Union Texas. A year later Johnson was named to the additional post of chief executive, succeeding William D. Geitz, who remained chairperson. Beginning in 1983 Union Texasseeking additional natural gas sales began pursuing spot or short-term sales of natural gas to local distribution companies and major end-users.

During the mid-1980s Union Texas continued expanding and maximizing its interest in exploration ventures in Indonesia and Pakistan. In 1984 the company participated in a joint acquisition which brought Union Texas a 50 percent interest in ENSTAR Corporation, a lucrative Indonesian oil and gas company. Between 1984 and 1985 the company made several discoveries in the southeastern area of Pakistan, where Union Texas had initially uncovered natural gas in the 1970s. During the mid-1980s Union Texas began placing an increasing emphasis on offshore domestic operations and securing federally leased tracts in the Gulf of Mexico. These operations were facilitated by the companys development of a semisubmersible offshore drilling rig earlier in the decade.

In July 1985 Union Texas Petroleum Holdings, Inc. became an independent company, after Alliedin the throes of refocusing its principal business operationssold a 50.3 percent interest in the oil and gas company through a leveraged buyout valued at $1.7 billion. At the time of the sale about one-third of Allieds profits were coming from oil and gas.

The Union Texas stake was acquired by an investor group comprised of the New York investment firm Kohlberg, Kravis, Roberts & Company (KKR) and Union Texass top management. This collective acquired the stake in Union Texas with $250 million in cash and an additional $1.15 billion borrowed against Union Texass assets from a group of banks and institutional investors. Following the leveraged buyout Allied and KKR each owned a 49.7 percent interest in Union Texas, while Union Texas managers owned the remainder of the companys stock. A. Clark Johnson retained his post as chief executive and also became chair of Union Texas, heading up a board of directors which included five members each from both Allied and KKR.

Union Texass domestic production capacity was significantly boosted in 1986 with the startup of various Gulf of Mexico operations. However, a dramatic drop in crude oil prices forced Union Texas to cut its expenses, and in 1986 the company sold its subsidiary Texgas and abandoned several undeveloped lease tracts, raising more than $325 million through the sale of assets. Despite the companys 1986 cost-cutting moves, which included slashing its workforce by more than 12 percent for the second straight year, Union Texas lost $57.5 million in 1986 on revenues of $1.25 billion.

By 1987 Union Texas had reduced the amount of bank debt it had carried into the leveraged buyout by more than $375 million. With investor interest in oil stocks climbing, Union Texas, then the nations largest independent oil and gas company, announced plans to go public. Allied and KKR initially agreed to each sell a 17 percent stake in Union Texas. However, just days prior to the late September 1987 offering, the two shareholding companies pulled out of the sale after market for oil stocks softened due to an excess of oil production by the Organization of Petroleum Export Countries (OPEC).

Union Texas scaled down its planned debut on the New York Stock Exchange, reducing its public offering from 29 million to 18 million common shares, diluting previously owned common stock, and reducing the ownership of Allied and KKR to about 39 percent each. Union Texas raised $236 million through the stock sale, which helped push the company back into the black and earn $56 million in 1987 on revenues of $1.25 billion.

The following year Union Texas, in response to a growing local demand, announced plans for a $71 million expansion of its jointly-owned ethylene plant. During the late 1980s Union Texas also boosted its interest in domestic and Gulf of Mexico projects as well as its production activities in areas where it had a history of success, including the North Sea, Pakistan, Indonesia, and Argentina.

In July 1988 an explosion at the Piper Alpha field production platform in the North Seaoperated by one of Union Texass partners, Occidental Petroleumkilled 167 workers and shut down a sizable portion of Union Texass North Sea operations. Business interruption insurance covered the companys loss of sales, and eventually Union Texas received a $228 million insurance settlement. Despite the loss of Piper field production, the companys earnings jumped 96 percent to $109.3 million on revenues of $1.28 billion.

The companys financial picture continued to improve in 1989, due in part to an 89 percent increase in offshore production in the Gulf of Mexico and an oil discovery at the Saltire field in the North Sea. For the year Union Texas earned $173 million on sales of $1.16 billion.

Union Texas entered 1990 committed to focusing on and expanding its core nondomestic operations overseas, while also initiating new overseas ventures. In 1990 the company signed a 20-year extension agreement with the national oil company of Indonesia, solidifying its presence in that country until 2018. Early that year Union Texas also signed an agreement for a new venture to explore 4.4 million acres offshore Argentina. Moreover, the company began a development project in Egypt, conducted seismic studies on a tract offshore Spain, and acquired a 20 percent interest in a petroleum prospect license awarded by the government of Papua New Guinea.

In May 1990 Union Texas announced that it would put itself up for sale in order to increase shareholder benefits. However, after seven months on the block, the company took itself off the market after failing to get the price it wanted for the entire company. For the year Union Texas earned $116 million on revenues of $1.33 billion.

In 1991 the company began aggressively expanding its exploration activities into several frontier ventures, including those in Papua New Guinea and offshore Argentina. The company also launched a program to identify coal basins in Europe with high potential for yielding methane gas and was awarded two permits in Spain to explore for natural gas in coal beds using a methane recovery technology. In the North Sea, Union Texas focused on completing a new production platform to replace the Piper Alpha platform, dedicating $136 million in 1991 to the redevelopment of Piper field and the development of the nearby Saltire field.

Despite its decision not to sell the company as a whole, Union Texas entered 1991 with plans to sell the majority of its North American operations, and by the end of the year the company had sold its domestic offshore oil and gas business for $475 million, its North American oil and gas business, excluding Alaskan operations, for $260 million, and its domestic natural gas processing business, including 12 gas processing plants, for $135 million. For 1991 Union Texas earned $333 millionincluding a one-time gain of $203 million stemming from the sale of businesseson revenues of $1.08 billion.

After selling its U.S. assets, Union Texas entered 1992 free from exposure to the cyclical domestic natural gas market. The divestitures also left Union Texas a more sharply-focused company, with activities in the United Kingdom North Sea, Indonesia, and Pakistan serving as cornerstones of its business.

During 1992 the company launched several new exploration programs, highlighted by a crude oil discovery offshore northern Alaska. The companys overseas joint ventures in Indonesia and Pakistan set production records, and Union Texas entered the French gas market after securing a permit to explore for oil and gas in France using coalbed methane technology.

In November 1992 Alliedin the throes of its own restructuring and consolidation programsold its 39 percent stake in Union Texas in a secondary public offering of more than 33 million shares. Union Texas received no proceeds from the sale, which left about 61 percent of the company in the hands of the general public. That year Union Texas earned $109 million on revenues of $714 million. As a result of the sale of its domestic assets, Union Texas was listed by Fortune as having the biggest 1992 sales decrease among Fortune 500 Companies, with divestitures leading to a 34 percent drop in sales from a year earlier.

While continuing to depend on its more established operations, Union Texas entered 1993 placing increasing emphasis on other territories such as Alaskawhere the company began actively pursuing and exploring new leaseholdsas well as Papua New Guinea and offshore Argentina. Coalbed methane projects continued to grow as well, and in early 1993 the company received a license to explore for coalbed methane in Great Britain.

In early 1993 production at the Piper oil field resumed at a reduced rate, with full production expected by 1994. With the redevelopment of the Piper field, Union Texas moved towards the mid-1990s in a mode geared towards restaking its claim in the North Sea. At the same time the company looked to maintain its solid presence in Pakistan and Indonesia, secure a growing foothold in Alaska, Argentina, and Papua New Guinea, and expand its foundation in Europe through coalbed methane explorations.

Principal Subsidiaries

Union Texas Petroleum Limited (England); Union Texas Petroleum Europe & Middle East, Inc. (England); Union Texas South East Asia Inc. (Indonesia); Union Texas Pakistan, Inc.; Union Texas Asia Corporation (Singapore); Union Texas Espana, Inc. (Spain); Unistar, Inc.; Union Texas Exploration Corporation; Union Texas Petroleum First Financial Corporation.

Further Reading

Byrne, Harlan S., Allied-Signal Inc.: The Shuffling Over, It Nurtures a Profitable Blend of Businesses, Barrons, June 18, 1990, pp. 4950.

Calkins, Laurel Brubaker, Union Texas Petroleum Cancels Proposal to Sell Entire Company, Houston Business Journal, December 24, 1990, p. 13.

Frazier, Steve, Union Texas Petroleum Plans Initial Offering, The Wall Street Journal, August 5, 1987, p. 8.

Hager, Bruce, Taking an Ax to Allied, Business Week, November 4, 1991, p. 70.

Koen, A. D., U.S. Petroleum Industry Adjusts to Tough Economy, Oil and Gas Journal, July 13, 1992, pp. 1417.

Kurylko, Diana T., The Corporate Chameleon, Business Journal of New Jersey, October, 1988, p. 50.

Naj, Amal Kumar, Allied-Signal Inc. Will Sell Its Interest in Union Texas, Raising $955 Million, The Wall Street Journal, September 24, 1992, p. A4.

Percefull, Gary, Oxy to Redevelop North Sea Oil Field, Tulsa World, December 1, 1989, p. B7.

Solomon, Caleb, and Patricia Ann McKanic, Union Texas Petroleum Cuts Price, Size of Offering as Large Holders Pull Out, The Wall Street Journal, September 25, 1987, p. 6.

Solomon, Caleb, Union Texas Petroleum Expects to Post Surge in 2nd-Quarter Operating Profit, The Wall Street Journal, July 10, 1989, p. A5.

____. Union Texas Putting Itself on the Block, The Wall Street Journal, May 1, 1990, p. A4.

Roger W. Rouland

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