Benton Oil and Gas Company

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Benton Oil and Gas Company

15835 Park Ten Place Drive, Suite 11
Houston, Texas 77084
U.S.A.
Telephone: (281) 579-6700
Fax: (805) 566-5610
Web site: http://www.bentonoil.com

Public Company
Incorporated: 1988
Employees: 926
Sales: $140.3 million (2000)
Stock Exchanges: New York
Ticker Symbol: BNO
NAIC: 211111 Crude Petroleum and Natural Gas Extraction

Benton Oil and Gas Company is engaged in the exploration, development, and production of oil and gas properties, relying on 3-D seismic technology to find leftover oil and gas in fields abandoned by major oil companies. While the company’s interests may present little risk geologically, they have been mostly located in politically questionable regions of the world. Benton Oil operates primarily in Venezuela and Russia. It has also drilled in China, Senegal, and Jordan. Following the 1999 resignation of its founder, Alexander Benton, the company has undergone a retrenchment effort that has included moving its headquarters from Carpinteria, California, to Houston, Texas.

Arrival of Alexander Benton in United States: 1950

Alexander Benton, the founder of Benton Oil, was born Alexander Strochenko in 1942 in a Russian village located near the Black and Caspian Seas. Less than a month later, his family fled, fearful of both the Nazis targeting the Caspian oil fields and the Soviet government. As intellectuals, Benton’s parents were in danger of becoming victimized by one of Soviet leader Joseph Stalin’s periodic purges. During the rest of World War II, the family wandered Europe as refugees, eventually landing in Munich, where they remained after the war because returning home to Russia would be risking incarceration or possibly execution. Even Russian soldiers who had the misfortune of being taken prisoner by the German Army were, once liberated, sent to the infamous Soviet gulags. Benton’s father taught veterinary medicine at the University of Munich, lecturing in the same building where the family once sought shelter from Allied bombings. In 1950, Benton’s family was able to immigrate to the United States, sponsored by a Presbyterian church in northern California. They settled in the town of Gilroy in the San Jose area, where Benton’s parents scraped together a living by doing menial labor. Benton’s father was employed as a janitor by the sponsoring church, and his mother, a bacteriologist by training, cleaned houses and later found work in a garlic and onion factory. Benton would find employment in the factory as well, eventually saving enough money to study geophysics at San Jose State College. Four years older than the average college student, he excelled enough in the classroom to attract the attention of oil giant Amoco, which recruited him during his senior year.

When Benton went to work for Amoco in 1968, its geologists were just becoming involved in bright spot analysis, an advanced technique for detecting oil deposits. Benton proved to be a valuable addition to the company who was instrumental in a number of major finds, and he was ultimately named director of applied geophysical research at Amoco’s Tulsa, Oklahoma, think tank. After a decade with Amoco he decided to take advantage of prosperous times in the oil business and joined an independent Houston oil company, Trans Ocean Oil. When Mobil acquired the company, it kept on Benton as the manager of geophysics at its Dallas affiliate, Mobil Exploration Special Projects. Soon, Benton again opted for employment with a smaller independent, in 1981 going to work for May Petroleum, a Dallas exploration company, where he was named senior vice-president of exploration.

It was at May Petroleum that Benton expanded his knowledge beyond science, gaining a practical business education. Several years later, when May was acquired, he bought out a Ventura, California, district office that he had set up for the company. Financially backed as a subsidiary of Michigan-based Patrick Petroleum, he called the new enterprise Benton Petroleum. In September 1988, he incorporated Benton Oil and Gas Company under Delaware law, then six months later took the new business public, raising $4 million, out of which he paid Patrick $1.2 million to acquire Benton Petroleum and the natural gas assets he had accumulated in the Sacramento Basin. Although he was now an entrepreneur, Benton remained very much a geophysicist. His plan was to buy interests in known but depleted oil fields, then use the new 3-D seismic technology (he became one of the earliest independents to employ it) in order to locate untapped pockets of oil and gas. If promising assets could be acquired at a reasonable cost, Benton Oil stood to make a tidy profit. The concept certainly appeared promising enough to investors, who over the course of the first two years paid $26 million for stock or limited partnerships in the company.

Benton Oil’s first major move outside of the Sacramento Basin came in 1989 when the company purchased a small stake in proven reserves (the West Côte Blanche Bay Field) in the Gulf of Mexico, off the shores of Louisiana. The field was originally discovered by Texaco in 1938 and over the course of 50 years produced more than 200 million barrels of oil and 195 billion cubic feet of gas. Benton Oil teamed with Texaco to conduct a 3-D seismic survey of the area’s deep gas assets, which now became economically attractive due to higher gas prices. After completing a number of separate transactions, the company acquired over 43 percent of the field by early 1992 at a cost of $23.2 million. In addition to gas, the field also began to produce a considerable amount of oil from its shallower depths. Benton Oil soon employed 3-D seismic technology on other Louisiana fields for which it gained sizeable interests from joint-venture partners, including Belle Isle Field, a salt dome discovered in 1941, as well as the Rabbit Island Field.

Negotiating with the Russians: 1990

Benton Oil was quickly gaining an international reputation as a technically savvy operation. In 1990, the company was approached by the Russian Republic of the Soviet Union to be involved in a joint venture to exploit a newly discovered western Siberia oil field. Benton Oil was recommended to the Russians by a London geological data firm. Because Alexander Benton was able to negotiate in Russian, his mother tongue, it was a good fit. In January 1991, along with several other Benton Oil executives, he returned to the country where he was born, then made the arduous trip to the North Gubkinskoye field, some 2,000 miles north of Moscow, above the Arctic Circle, where he was greeted by temperatures as low as 60 degrees below zero. Benton Oil subsequently agreed to form a joint venture, named Geoilbent, with two Russian ministries as partners. In less than a year, the enterprise was operational. For Benton Oil, with a 34 percent interest, the arrangement was especially advantageous because seismic studies had already been done and the company was grandfathered so that it did not have to pay an excise tax to export the oil. Essentially the Russians provided the field as well as the bulk of equipment and labor, and Benton Oil provided the funding and expertise.

In addition to Russia, Benton Oil was also asked in 1991 by Venezuela’s national oil company, Petroleos de Venezuela, to bid on the right to work nine mature oil fields in that country. A failed coup attempt in February 1992 scared away other companies, and Benton Oil was able to secure oil concessions on very favorable terms. Aside from its technology, Benton Oil was now established as a company willing to work in politically risky areas of the world. In order to fund its ambitions, however, the company had to attract new investors, but its business was a financial high wire act that a number of analysts predicted was destined to fail. Benton Oil attempted a public offering of three million shares in December 1991, hoping to raise $35 million. A drop in oil prices caused the underwriter, PaineWebber, to cancel the offering, and Benton Oil was able to raise only $5 million by selling shares by itself. To concentrate on assets with greater potential and pare down debt, in 1992 the company sold off most of its California interests, as well as interests in some Colorado properties. A year later it raised another $8.2 million by selling off some of its Louisiana interests.

Benton Oil’s financial condition was complicated in 1993 when the new Russian government imposed a $5.50 per barrel excise tax on exported oil, only three months after the completion of a pipeline that would connect the Siberian field to the Soviet pipeline, which in turn would connect to refineries in the Czech Republic, Slovakia, and Germany. The tax, which virtually eliminated a profit for Benton Oil, completely violated the promise made to the company when it originally agreed to fund the project. Russian President Boris Yeltsin imposed the tax in order to generate much needed revenues, but mostly to appease political opponents. Because of the tax burden, instead of producing 100,000 barrels a day, the field pumped little more than 3,500 barrels. Yeltsin soon lifted the tax, but considerable time would elapse before entrenched bureaucrats would acknowledge the change. Benton Oil cut back its capital spending on the project and waited for tax relief.

Company Perspectives:

Benton Oil and Gas Company continues to focus on its primary corporate objective: the creation of value for shareholders by identifying oil and gas accumulations with relatively low geological risk but with substantial reserve potential.

Accepting political complications was simply the price a company like Benton Oil had to be willing to pay in order to gain access to potentially high-yield reserves of oil and gas. It also encountered obstacles in Venezuela when local politicians, whose behavior the company characterized as “grandstanding,” called for an investigation of how the oil concession had been granted. Despite such difficulties, Benton Oil increased its commitment to the country, acquiring additional rights in 1994 and 1996. In the meantime, the company sold off most of its domestic interests, including a 1996 sale of its Louisiana operations to Shell Oil for $35.4 million. It subsequently moved into other high-risk areas of the world. Benton Oil entered into a joint venture to exploit an oil field in southeastern Jordan, near the border with Saudi Arabia, then signed an agreement with the state oil company of the West African nation of Senegal to study and develop its 600,000-acre Thies Block. It acquired Creston, a Colorado oil company with interests in the South China Sea that were the subject of territorial claims between the People’s Republic of China and Vietnam. Through an agreement with Shell Exploration Limited, Benton Oil also acquired a 50 percent participation in China’s third largest producing oil and gas field. Moreover, the company renewed its interest in California, acquiring a 40 percent working interest in the Molino project, which covered three offshore oil and gas leases spread across more than 12,000 acres.

Collapse in Oil Prices and Revenues: 1998

With Venezuelan interests providing the bulk of the earnings, revenues for Benton Oil totaled $165.1 million in 1996, growing to $179 million in 1997. The company posted net earnings of $28.3 million in 1996 and $18 million in 1997. In 1997, the company borrowed $240 million through junk bonds in order to finance further growth, but a short time later, world crude oil prices collapsed. Coupled with declining revenues, which fell to $112 million in 1998, Benton’s was now carrying a heavy debt load. Moreover, the Molino project came up dry. Consequently, Benton Oil was forced to take a one-time writeoff of $153 million on properties that failed to live up to projections, resulting in a net loss in 1998 of $183 million.

In early 1999, despite cost-cutting measures and rebounding oil prices, Benton Oil lacked the necessary cash flow to pay its debts and properly exploit its assets. It hired J.P. Morgan & Co. to explore its choices, which included the sale of assets and possibly the entire company. The situation was complicated further by the dire financial condition of Alex Benton, who over the course of the three previous years had borrowed some $7.5 million, secured by company stock that was now worth considerably less than the loans. In August 1999, he filed for personal bankruptcy and two weeks later resigned as chairman, CEO, and president of Benton Oil. He remained a director of the company and a consultant to the Russian operations, while making arrangements through the courts to repay his debt to the company.

Benton’s departure reassured the market, and the company’s stock, which had been in a free fall, finally stabilized. Replacing Benton on an interim basis were directors Bruce M. Mclntyre and Michael B. Wray, who shared the office of chief executive while recruiting a permanent occupant for the post. They settled on Dr. Peter J. Hill, who boasted 25 years of experience at British Petroleum, where he served as Chief Geologist. After leaving BP in 1994, he went to work for Deminex, Germany’s largest oil company. Believing that Benton Oil still controlled a valuable asset base, Hill agreed to become the company’s CEO. With Wray staying on as chairman, Hill revamped the board of directors to regain investor confidence in the company. In addition, he hired a new chief financial officer and senior vice-president of exploration and production. Although committed to aggressively exploiting the asset base of Benton Oil, Hill was also mindful of putting the company’s financial house in order and studied all the options, which again included the sale of assets or the company in its entirety.

Under Hill’s direction, Benton Oil opted to impose cost-cutting measures and to restructure its debt. To lower its general and administrative expenses, the company moved its headquarters in June 2001 from California to Houston, Texas. It received some good news a short time later when one of its Russian ventures struck oil. In February 2002, Benton Oil took a major step in its financial recovery when it sold some of its Russian interests for $190 million. This infusion of cash allowed the company to retire $108 million in debt while allowing it to better exploit its remaining Russian assets and Venezuelan interests. Hill characterized the sale as a landmark transaction that he hoped would convince analysts of the intrinsic value of the Russian market and in turn the inherent value of Benton Oil. He also hoped that by reducing the company’s debt load, investors would be willing to take a fresh look at the potential of Benton Oil.