Deltic Timber Corporation

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Deltic Timber Corporation

210 E. Elm Street
P.O. Box 7200
El Dorado, Arizona 71731-7200
U.S.A.
Telephone: (870) 881-9400
Fax: (870) 861-6457
Web site: http://www.deltic.com;
http://www.chenal.com

Public Company
Incorporated: 1996
Employees: 526
Sales: $106 million (2001)
Stock Exchanges: New York
Ticker Symbol: DEL
NAIC: 321113 Sawmills; 111998 All Other Miscellaneous Crop Farming

Deltic Timber Corporation, headquartered in El Dorado, Arkansas, harvests and mills lumber on its 368,000 acres of Arkansas timberland, rich in Southern Pine. The company operates two sawmills: the Ola Mill, in central Arkansas, and the Waldo Mill, in south Arkansas. The lumbering and milling operation account for over 80 percent of the company’s annual revenue. The company also owns a 50 percent interest in Del-Tin Fiber L.L.C., which manufactures and markets a medium density fiberboard, and through a subsidiary, Chenal Properties Inc., Deltic also manages a 4,300-acre master-planned residential and corporate community in Chenal Valley, the premier upscale development in the Little Rock real estate market. Until 1996, when it was spun off as a separate corporation, Deltic, then named Deltic Farm & Timber Co., was a subsidiary of Murphy Oil. Heirs of Murphy Oil founder C.H. Murphy Sr. still own about 27 percent of Deltic Timber. Altogether, Deltic owns about 413,000 acres, including about 36,000 acres of farmland in northeastern Louisiana.

1907–70: From Murphy Oil Corporation to Deltic Timber

Because Deltic Timber Corporation originated as a subsidiary of Murphy Oil Corporation, its roots go back to 1907, when Charles H. Murphy Sr., an entrepreneur, first started accumulating pine wood acreage in Arkansas for investment purposes. Murphy was a south Arkansas banker and land baron, something like a modern-day venture capitalist long before that role was defined. Oil was only one of Murphy’s varied interests, but one that began to pay dividends when fields in Shuler, Arkansas, and Ezzell, Texas began producing crude.

During the pre-World War II years, long before using land for lumbering, Murphy began buying up additional acreage. Notably, in the 1920s, he acquired considerable property at public sales, not just in Arkansas, but elsewhere as well. Still, oil was not Murphy Sr.’s focal interest. It was, his son, Charles H. Murphy Jr. who wanted to be an oil man pure and simple, and after serving in the armed forces during the first half of the 1940s, he entered the business with a missionary’s zeal and over the next several years built a legendary reputation in the industry. He was prompted by what became the foundation for Murphy Oil–the 1944 discovery of oil in the Delhi Field in Richland Parish, Louisiana.

The Delhi Field, first worked in conjunction with Sun Oil, eventually produced over 213 million barrels of oil. Its early promise led Charles Jr. to take some very aggressive steps. In 1952, two years before his father died, he took Murphy Oil public and proceeded to grow and diversify the company over the next half century. In 1953, he created a subsidiary, Ocean Drilling and Exploration Co.(ODECO) to drill offshore for both his own company and others. Thereafter, he became intrigued with the idea of expanding Murphy Oil into global markets. He invested in Venezuelan oil exploration, and in the mid-1960s moved into oil producing areas in Southeast Asia. Among ODECO’s industry’s successes was its development of the Sassan Field off the Iranian coast in the Persian Gulf, in which it held a 25 percent share, and its part in the discovery and development of the large Ninian Field, off the British coast, in the North Sea.

During those years, although his focus was on oil exploration and production, Charles, Jr., did take at least one significant step that would figure importantly in the future of Deltic Timber Corporation: in 1957, he acquired 85,000 acres in a public land trade and added them to the company’s holdings.

1971–96: Deltic Farm and Timber Company Is Formed

With an uncanny degree of prescience, in the 1970s, Murphy Oil began diversifying its operations. Although its focus was and would remain on oil exploration and production, it branched into some new ventures, including the cutting and milling of timber on large tracts of land it had acquired over its long history. It was in 1971 that the Deltic Timber Corporation, originally named Deltic Farm and Timber Company, Inc. and formed as a subsidiary of Murphy Oil, commenced its sawmill operations. Although an oil man tried and true, Murphy knew the potential of the timber and milling business, and between 1976 and 1984, he authorized the acquisition of another 138,000 acres of pine-forest land. By 1984, Deltic Timber was operating two saw mills, one at Ola in central Arkansas, and the other at Waldo, in southern Arkansas.

In 1985, Deltic started up its real estate operation for the purpose of developing and managing its timberland located in Chenal Valley, smack in the middle of Little Rock’s growth corridor. Four years later, it began its annexation of real estate, with the incorporation of 2,180 Chenal Valley acres.

Deltic Timber’s parent, Murphy Oil, entered a financial slump in the early 1990s. From 1991 to 1996, it returned only an average of about seven percent on its equity, far below the average 11 percent for all comparable integrated oil companies. Refining and marketing, which accounted for over half of the company’s revenue, were not the traditional core businesses of Murphy Oil, and in the 1990s they fared badly. In August of 1996, as part of an effort to reverse Murphy Oil’s declining fortunes, Claiborne Deming sold off nearly all of Murphy’s producing properties in the United States, for which the buyers, a group of institutional investors, paid about $50 million. Then, in September, he made plans to spin off Deltic Timber, whose assets at that time were estimated to be worth about $260 million. The result was that Murphy Oil was left with exploring and production operations in the Gulf of Mexico, Canada, and the North Sea fields near Britain, the core activities that had made the Murphy family’s fortune.

Prior to being spun off, Deltic Farm & Timber Co. had expanded its operations. Among other steps it took, in 1995, in a new business venture, it entered into a joint ownership arrangement with Temple-Inland Forest Products Corp., a subsidiary of Temple-Inland Inc., to begin construction of the Del-Tin Fiber LLC medium density fiberboard (MDF) plant in the Newell community near El Dorado. The large plant, boasting nine acres under roof, was designed to process about 430,000 tons of raw materials annually, turning out about 150 million feet of fiberboard.

1997 and Beyond: Deltic Timber Goes Public and Expands

Emerging as an independent company, Deltic Timber Corporation began taking several further steps to grow the company and develop other business possibilities. One of its first steps was to raise capital by going public. It also increased its acreage, timber harvest, mill capacity, and real estate operations.

Late in 1996, Deltic had implemented a timberland acquisition program designed to allow the company to increase its timber harvest and its inventory. It aim was to increase its acreage holdings in the southern part of the United States, where most of the timberland was still privately owned.

Between 1992 and 1996, as a subsidiary of Murphy Oil, Deltic’s timberland had remained stable at around 342,000 acres, all of which were located in Arkansas and northern Louisiana. In 1997, it increased its holding to about 360,000 by buying an additional 17,000 acres. At that point, most of Deltic’s operating income was generated from its forest products business and agriculture, with just nine percent coming from its real estate development.

However, it was in real estate that Deltic started its most significant growth. In June 1997, the company announced plans for developing two new residential communities, one just outside Little Rock and the other just outside Hot Springs. Like Deltic’s Chenal Valley developments, these were planned as upscale communities, though not on a matching scale. Clearly, Deltic’s real estate division was playing an increasingly important role in the company’s business. In 1998, although that division’s $16 million in net sales only represented about 15 percent of Deltic’s total revenue of $107 million, its operating income was $5 million, or 27 percent of Deltic’s overall operating income of $18.3 million.

In that same year, 1998, Deltic purchased an additional 16,300 acres of pine timberland in Arkansas from RII Timberland Partners I, LP. That acquisition increased the company’s timberland holdings to almost 400,000 acres. It was also in 1998 that the Del-Tin MDF plant finally began operations.

In the following year, 1999, the company announced plans to sell or exchange some of its agricultural land in Louisiana in order to acquire additional southern pine timberland. It also planned to convert some of its Louisiana farm land directly into timberland. In that year, too, Deltic got into an annexation fight with the Little Rock board of directors. The issue was the annexation of Deltic’s final portion of its 4,700-acre Chenal Valley development in west Little Rock. The company wanted to use the last 1,200 acres for developing approximately 700 home sites and constructing a second 18-hole golf course for Chenal Country Club, but some city board members were concerned about the capital costs involved in additional annexations. Despite objections, the board approved Deltic’s request but left some concern about future annexation efforts.

Company Perspectives:

The company is focused on expanding its land base, increasing timber harvest levels, and enhancing manufacturing capabilities.

Although Deltic’s net income for 2000 rose to $13.6 million in 2000, up from $10.9 million in 1999, its revenues declined from $124.2 million to $109.5 million, prompting CEO and president Ron Pearce to acknowledge that the company’s financial performance was “disappointing.” Deltic’s milling operations produced sales that were at or near the lowest in ten years, in part because of downtime at the company’s two mills. Although capital projects and two ice storms were partly responsible for the temporary shutdowns, poor market conditions also played a major role.

The timber business depression continued into 2001. In February, Deltic temporarily shut down its jointly owned Del-Tin plant, giving as reasons a weakened MDF market and the high cost of natural gas. While the plant was closed, the plant’s owners made a $2.8 million modification in its heating system. Meanwhile, in order to counter the timber market downturn, Deltic continued to expand its program of selling tracts of land that could be priced high enough to offset their value as timber-land. Between 1956 and 1999, Deltic and its original parent, Murphy Oil, had purchased over 67,000 acres in west Pulaski County, Arkansas, paying an average price of about $350 per acre. By 2001, land in the same area was selling for an average of $6,400 an acre for undeveloped land and an average of $85,000 an acre for land within Deltic’s Chenal Valley development. The value of the land offered a strong incentive for growing Deltic’s real estate operations. As the company’s mission statement indicates, Deltic entered the new century determined not just to weather bad market conditions, but also to expand its timberland holdings, increase its harvests, and upgrade its manufacturing capabilities.

Principal Subsidiaries

Chenal Properties Inc.

Principal Competitors

Georgia-Pacific Group; Louisiana-Pacific Corporation; Plum Creek Timber Company; Potlatch Corporation; Tembec Inc.; Weyerhaeuser Company.

Key Dates:

1907:: C.H. Murphy, Sr., purchases investment land.
1946:: Charles Murphy takes reins of Murphy Oil.
1971:: Deltic Farm & Timber Company begins milling operations.
1985:: Company begins its Chenal Valley real estate operations.
1995:: Deltic announces plans to build Del-Tin, a medium density fiberboard (MDF) plant with Temple-Inland Forest Products Corp.
1996:: Murphy combines its real estate and agricultural operations and spins them off as Deltic Timber.
1997:: Deltic goes public.
1998:: Del-Tin commences operations.