Amerada Hess Corporation - Company Profile, Information, Business Description, History, Background Information on Amerada Hess Corporation



1185 Avenue of the Americas
New York, New York 10036
U.S.A.

Company Perspectives:

Our vision is to be the leading independent in each of our businesses and to achieve a return on capital employed that will place the corporation in the top one-third of oil companies.

History of Amerada Hess Corporation

Amerada Hess Corporation is one of the largest integrated petroleum companies not considered one of the "majors." It engages in petroleum exploration, production, refining, transportation, and service station retailing. The Amerada Hess story begins with the English oil entrepreneur Lord Cowdray, who early in 1919 set up the Amerada Corporation to explore for petroleum in the United States, Canada, and Central America. At this time Everette DeGolyer, a geophysicist and engineer with a record of important technical innovations, was made Amerada's first vice president and general manager. DeGolyer repeatedly stressed the importance of both geological competence and the then-newly evolving technologies of gravimetric and seismic reflection exploration, arguing that Amerada's ultimate success lay in making accurate and timely scientific estimates and appraisals of oil well production, as well as in the equally difficult economic estimates of oil market futures.

Origins

The company's first operations centered around wildcat and development fields in Kansas, Oklahoma, Texas, Louisiana, and Alabama. As well as having ties to the Mexican Eagle Oil Company, Amerada Corporation by 1920 controlled two subsidiaries, Goodrich Oil Company and Cameron Oil Company. Early successes were in major fields in Kansas, such as the Urschel; and in Oklahoma, the Osage, Seminole, Cromwell, and others. In 1923 DeGolyer was one of the first and most vocal advocates for systematic, as opposed to guesswork, exploration for certain kinds of oil traps around salt domes, frequently found in the Gulf of Mexico states. After state, congressional, and private rumblings about the large land and financial holdings of foreign-controlled oil companies in the United States, between 1924 and 1926 Lord Cowdray sold Amerada stock on the United States market at $26 a share, principally through the Rycade Corporation, to fund the acquisition of oil field holdings in Texas.

As many explorationists and historians acknowledge, much of the drama and success of the Amerada Corporation before and during the Depression was tied closely to its pioneering use of geophysical exploration methods. In 1922 DeGolyer conducted what was apparently the first survey of an oil deposit at the famous Spindletop Salt Dome in Texas using advanced geophysical techniques. To further develop and perfect these methods, in 1925, after oil's recovery for approximately 50 cents to $3 a barrel, DeGolyer together with J. Clarence Karcher organized a subsidiary company, Geophysical Research Corporation (GRC) of New Jersey, which established numerous patents and which eventually spawned Geophysical Service, Incorporated, now Texas Instruments. Pioneering many early joint ventures, Amerada's first major success in new field prospecting by geophysical methods came with the discovery of the Nash dome, along with 10 others elsewhere, on a lease held by Louisiana Land and Exploration Company (LL&E), systematically exploring over three million acres of south Louisiana swamps in a fraction of the time of prior surveys. GRC undertook another major survey for Amerada Corporation in 1927 and 1928, finding oil deposits in the Wilcox sands, which had been missed by many other major and independent oil companies. DeGolyer's innovations and discoveries led to his becoming president in 1929, and in 1930 chairman of the board of Amerada. Notwithstanding continued exploration successes because of geophysical innovations developed during the Depression, in 1932 DeGolyer resigned from the company to continue work as an independent consultant and exploration company.

After extensive joint seismic exploration survey in 1933, Amerada and Stanolind Oil & Gas made the first discoveries in the famous Katy, Texas, oil and gas fields. Further extension surveys led to other discoveries near Houston, Texas. In 1945 Amerada was responsible for finding another major reservoir in the west Texas Permian Basin. The history of the famous North Dakota Williston Basin oil fields emerged into geological and public attention when Amerada, between 1951 and 1953, completed major reconnaissance seismic surveys leading to an important wildcat discovery, in the Nesson anticline.

Mergers and Growth, 1940s--60s

In 1941 Amerada Corporation merged with its principal operating subsidiary and became Amerada Petroleum Corporation. Through the World War II period Amerada operated exclusively within the United States and Canada. In December 1948 Amerada Petroleum Corporation; Continental Oil Company, now Conoco; and Ohio Oil Company, now Marathon, formed the Conorada Petroleum Corporation. Conorada was charged with petroleum exploration outside the United States and Canada, and negotiated major concessions in Egypt around the Qatiara Depression near the Libyan border. In January 1963 Amerada acquired the stock interests of Conorada held by Conoco and Marathon, becoming full owner of Conorada. In 1964 Amerada joined with Marathon, Continental, and Shell, to form the major Oasis petroleum consortium in Libya, reportedly holding half of Libyan production--estimated at one million barrels a day--and paying only 30 cents a barrel in taxes compared to Exxon's 90 cents.

In 1950 Amerada became active in petroleum pipelining and refining. By 1954 Amerada Petroleum Corporation was one of a group of small producers that sold its output at the well-head. Fortune, on July 15, 1966, reported that since 1957 Amerada Petroleum had ranked first in profit margin on crude oil and natural gas, holding full or partial interest in over six million acres in both the United States and Canada, and some 68 million acres overseas. During this period Amerada Petroleum had been producing natural gas in the North Sea in partnership with Standard Oil Company of Indiana. In the spring of 1966, Leon Hess bought nearly 10 percent of Amerada's outstanding common stock from the Bank of England, which had acquired it during World War II.

Shortly before World War II, Leon Hess had initiated expansion of his father's original fuel oil business. His father, Mores Hess, founded the small business in 1925. In the late 1930s Leon Hess refocused the business to post-refinery residual oil, usually treated as waste, and used as fuel only for large boilers and utility operations. Hess apparently recognized that as power companies and industrial consumers progressively switched from coal to oil, residual oil had the potential to become a profitable commodity. Hess subsequently created a tank-truck fleet specifically designed to transport residual oil to power plants--the trucks were equipped with heaters that kept the oil hot and thus still useful. Adding more distribution depots and a provision terminal, Hess was able to underbid his competition for a variety of federal fuel contracts, a traditional source of significant revenue throughout the company's history. It is probable that Hess's own World War II experience in the army as a petroleum supply officer was a notable source of his later ideas about organization and discipline in business.

The late 1940s marked the start of Hess's first large profits from residual oil sales, to customers such as Public Service Electric & Gas. Hess competed on a tight price basis, establishing large stations at prime locations close to refineries and depots, and pioneering gasoline sales without services. After a period of further expansion through debt, in early 1962 the high debt-to-equity ratio forced Hess to take his company public, by means of a merger with the Cletrac Corporation. Under terms of the May 1962 merger, the new company became Hess Oil & Chemical Corporation, Hess becoming CEO and chief stockholder.

At this point, all of Hess's operations were exclusively in refining, transportation, distribution, and retailing. Because of the opportunities, and possible vulnerability, Hess considered a merger with a larger integrated independent oil company. The Amerada-Hess merger that ultimately ensued has generally been acknowledged as an extremely well-planned and -timed success, resulting in a sizable gain in crude supply coupled with a dramatic reduction in federal income tax liabilities, at a time when oil prices were low and expected to remain so. At the time of the merger, Amerada Petroleum had no debt, and had proven oil reserves exceeding 500 million barrels in the United States and 750,000 barrels in Libya through the Oasis consortium. Hess made an initial purchase of Amerada stock in 1966. Amerada's chairman tried to stop the takeover, first by an arranged merger with Ashland Oil, later by an agreement with Phillips Petroleum. By offering a notable over-market price, Hess invested more than $250 million in what Fortune, in January 1970, called "one of Hess's most dangerous gambles." In the spring of 1969, Phillips withdrew from the contest for ownership, and despite a May 1969 suit filed in federal district court to nullify the merger, Amerada's stockholders approved it by an overwhelming margin.



Because of what several analysts consider some surprising similarities in strategy and outlook, the two companies integrated so smoothly that the new Amerada Hess Corporation rapidly pursued an aggressive and successful exploration program. In May 1970 Amerada Hess drilled the first successful wildcat well in Prudhoe Bay on Alaska's North Slope. In mid-1971 Amerada Hess was one of seven oil companies invited by the Canadian government to explore the building of pipelines from oil fields in Alaska's North Slope through Canada to the United States. In September 1974 the U.S. Interior Department reported that the company was the first to apply for permits to unload supertankers from the Trans-Alaska Pipeline.

Between 1966 and 1967, the Hess Oil & Chemical Corporation had initiated a refinery on St. Croix in the Virgin Islands. In late 1967 negotiations had been approved, between Hess, the local government, and the U.S. Department of the Interior, on a 10-year plan to promote economic development in the Virgin Islands by U.S. industry, reciprocally permitting Hess the right to ship 15,000 barrels per day of finished oil products made from foreign crude to the U.S. mainland. The reported rationale was the need for cost-efficient heating oil in the northeast United States, where Hess was a major refiner and fuel dealer to the government and industry. Some adverse attention and controversy arose following Secretary of the Interior Stewart L. Udall's announcement that a similar proposal by the Coastal States Gas Producing Company had been finally rejected in favor of Hess. In November 1970 Amerada Hess was charged by the U.S. Interior Department with import-rules violation from claims that it had made no significant expenditures for upgrading its Virgin Island facilities and employee quota and apparently had not paid the agreed-upon royalty of 50 cents per barrel to the local development and conservation fund. By 1979, the company's St. Croix refinery output was reported as 700,000 barrels per day, the world's largest. A longtime supplier of jet and fuel oil to the Defense Supply Agency, the Defense Logistics Agency, and the Defense Fuel Supply center, Amerada Hess had also long been a chief supplier of residual and fuel oil to numerous community power and light companies. In April 1975 Amerada Hess was one of several oil companies charged by the Federal Energy Administration with pricing violations. In August 1978 Amerada Hess was one of five firms convicted on federal charges of fixing retail gasoline prices.

Oil Crisis, 1970s

In 1973 Amerada Hess received permission from U.S. President Richard Nixon's Office of Emergency Preparedness to import an extra six million barrels per day of heating oil to ease the nation's shortages, but received some unfavorable notice by selling primarily to the East instead of the more energy-needy Midwest regions. With the prices of crude oil increasing threefold in less than six months, Amerada Hess received notable profits. Net reported earnings of $133 million in 1971 increased to $246 million in 1973, and to $577 million by 1980. Business Week on July 16, 1979, reported Amerada Hess as being among the biggest gainers of the United States's oil entitlements program, established in 1974 to equalize costs between domestic refineries supplied by lower-priced domestic sources and those depending on higher-priced foreign imports.

Including its role as major partner--with Hunt, Getty, and Louisiana Land and Exploration Company--on the Alaska North Slope, between the Arab oil embargo, of 1973 to 1974, and 1979, Amerada Hess invested more than $1.2 billion in exploration and production. In the early 1970s Amerada Hess was one of many companies negotiating with Portugal for oil and gas exploration concessions in and off the shore of Angola, and later Gabon. In 1975 Amerada Hess and Mississippi Chemical Corporation initiated a five-year joint venture of exploration and evaluation in southern Mississippi and Alabama. In 1981 Petro-Canada initiated operation of drill ships off Labrador on behalf of a consortium including Amerada Minerals Corporation of Canada Ltd., with considerable exploration success continuing through 1984, when it also made major natural discoveries offshore of Grand Isle, Louisiana, and further Alaskan strikes off Seal Island in 1986. In 1985 Amerada Hess acquired Monsanto Oil Company in the United Kingdom and it became a wholly owned subsidiary.

In response to U.S. President Ronald Reagan's June 1986 deadlines, Amerada Hess officially ended its Libyan operations. Although after January 1989 U.S. oil companies had U.S. government approval to resume activities there, because of the instability in the Middle East the future of such activities remained uncertain. In 1987 Amerada Hess and Chevron were reported as the top U.S. crude and product importers of the year. In August 1989 Amerada Hess acquired for $911 million a 37 percent interest in major offshore oil and gas properties in the northern Gulf of Mexico from the TXP Operating Company, a Texas limited partnership affiliated with the Transco Energy Company, increasing Amerada Hess's total natural gas reserves by 25 percent. Included were major efforts at development and production in the North Sea Scott and Rob Roy fields. Natural gas was reported in 1990 to make up approximately half the company's total hydrocarbon reserves. In September 1990 Amerada Minerals Corporation of Canada acquired assets from Placer Cego Petroleum Ltd. in Alberta and British Columbia. Amerada Hess Norge A/S maintained 25 percent interests in several major offshore fields.

In December 1989 the company settled its part in a 13-year suit brought by the state of Alaska concerning the North Slope oil pipeline. More notably, Amerada Hess survived apparent takeover plans in the mid-1980s. In late 1988 despite much published speculation about the flaws in corporate management, the company's overall picture remained strong. Its trend was considered uncertain, however, because its five-year record is reported to be among the lowest for the entire petroleum industry. The clear trend of reserve acquisitions in the United States, Canada, and overseas is reported to have pushed company debt to approximately 45 percent of total capital.

Staying Financially Fit, the 1990s

A major goal for the 1990s included substantial reduction in overall debt levels. Because the company was no longer the leading innovator in developing geophysical exploration technologies or wildcatting as it was from the 1920s to the 1940s, at least some of its successes depended on continued joint efforts with major partners, notably in improved subsurface development of established fields. Amerada Hess has long been an advocate of domestic oil decontrol and comprehensive national energy policy. Amerada Hess is, in several published opinions, cited as a successful example of the trend toward increased economies via vertical integration.

Low oil prices and the costs of compliance with federal pollution control regulations hampered Amerada's profitability throughout the 1990s. Net income dropped from $483 million in 1990 to only $7.5 million in 1992, and in 1993 and 1995 Amerada suffered staggering net losses of $268 and $394 million, respectively. Its decision to pump $1.1 billion into the upgrade of its St. Croix refinery--damaged by Hurricane Hugo in 1989--was partly to blame, but Amerada's vast network of East Coast storage facilities also imposed burdensome inventory costs when oil supplies were abundant, as they were throughout the decade. Between 1989 and 1993 alone Amerada's $7.3 billion in capital expenditures was three times higher than the total for 1984--88, and by the end of 1993 the tab for developing its North Sea oilfields and the St. Croix refinery upgrade totaled more than $42 billion. In 1993 it finished construction on its Central Area Transmission System pipeline between the North Sea and the United Kingdom. But by the end of 1995 Amerada's stock had been unable to regain its high of four years earlier, and a decade and a half separated it from its earnings peak of 1980. In the words of Forbes magazine, Amerada "was visibly bleeding."

In May 1994, Leon Hess retired after six decades at the company's helm, and a year later his son John was named chairman and CEO. As production began at Amerada's new South Scott oil field in the North Sea, Hess announced his intention to sell off marginal properties, consolidate the company's U.S. exploration and production operations in Houston, downsize its workforce, and reduce the company's debt. In 1995 Hess initiated a top-down review of the company's operations to reassess Amerada's strategy and prospects. With the goal of producing 500,000 barrels of crude oil a day by the end of the century, Hess junior began building the company's hydrocarbon reserves and production through acquisitions, continued its debt reduction efforts, laid off some 20 percent of his workforce, and disposed of noncore properties, including Amerada's Canadian subsidiary, which alone had accounted for 10 percent of its assets.

Now reduced to its core operations&mdash′imarily in the North Sea and the Gulf of Mexico--Amerada moved into the Brazilian market in 1996 in a joint venture with Petrobas and in 1997 pursued the Venezuelan market through negotiations with Petroleos de Venezuela S.A. It also gained stakes in oil fields in Thailand and the Falkland Islands and explored oil development prospects in Namibia. On the marketing side, it expanded its 548-store East Coast HESS gas station chain by acquiring 66 Pick Kwik retail stores in Florida and four Sears outlets in New York and in 1997 initiated a gas retail marketing venture in the United Kingdom.

By 1997 Hess was announcing that the "first phase" of Amerada's "repositioning" program was complete. Net income for 1996 had rebounded more than $1 billion from 1995's loss, to $660 million, and Amerada's debt-to-capitalization ratio had been cut by almost $800 million to 36.4 percent. With $1 billion worth of exploration and production properties jettisoned, five new high-return oil and gas fields fully developed, and a commitment to streamline its administrative operations by adopting SAP's enterprise planning software, Amerada could view its goal of moving into the top one-third of U.S. oil companies by the year 2000 with some optimism.

Principal Subsidiaries: Amerada Hess Ltd. (U.K.); Amerada Hess Oil Corporation of Abu Dhabi; Amerada Hess Pipeline Corporation; Amerada Hess Shipping Corporation (Liberia); Amerada Hess St. Lucia Ltd. (West Indies); Hess Virgin Islands Corporation; Amerada Hess Norge A/S (Norway); Amerada Hess A/S (Denmark); Amerada Hess Production (Gabon); Jamestown Insurance; Tug New York Co.

Additional Details

Further Reference

Easton, Thomas, "Boot the Coach?," Forbes, December 4, 1995, p. 64.Ingham, John, and Lynne Feldman, Contemporary American Business Leaders, Westport, Conn.: Greenwood Press, 1990.Jaffe, Thomas, "Amerada, Mon Amour," Forbes, July 19, 1993, p. 254.Tinkle, Lon, Mr. De: A Biography of Everette Lee DeGolyer, Boston: Little, Brown, & Company, 1972.

User Contributions:

Comment about this article, ask questions, or add new information about this topic: