Mitchell Energy and Development Corporation

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Mitchell Energy and Development Corporation

P.O. Box 4000
The Woodlands, Texas 77387-4000
U.S.A.
(713) 377-5500
Fax: (713) 377-5802

Public Company
Incorporated: 1946 as Roxoil Drilling, Incorporated
Employees: 2,900
Sales: $874 million
Stock Exchanges: New York Pacific Boston Philadelphia
SICs: 1311 Crude Petroleum & Natural Gas; 1321 Natural Gas Liquids; 6552 Subdividers & Developers Nee

Mitchell Energy & Development Corporation is one of the Houston-Galveston area’s leading real estate developers and one of the nation’s largest independent natural gas and liquid hydro-carbons producers. Its largest real estate development project is The Woodlands, a 25,000-acre community with a population of more than 33,000. Among energy related activities, it produces natural gas liquids, operates intrastate pipelines and explores for and produces natural gas and crude oil. In 1991 it produced 60.5 billion cubic feet of natural gas and approximately 18 million barrels of oil, condénsate, and natural gas liquids.

Financier H. Merlyn Christie first incorporated the company as Roxoil Drilling on February 5, 1946. That December, the firm changed its name to Oil Drilling, Incorporated, when a share of the company was bought by geologist George P. Mitchell.

Mitchell, the son of a Greek goatherd who immigrated to Arkansas, would eventually become the company’s CEO and guiding light. Mitchell’s family gained an American name after a railroad timekeeper who couldn’t pronounce Savva Paraskivopoulis decided to call his father Mike Mitchell. Born in Galveston in 1919, the younger Mitchell worked his way through Texas A & M University’s renowned petroleum engineering school. Despite his lack of experience, he got work as a consulting geologist, taking a small fee and a percentage of any oil found.

In the late 1940s, Oil Drilling put together prospects for others and drilled as investors. It discovered or developed production in a score of Texas fields and in 1951 it began exploration and production operations in Alberta and on the Ontario side of Lake Erie.

In 1952 a Chicago bookie called George Mitchell, trying to sell him a 10,000-acre lease in North Texas, an area known as “the wildcatter’s graveyard.” Going against the conventional wisdom, Mitchell bought the lease and drilled near Bridgeport, where he opened what would become Mitchell Energy’s extraordinarily successful North Texas holdings. During 1953, the company drilled 13 consecutive producing development wells there and by year’s end, it had more than 300,000 North Texas acres under lease—an area which in the early 1990s was still the heart of Mitchell Energy’s production.

Also in 1953, George Mitchell’s older brother, engineer Johnny Mitchell, joined the firm. Johnny Mitchell had worked with his brother as a consulting geologist and was remembered by a Forbes correspondent as a flamboyant man who walked about Houston in jungle shorts and a pith helmet, and who wrote a potboiler war novel, The Secret War of Captain Johnny Mitchell. By year’s end, George Mitchell, Johnny Mitchell, and Merlyn Christie had bought out Oil Drilling’s other shareholders and formed a new operating subsidiary—Christie, Mitchell & Mitchell (CM&M).

CM&M expanded operations through the mid-1950s. In 1954 it opened a Western Canada field office in Calgary, where in 1955 it discovered the Alvord 3000’ Strawn and Tidwell 4600’ Strawn fields.

All was not completely rosy for the new firm, however. In 1956 royalty owners in North Texas’s Wise County—where CM&M had drilled 57 oil wells and 103 gas wells in 34 separate fields—began to grow impatient with CM&M which, because of low gas prices, was keeping gas shut-in. George Mitchell decided to deal with the disgruntled royalty owners publicly. He invited the entire county to a barbecue, where he told 3,000 residents that though it had not seen a penny of revenue from gas sales, the company was willing to spend another $7 million to drill 40 wells in the area in 1956 and another 170 wells in 1957. Given the company’s financial commitment, residents agreed to wait for satisfactory prices before demanding royalties.

It was not as if the company was not trying to market its gas. As early as 1954 it had negotiated with Natural Gas Pipeline Company of America for a pipeline spur that would transport Wise County gas to Chicago. The Federal Power Commission had rejected this first deal and did not approve a spur into Wise County until 1957. Through the late 1950s and early 1960s, the company expanded and reorganized. It became part owner of the GM&A Gas Products Plant at Bridgeport, which opened in 1957. In 1959 George Mitchell became CEO. And in 1961 the company, which had just discovered the Alvord South Caddo Conglomerate Field in Wise County, formed CM&M Equilease to lease oil field equipment.

In 1962 the Mitchell brothers bought out Merlyn Christie’s remaining stock and changed the company’s name to Mitchell & Mitchell Gas & Oil. The following year they acquired their first intrastate gathering and transmission business—Southwestern Gas Pipeline, which owned 200 miles of pipeline in Palo Pinto County, Texas. In 1963 George Mitchell bought the Grogan-Cochran Land Company, whose 50,000-acre tract in Montgomery and Grimes Counties would later figure prominently in Mitchell Energy’s real estate developments.

By 1964 Mitchell & Mitchell had over 1,000 producing wells. In 1965 its gas reserves surpassed 400 billion cubic feet, and in 1966 it became Texas’s top independent gas producer and the nation’s third-ranked independent interstate gas marketer.

In the mid-1960s, George Mitchell continued the process of integrating into Mitchell & Mitchell services that the company had previously paid for. In 1965 he purchased pulling (workover) units for the North Texas division and began to buy out the other investors in the GM&A Gas Products Plant. Also, when a gas and oil surplus forced Texas authorities to limit production to ten days a month, he bought Houston real estate as an investment and a tax shelter.

Through the remainder of the decade, Mitchell continued to acquire assets, even as Mitchell & Mitchell became the nation’s second largest independent producer of gas moving in interstate commerce. In 1966 he purchased the remaining interest in 53,250 Lake Erie acres from Livingston Oil and Gas and bought a controlling interest in Gulf Gas, which owned 100 miles of pipeline in Texas’s Eastland, Callahan, Brown, and Coleman Counties. In 1967 he increased Mitchell & Mitchell’s GM&A ownership to 80 percent and on January 1, 1968, the company acquired R. E. (Bob) Smith and Company’s oil and gas leaseholds in Texas, Louisiana, and Canada.

In 1969 Mitchell formed Brazos Gas Compressing to provide compression service for the company’s Southwestern and West Cen-Texpipeline systems. At the same time, Southwestern Gas Pipeline completed the company’s first underground gas storage facility, at Lone Camp, Texas. And at year’s end, Mitchell & Mitchell discovered 100 billion cubic feet of gas in Lafitte’s Gold Field on Galveston Island.

By the early 1970s, the company was beginning to act like a major player in natural gas, which in 1971 accounted for almost two-thirds of its activities. In 1970 it leased its first acreage off the Texas shore through a joint venture with Diamond Shamrock, Inc. and the Natural Gas Pipeline Company of America. In 1971 it changed its name to Mitchell Energy & Development Corporation and went public in February of that year, issuing 770,000 shares of common stock (about 4.5 percent of total) to finance long-term growth prospects.

Parallel with Mitchell’s growth as an energy company, George Mitchell, who owned almost 71 percent of the company, saw a future in land development. Using land assets acquired in the 1960s, he planned a new community—The Woodlands—25 miles north of Houston. The project would in part be financed by $50 million in loan guarantees provided by the Department of Housing and Urban Development’s “New Communities” project and would, it was hoped, provide a stable long-term income stream.

It seemed that the company could grow both as an energy concern and as a land development business. In 1973 Mitchell expanded its gas gathering systems, acquiring 25 percent of the Ken-Ohio Pipeline in Ohio. In 1974 he entered the contract drilling business by forming MND Drilling to support his North Texas operations; he also acquired Butler Drilling’s assets to support Gulf Coast operations for $9.3 million.

In 1974 George Mitchell also opened his ambitious real estate development, The Woodlands, and the project was widely criticized. Certain commentators thought it was consuming capital that would be better used in drilling. Others, like Forbes, essentially laughed at an oil man like George Mitchell getting into real estate.

The Woodlands was in fact consuming capital and hurting drilling operations. Between 1972 and 1974, interest costs on the land went from $6.6 million to $19 million. And between 1972 and 1977, the company spent $60 million on roads, buildings, golf courses and other infrastructure. According to Forbes, Mitchell drilled 311 wells between 1973 and 1974 but only 182 wells between 1975 and 1976. During the same period crude reserves fell 2 percent and natural gas reserves fell 7 percent.

In Mitchell’s defense, his strategy was one that required major front-end investments and planned for long-term return. Only the future would tell what the project’s success would be. Moreover, the land’s value was appreciating (the appraised value of The Woodlands had risen from $99 million in January of 1972 to $123 million in August of 1973), so there was already a paper profit from the venture.

Although Mitchell Energy’s previous rates of growth did not return until the late 1970s, the company did continue to reach new milestones in the mid-1970s. In 1975 its Texas Intrastate pipeline system topped 1,000 miles. In 1976 it participated in drilling its 3,000th well, and in August of 1977 it began production in Arkansas County, Texas’s Mesquite Bay Field.

As The Woodlands crossed the break even point, earning $8.7 million (about 10 percent of Mitchell’s net) in 1978, the company returned to acquisitions. That year, it acquired the drilling assets of Jack Houston Exploration Company and purchased 80 percent of the 300-mile Winnie Pipeline System, 34 percent of the 500-mile Tejas Gas network and 50 percent of the 79-mile Tejas-Southwestern Pipeline. These new pipelines brought the company’s total intrastate pipelines to more than 2,200 miles.

Gas processing had long been an important activity for the company but in 1979—when the government lifted controls on natural gas liquids—operating earnings from the company’s gas processing segment soared from $27 million in 1979 to $99 million two years later.

The company first entered the field of natural gas liquids when George Mitchell hired Bruce M. Withers, Jr., in 1974. Withers, a young former Tenneco employee, convinced Mitchell to buy five small, portable, highly efficient gas processing plants called turbo expanders. Using cryogenics, an available but not widely used technology, these plants condensed a very high proportion of liquids out of natural gas. The company would then sell these natural gas liquids (NGLs)—after fractionating them into ethane, propane, butane, and natural gasoline—to manufacturers of plastics, paints, solvents, synthetic rubber, gasoline, and a wide variety of other products. The dry residue gas—mainly methane—was sold as fuel for homes and industry.

By the early 1980s, Mitchell’s NGL operation had become both admired and profitable. “They got an innovative thinker when they hired Withers,” D. N. McClanahan, a Houston NGL consultant, told Business Week, “and really beat everybody to the punch with cryogenics.” Mitchell Energy’s 35 natural gas processing plants made it one of the nation’s top 15 NGL producers. And in 1980 its daily NGL production of 35,500 barrels accounted for 28 percent of its $696 million in sales and 45 percent of its $221 million in operating earnings.

Mitchell Energy continued making acquisitions and in 1982 reported revenues topping $1 billion and net income of $115.2 million. These were growth years. The company extended its gas gathering system past 3,200 miles in 1981, acquired a 50 percent interest in its 54th gas processing plant in 1982, and reached the 45,000 barrels per day level in NGL sales for the first time in 1983.

Both the oil industry and Texas real estate faltered in the mid-1980s, however, as oil and gas prices declined from their 1982 peaks. Lot sales at The Woodlands fell by two-thirds, and Mitchell Energy kept gas shut in rather than sell assets at below replacement costs. Revenues fell to $595 billion, and profits fell to a relatively infinitesimal $8.4 million in 1986. Even so, Mitchell Energy was one of the few independents to stay in the black.

The company responded to a market that had suddenly turned hostile by cutting drilling expenditures to extremely low levels and, insulated to some degree by the relative strength of NGL prices, managed to remain in the black through the remainder of the decade. The company drilled its 5,500th well in 1988 and in 1989 it acquired a 50 percent interest in a 235-mile gas pipeline running from Robertson County to an interchange near Katy, Texas. In 1989 the company made $30.4 million on revenues of $658 million.

After another difficult year in 1990, when oversupply sent gas prices plummeting, Mitchell Energy recovered somewhat in 1991 when new home sales at The Woodlands improved. But natural gas prices plummeted again in 1992, and the company reorganized its exploration and production division to reduce staff and focus on both a substantial backlog of undrilled wells in proven areas such as North Texas, Southeast New Mexico, East Central Texas, and the Texas Gulf Coast. It also acquired natural gas fields being sold by energy companies who were focusing on overseas exploration. “The cutbacks are being undertaken,” George Mitchell told the Oil & Gas Journal, “as a result of today’s abysmally low prices, which make it unprofitable to explore for natural gas in higher risk areas.”

In the summer of 1992, the enormous gas bubble which had kept prices low for so long began to shrink. Mitchell Energy joined Conoco in acquiring Oryx Energy’s interest in 14 processing plants in Texas and Oklahoma. This acquisition increased Mitchell’s NGL production capacity by 10,000 barrels a day to between 55,000 and 60,000 barrels a day, and made the company a top 10 gas liquids producer.

Mitchell Energy and Development Company began in 1946 as a packager of energy investments. Under the leadership of geologist George Mitchell it grew into a successful driller of natural gas and oil and expanded into gas gathering systems and natural gas processing plants. In the early 1970s, the company invested heavily in The Woodlands, which has been sporadically profitable while adding immensely to the company’s paper worth. Profits soared during the energy crisis of the 1970s and after the deregulation of natural gas liquids in 1979, but fell with gas prices during the mid- and late 1980s. Ever expanding in its gas gathering and processing capabilities, Mitchell is set to profit if gas prices rise.

Principal Subsidiaries

MND Energy Corp.; Mitchell Energy Corp.; Brazos Gas Compressing Co.; Liquid Energy Corp.; Oilworld Supply Co.; Southwestern Gas Pipeline, Inc.; Mitco Pipeline Co.; Northeastern Gas Pipeline, Inc.; Southeastern Marketing Co.; Mitchell Marketing Co.; Winnie Pipeline Co.; Acacia Natural Gas Corp.; Woodlands Corp.; Mitchell Catamount, Inc.; Mitchell & Mitchell Investment Corp.; Woodlands Communications Network, Inc.; MND Hospitality, Inc.; Mitchell Mortgage Co.; MND Finance Co.; Woodlands Venture Capital Co.; MND Service, Inc.