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Unocal: Making the Right Connections.
Linking markets to resources: Unocal targets growth opportunities in emerging energy markets, primarily in Asia and Latin America.
Taking an integrated approach: Unocal focuses on regional energy solutions, entering the value chain upstream or downstream to develop resources, pipeline systems, power generation plants, or related projects.
Meeting the competition: Unocal's fast-acting business units--guided by a corporate focus on solid value creation--have the flexibility and autonomy to be the best in their businesses.
Building relationships as the "partner of choice": Unocal's track record as a loyal, low-cost, reliable supplier opens doors to building our businesses in both developed and frontier areas.
Unocal Corporation is the largest U.S.-based independent energy exploration and production company. Its principal oil and gas exploration and production sites are in Asia, Latin America, and the Gulf of Mexico. Unocal, which has survived three major hostile takeover battles in its history, was a fully integrated oil company--with a major presence in oil refining, marketing, and transportation on the U.S. West Coast--until the mid-1990s, when it shed most of its downstream operations. In addition to its leading upstream position, Unocal is the leading producer of geothermal energy in the world, and it constructs and operates electrical power generation plants. The company's Diversified Business Group makes and markets nitrogen-based fertilizers, petroleum coke, graphites, and specialty minerals and has various petroleum pipeline activities.
Formed Through Three-Way 1890 Merger
Unocal was founded in 1890 as Union Oil Company of California from the merger of three California oil companies: Sespe Oil and Torrey Canyon Oil, both of which were owned by oil and land baron Thomas Bard of Ventura County, and Hardison & Stewart Oil. Hardison & Stewart began as a "gentlemen's agreement" partnership between Lyman Stewart and Wallace Hardison in 1883 and incorporated later that year. In constant need of cash to finance exploration, Hardison and Stewart were referred to Bard by their bankers in 1885. Bard became their partner and operated his companies in an informal alliance with theirs. Hardison & Stewart frequently ran short of cash, however, and Bard finally proposed that they merge their companies. Hardison and Stewart consented, and Union incorporated in Santa Paula, California, as a mining company, with Bard as president, Stewart as vice-president, and Hardison as treasurer. The Santa Paula plant was, in 1891, the site of the first petroleum research facility in the western United States.
The merger proved to be anything but stable. Hardison, who had been gradually losing enthusiasm for the oil business, sold out his interest in 1892 and left Union to engage in fruit growing. His shares found their way into the possession of Stewart's family. This, in turn, bred in Stewart a conviction that the company was his by rights and led to a conflict with Bard. Although both were Pennsylvania-born wildcatters who had been drawn to California by geologist Benjamin Silliman's predictions of vast oil deposits there, Lyman Stewart and Thomas Bard differed in temperament. Stewart had lost his savings in a youthful oil venture in his native state; despite this early failure, he flung himself into the oil business with the zeal of one who believed that worldly success was a sign of God's salvation. Bard was a calm and shrewd negotiator who would later become a U.S. senator. Stewart wanted Union to put more effort into marketing petroleum products; Bard wanted it to remain a producer and wholesaler of crude.
In 1894 Bard resigned as president to protest an expansion of Union's refining capacity that Stewart initiated and that was approved by other directors. Bard was succeeded by D. T. Perkins, his hand-picked successor. Stewart, however, faced Perkins down at an annual meeting several months later, and Stewart assumed the presidency himself. Bard, still a director, continued to object to Stewart's free-spending expansion schemes but was outvoted time after time. Finally, he sold out his interest in Union in 1900 and began his political career. In 1901 Union moved to Los Angeles.
With Stewart as president, his son Will Stewart, a former University of California football star, became general manager. Under the Stewarts, Union continued to expand both its production and retailing operations. Union spent much money on technological advances, organizing the first petroleum-geology department in the U.S. west in 1900, launching a prototypical tanker in 1903, and completing the first successful cemented oil well in 1905. In 1913 the company opened its first service station, at the corner of Sixth and Mateo Streets in Los Angeles. In time, Union came to miss Thomas Bard's fiscal sobriety. As Lyman Stewart continued to buy up real estate with alarming aggressiveness, the company remained poor in cash. To keep up bond payments Union had to borrow ever-larger sums from local banks and financiers. As the situation worsened, creditors forced the elder Stewart to resign in 1914, and the board of directors elected his more conservative son to succeed him.
Survived First Takeover Attempt in Early 1920s
Under Will Stewart, Union continued to expand. In 1917 it acquired Pinal-Dome Oil, a local company that added 20 service stations in Los Angeles and Orange County to its retail network. Union also opened a refinery in Wilmington, California, near Long Beach Harbor, in 1917, just as U.S. involvement in World War I increased the demand for fuels. The company emerged from the war still in vulnerable financial condition. A speculative scramble for Union shares in 1920 generated takeover rumors, and the next year a foreign syndicate headed by what later became Royal Dutch/Shell Group formally launched an acquisition attempt. In response, Lyman Stewart and two other directors, banker Henry Robinson and retired Borden executive Isaac Milbank, organized Union Oil Associates, the sole purpose of which was to accumulate Union shares and prevent them from falling into Shell's grasp. The contest took on jingoistic overtones and came down to a proxy vote at a stockholders meeting in March 1922. When the votes were counted, Union Oil Associates won. Union Oil Associates began to merge with Union itself, and two years later, Shell dumped its Union shares on the open market.
The last great battle of his life over, Lyman Stewart died in 1923. Winning that same fight had left Union in stronger financial condition than ever, and the company continued to prosper. In 1928 it joined with Atlantic Refining to form Atlantic-Union Oil, a marketing venture in Australia and New Zealand. By the end of the decade, Union's annual sales had reached $90 million, and it was pumping more than 18 million barrels of oil per year. The Great Depression abruptly ended the good times for Union. Will Stewart died suddenly in 1930. He was succeeded as president by Vice-President Press St. Clair, who pursued a cautious strategy in response to the worsened business climate. In 1931 Union sold its interest in Pantepec Oil, which held leases for exploration in Venezuela. Two years later, the company sold its share of Atlantic-Union.
Union emerged from the Great Depression with an advertising motif that stood the test of time. In 1932 the company was looking for a distinctive brand name for its gasoline. Robert Matthews, a director and British national who was studying U.S. history to qualify for citizenship, suggested "Union '76," as in "The Spirit of '76" for its patriotic connotations. The octane rating of Union's most potent gasoline also happened to be 76, and the marketing department adopted Matthews's idea.
Provincialism Prevailed from 1938 to 1964
Press St. Clair retired in 1938 and was succeeded by Reese Taylor, president of Consolidated Steel and a Union director. Taylor, who was something of a regional chauvinist, would run Union with an iron hand for 24 years. Under his direction, the company would take St. Clair's caution to an extreme and remain tucked into its geographical niche, rejecting expansion. It would eventually pay for this provincialism, falling behind in the game when other major oil companies embarked on worldwide expansion. First, however, World War II broke out, and Union boosted its crude production in response to increased demand for petroleum products. The production of aviation fuels was increased to seven times prewar levels. The company was well located to keep U.S. Navy ships operating in the Pacific Ocean supplied with fuel.
It was after the war that most of the U.S. oil giants began to develop overseas sources of crude, while Union concentrated its operations in North America. In 1949 Union acquired Los Nietos Company, an oil and gas concern the holdings of which were concentrated in California. It also discovered and began exploiting substantial fields in Louisiana. Nevertheless, Union could not find enough crude to keep up with increasing demand for petroleum products, and it had to dip into its reserves to keep customers happy.
Union made some sporadic attempts to find oil in Latin America, North Africa, and Australia. It got nothing but dry holes for its trouble. Injecting steam into abandoned California wells added 70 million barrels to its reserves, but by 1956 the company was strapped for both oil and cash. That year, Taylor turned to a friend, Gulf Oil President William Whiteford, and swung a deal to acquire Gulf's surplus crude in exchange for convertible debt securities. Those debentures, however, could be exchanged for enough Union stock for Gulf to control Union. Gulf, cash and oil rich, sought entry into the western market and Union once more became a takeover target, all the more so because it accounted for more than ten percent of gasoline sales in the Pacific Coast market. As Gulf mulled over the possibilities, in 1959 Oklahoma-based Phillips Petroleum began acquiring Union stock and became Union's largest shareholder the next year with 15 percent. Union bought back the Gulf debentures for $120 million--$50 per share--and got a federal court to bar Phillips from acquiring any more of its stock, ending the second major threat to Union's independence.
None of this, however, addressed the problem of expanding the company's oil reserves and marketing presence. At the end of the 1950s, two-thirds of Union's production was still coming from California, including the Torrey Canyon field discovered by Lyman Stewart in 1889, but a prolonged management shuffle prompted by Reese Taylor's sudden death in 1962 distracted the company from finding a solution. Union's board brought back Albert C. Rubel, who had retired as president in 1960 (Taylor had become chairman in 1956), to take over until a permanent successor could be found. Under Rubel, Union entered into merger talks with Atlantic Refining in 1963, but Atlantic called off the deal because it did not want Union to be the surviving company, losing as it would then its own identity in its East Coast markets. Finally, in 1964, Rubel appointed Senior Vice-President Fred Hartley to take over as CEO.
Stepped-Up Exploration Efforts in the Late 1960s and 1970s
Blunt and outspoken, Hartley was a chemical engineer by training but had shown good business instincts as head of the marketing division. His first actions as CEO were to improve Union's bottom line through layoffs and closing unprofitable service stations. The company also broke out of its provincialism in 1965 by acquiring Pure Oil Company, a struggling oil concern that nonetheless had an extensive distribution network in the Midwest and Southeast. Hartley concluded the deal over the objections of shipping magnate Daniel Ludwig, who had become a Union director when he bought Phillips' 15 percent stake in 1963. The company quickly raised $146 million and bought up all of Ludwig's shares at $36.50 per share.
Hartley saw the need for increased exploration. "If we don't explore we'll go backward and if we don't explore with success we'll go backward and broke," he was fond of saying at the time, as quoted in Fortune in April 1967. Union cast a wide exploration net, but it mostly dredged up dry holes. In 1969 the company suffered a public relations disaster when one of its drilling platforms off the coast of California leaked hundreds of thousands of gallons of oil into the water and onto the beaches of Santa Barbara. It took months for Union to get the seepage down to a manageable level. The company maintained that it responded to the leak promptly and had minimized environmental damage, but the incident helped turn public and political opinion against offshore drilling. Various governmental authorities sued Union, Mobil, Gulf, Texaco, and Peter Bawden Drilling, and in an out-of-court settlement reached in 1974, the defendants agreed to pay a total of $9.7 million in damages to the state of California, Santa Barbara County, and the cities of Santa Barbara and Carpinteria.
The Santa Barbara spill and Union's peppery response to criticisms stemming from it gained the company a bad reputation among environmentalists. Throughout the 1970s, even before oil prices began to skyrocket, Union had charted an aggressive course in research and development of alternative energy sources. Union spent substantial sums on developing geothermal power and liquefied natural gas as an automotive fuel. Hartley stopped using a Cadillac as his company car in favor of an Audi, complaining about U.S. automakers' unwillingness to build cars with better gas mileage. In 1974 Union began building an experimental oil shale processing plant in Colorado. Many oil companies turned to shale in the 1970s as a potential source of crude. It was an old enthusiasm of Hartley's; he had written a thesis on it while a student at the University of British Columbia. In 1980, while others were still marking time, Union announced that it would begin constructing a commercial-scale oil shale plant in Parachute Creek, Colorado.
In the 1970s Union joined with Standard Oil of New Jersey, Atlantic Richfield, Standard Oil of Ohio, Mobil, Phillips, and Amerada Hess to form Alyeska Pipeline Service, which would build the TransAlaska pipeline. Union, which was already drilling in Alaska's Cook Inlet, would thus participate in the exploitation of the immense deposits lying under Prudhoe Bay. Union entered a niche of the metals industry in 1977 when it acquired Molycorp, Inc., a producer of rare-earth metals used in high-tech applications.
1980s Brought Third Takeover Attempt
After 15 years under the guidance of Fred Hartley, Union approached the 1980s in a state of financial strength, giving its shareholders a higher-than-average return on assets. Its exploration efforts had begun to pay off, making it rich in oil and gas reserves. At the same time, Hartley's age--he turned 65 in 1980--and the lack of an heir apparent made Union the subject of takeover speculation on Wall Street. To thwart any such attempts, it reorganized in 1983, creating Unocal Corporation as a holding company and reincorporating in Delaware, where incorporation laws made it harder for outsiders to gain control of a company without approval by its directors.
None of this, however, deterred Mesa Petroleum Chairman and corporate raider T. Boone Pickens, Jr., who launched the third major threat to Unocal's independence. Pickens began acquiring Unocal shares in late 1984, even as he was beginning a separate takeover bid for Phillips Petroleum, and eventually accumulated a 13.6 percent stake of Unocal. The Phillips bid failed, but when Pickens walked away from it in January 1985 he did so with a hefty greenmail payment and more than $1 billion in unused credit lines and potential margin loans on his Unocal stock. In the meantime, Hartley refused to sacrifice the money Unocal was pumping into exploration to initiate a stock buyback and inflate its price, although institutional shareholders were clamoring for such a move. Observers speculated that it was only a matter of time before Pickens and Mesa pounced.
Hartley knew that something was up. In early April, the two met by chance as they waited to testify in congressional hearings on the recent spate of hostile takeover bids for major oil companies. Business Week, April 15, 1985, reported that Pickens extended his hand in greeting but Hartley refused it, growling, "Go away." "Fred, you're talkin' to your largest stockholder," Pickens said. "Isn't that a shame," Hartley shot back.
Later that month, Mesa announced that it was offering $54 per share in cash for the 37 percent of Unocal stock that it would need for a controlling interest and the same amount in debt securities for the remaining shares. Unocal responded with an offer to buy back 49 percent of its stock for $72 worth of debt per share, but only if Mesa reached its target of 37 million shares. Any shares in Mesa's possession were excluded from this deal, meaning that Pickens could not sell them back to Unocal at a hefty profit. Pickens challenged this last provision in court and initiated a proxy battle to delay the company's annual meeting until he could field his own slate of candidates for the board of directors. Loyal shareholders, however, voted Pickens down in May and reelected Hartley as chairman.
Several days later, the Delaware Supreme Court ruled that Unocal had no legal obligation to include Mesa's holdings in its partial buyback offer. Unocal had stalemated Pickens. To get rid of him, the company agreed to buy back one-third of Mesa's shares at $72 per share; other stockholders would be allowed to sell back some of their holdings as well. Pickens admitted that he would do well to break even on the deal. The most ambitious attempt in his campaign to restructure the oil business--and his first genuine failure--had ended. For its part, Unocal was anything but triumphant in victory. To finance the stock buyback, it had increased its debt load from $1.2 billion to $5.3 billion. Cuts in capital outlays would be necessary.
Fred Hartley was forced to retire in 1988 (he died in October 1990). He had built Unocal into the 14th largest oil company in the United States, but it was left to his successor, CEO Richard Stegemeier, to cope with the bulk of the debt load incurred in the battle against Pickens. Under Stegemeier, Unocal closed unprofitable production and refining facilities and sold off real estate that did not hold oil or gas, including its headquarters building in downtown Los Angeles. Unocal also exited from the no longer promising oil shale business, having spent nearly $1 billion since the mid-1990s and seeing little in return. By the end of the decade, the company was ready for further expansion. In 1989 Unocal joined with Petróleos de Venezuela to form Uno-Ven, a marketing and refining partnership in the midwestern United States. In May 1990 Unocal added to its gas reserves by acquiring Prairie Holding Company from gold mining concern Placer Dome.
Transformative 1990s
Overall, however, Unocal continued to be haunted by the Pickens takeover attempt well into the 1990s. At the end of 1991 long-term debt stood at a still-high $4.54 billion, resulting in annual interest expenses of about $300 million, which led to a lack of cash for capital projects. For example, the company's California gas stations were long neglected, leading to a market share drop from 13 percent in 1985 to 11 percent in 1993. Stegemeier thus was forced to sell additional assets, $527 million worth in 1993 alone. But these moves were not nearly the dramatic steps needed to turn the company's fortunes around, and at the end of 1993 debt had been reduced only to $3.45 billion.
It was under Roger C. Beach, who took over as CEO in May 1994, that Unocal finally found the strong leadership needed to extricate itself--in dramatic fashion--from its troubled past. Although longtime employee Beach had headed the company's domestic gasoline refining and marketing unit from 1986 to 1992, overseas was where he saw Unocal's future. He began to aggressively expand the company's oil and gas exploration and production outside of the United States, particularly in Asia and Latin America, while concentrating domestic efforts offshore, in the Gulf of Mexico. The quintessential California oil company cut its California production roots in late 1996 when it sold the last of its Golden State fields. Even more dramatic was Beach's rapid divestment of the company's domestic downstream operations. In March 1997 Unocal sold virtually all of its West Coast refining, marketing, and transportation assets to Tosco Corporation for $1.4 billion in cash. Later that year, Unocal sold off its interest in Uno-Ven, the Midwest refiner and marketer. Then, in another move aiming to refocus the company's exploration and production activities, Unocal sold the bulk of its Canadian oil and gas production assets to Tarragon Oil and Gas Ltd. in exchange for a 28.7 percent stake in Tarragon.
While he was leading the company through this amazing transformation, Beach also was stepping up Unocal's presence in such high-growth, high-yield areas as geothermal energy, electrical power plants, and pipelines, often through international joint ventures. In October 1997, for example, a Unocal-led consortium, called Central Asia Gas Pipeline Ltd, was formed to build a $1.9 billion, 790-mile gas pipeline from a field in Turkmenistan to Multan, Pakistan, crossing Afghanistan in the process. With these projects, Unocal faced the challenge of gaining approval from politically unstable governments, such as that of Afghanistan. Even more troubling in the case of the Central Asia Gas Pipeline was that Unocal immediately was slapped with a $15 billion lawsuit from the Argentina-based Bridas S.A., which had plans for a natural gas pipeline of its own and alleged that Unocal had interfered with its Turkmen operations.
Unocal also had to contend with challenges from human rights advocates when it proposed projects for nations with repressive governments, most notably that of Myanmar (Burma). That nation's military regime had led the U.S. government to impose sanctions on it in April 1997. Unocal had a 28 percent interest in an international consortium--led by TOTAL S.A. of France--which was developing a natural gas field in the Andaman Sea off the coast of Myanmar and was constructing a pipeline from this field to Rathaburi, Thailand. In response to political pressure and in a possible first step toward "de-Americanization," Unocal in April 1997 opened a "twin corporate headquarters" in Kuala Lumpur, Malaysia, where company President John F. Imle, Jr., and several other senior executives would be based, with Beach remaining at the El Segundo, California, headquarters.
By the turn of the millennium, Unocal had certainly left the provincialism of its past far behind. If the company's future lay in Asia--where it was doing two-thirds of its capital spending in the late 1990s--then new challenges were in store, most notably the Asian economic crisis that unexpectedly erupted in 1997. With major operations in two of the hardest hit nations--Thailand and Indonesia--Unocal faced possible setbacks and delays in some of its projects. At the same time, the company was contending with a fall in revenue thanks to a drop in oil prices, which had fallen below $15 a barrel by early 1998. In response Unocal announced in April 1998 that it would cut its 1998 capital-spending budget by about $175 million, or 11.5 percent. After more than a century in which its existence had often been precarious, Unocal once again would need to prove itself tough enough to survive.
Principal Subsidiaries: Union Oil Company of California; Philippine Geothermal, Inc.; Unocal Geothermal of Indonesia, Ltd. (Bermuda); Unocal International Corporation; Unocal Canada Limited; Unocal Canada Resources; Unocal Canada Exploration Limited; Unocal Canada International Company; Unocal Canada Management Limited; Unocal Indonesia, Ltd. (Bermuda); Unocal Indonesia Company (Bermuda); Unocal Myanmar Offshore Co., Ltd. (Bermuda); Unocal Netherlands B.V.; Unocal Thailand, Ltd. (Bermuda); Unocal Capital Trust.
Principal Operating Units: Spirit Energy 76; Diversified Business Group; Asia Operations; International Operations/Geothermal; Unocal Global Trade.
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