Vastar Resources, Inc.

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Vastar Resources, Inc.

15375 Memorial Dr.
Houston, Texas 77079
(281) 584-6000
Fax: (281) 584-3268
Web site: http://www.vastar.com

Public Subsidiary of ARCO (Atlantic Richfield Company)
Incorporated: 1993 as Vastar Resources, Inc.
Employees: 1,100
Sales: $1.01 billion (1997)
Stock Exchanges: New York
Ticker Symbol: VRI
SICs: 1311 Crude Petroleum & Natural Gas

Vastar Resources, Inc. was created out of the interests of the ARCO Corporation in 1993. The company develops petroleum and natural gas reserves within the United States, producing more than a billion cubic feet of natural gas per day. Approximately 60 percent of its more than 1,000 employees work at its Houston headquarters. The firm, which prides itself on low-cost production, is valued at approximately $4 billion and remains 82.6 percent owned by ARCO. Vastar is regionally focused and emphasizes internally generated growth.

An Early 1990s Spinoff

Vastar Resources, Inc. was created in October 1993 as the Atlantic Richfield Company (ARCO) reorganized its exploration and production interests in the contiguous United States. The move created Vastar out of the Dallas-based ARCO Oil and Gas Co.’s Natural Gas Growth unit, which had a net income of $32 million in 1992 and $1.13 billion in revenue. The new company was headquartered in Houston. Three smaller oil companies (Arco-Permina, Arco-Bakersfield, and Arco-Long Beach) were formed at the same time. ARCO eliminated 1,300 jobs through the restructuring.

Vastar’s assets, 65 of ARCO’s best properties, were grouped into four main regions: the (offshore) Gulf of Mexico, the Gulf Coast (of Texas and Louisiana), San Juan Basin (New Mexico, Colorado, and Wyoming), and Mid-Continent (Oklahoma, Arkansas, and Kansas). Proved reserves totaled 2.1 trillion cubic feet of natural gas and 99 million barrels of crude oil, natural gas condensales, and other liquid byproducts of natural gas production.

Vastar also inherited, among other subsidiaries, ARCO Natural Gas Marketing, Inc., which became Vastar Gas Marketing, Inc. In addition, it retained access to ARCO’s sophisticated research center in Piano, Texas.

The company wasted little time in commencing its aggressive development efforts. In 1993, Vastar drilled in the Gulf using 3D seismic data combined with direct hydrocarbon indicators. This would prove the company’s most effective technology, achieving a better than 60 percent success rate. The Gulf would remain the object of much of Vastar’s attention for years to come.

Vastar produced the equivalent of 963 million cubic feet per day in 1993 and posted profits right out of the gate. Net revenues were $797 million, with net income of $117 million.

Going Public in 1994

Vastar announced its initial public offering in February 1994. The event raised $453 million in cash. When it was completed on June 27, ARCO owned 82.3 percent of the company and retained control of its board. ARCO’s large stake in the company seemed to make investors wary in spite of Vastar’s respectable performance.

In an interview with Oil and Gas Investor, CEO Michael Wiley (who first joined Arco in 1972), president of Arco Gas and Oil Co. until the restructuring in 1993, recalled that the change in the company’s culture was swift, as the unit shifted from being part of an established major player to a progressive, independent, more entrepreneurial one. In particular, Vastar reduced its cost structure surprisingly quickly. It changed its compensation program and empowered workers at lower levels with more control over decisions.

Cash from the IPO, one of the year’s largest, allowed Vastar to increase its drilling budget, which soon resulted in impressive results. In its first year as an independent, Vastar replaced all of its reserves and increased production at half of its fields. It quickly established a reputation for making impressive finds at low cost.

Although commodity prices fell in 1994, Vastar’s results improved thanks to increased production and unit production costs which fell by more than 25 percent. The company posted a $149 million profit on $817 million in net revenues while producing the equivalent of 1.04 billion cubic feet of natural gas per day.

The company started new drilling in 60 percent of its fields in 1995 as development continued in earnest. It would again replenish its reserves, adding 146 percent of proved reserves. Vastar produced 810 million cubic feet of gas per day in 1995.

In September 1995 Vastar increased its holdings in the San Juan Basin area, its most productive area by volume. Although ostensibly mature, Vastar’s technologies managed to spur growth there. In November, the company made a significant new discovery in the Gulfs South Pass 60 field unit, which would become its second largest producing area. Another area that attracted attention was the Lodgepole trend in Montana and North Dakota. Vastar bought a 55 percent interest in 150,000 acres there in the fall of 1995. Three-D seismography was again responsible for the sizeable find.

In 1995, Vastar began operating the Grand Chenier gas processing plant. In spite of increased production, the company’s sales fell to $739.5 million, earning a profit of $103 million. The equivalent of 1.08 billion cubic feet per day was produced.

In June 1996, the company signed a three-year contract for the use of Diamond Offshore Drilling Inc.’s Ocean Victory semi-submersible drilling rig. This gave it capability in deep-water exploration to begin in November 1997. By 1996, about 80 percent of Vastar’s offshore drilling was based on 3D DHI surveys. In August 1996, the company drilled a record 10,000 feet in 10 days at its South Pass 60 field. That year, development capital amounted to $260 million.

While it had previously sold all of its natural gas liquids to ARCO, in April 1996 it began marketing them independently. Vastar sold about three billion cubic feet equivalent of natural gas per day in 1996, most of it from other producers. This made it the llth largest natural gas marketer in the United States, capturing $30 million in profits. Vastar Power Marketing, Inc. began trading in the middle of 1996, with hopes of becoming a major player with the coming of deregulation in the electricity market.

The company posted a greater than 100 percent return on equity in 1996. It was simply a great year for Vastar. Commodity prices were their highest in years, while the company’s costs continued to fall. On sales of $966.6 million, the company posted a profit of $220 million. It produced the equivalent of 1.17 billion cubic feet per day and replaced 144 percent of its reserves. Capital expenditures continued to increase, to $585 million.

New Plays in the Late 1990s

In March 1997, Charles Davidson succeeded Michael Wiley as president and CEO. Wiley returned to ARCO. Otherwise, the company seemed to progress as usual. Vastar received its first U.S. patent, for “Chemically Induced Stimulation of Coal Cleat Formation” in September.

In September 1997, Southern Company Energy Marketing (SCEM), a joint venture with giant $10-billion-a-year electric utility Southern Co., began its bid to be one of the country’s top electricity and natural gas marketers with the coming of deregulation. Vastar initially held a 40 percent share in the project. Southern paid Vastar $40 million and planned to own three-quarters of the venture by century’s end, when SCEM was expected to be producing $40 million in profits per year. SCEM was headquartered in Atlanta instead of energy industry center Houston, though natural gas was sold at Vastar’s Houston trading floor. SCEM expected to add 100 employees per year to its initial workforce of 250. Vastar agreed to sell SCEM all natural gas produced for ten years.

Vastar suffered a 9,400-gallon oil spill off the coast of Louisiana in December 1997. The mile-long slick, which came from an oil platform, was classified as minor, however, and no wildlife was reported to be harmed.

On revenues of $1.014 billion, the company saw $240 million in net income. It produced 1.19 billion cubic feet equivalent per day and reached a record reserve replacement level of 154 percent.

A Strong Fin de Siecle

Production reached record levels (1.21 billion cubic feet equivalent per day) in early 1998 as recent offshore discoveries were brought on-line. However, declining commodity prices pushed the company’s first quarter profits down to $48 million from $63 million a year before. Crude oil and natural gas averaged $17 and $11 per barrel, respectively, down from $24 and $16 the year before.

Company Perspectives

Vastar Resources, Inc. is one of the largest independent oil and natural gas exploration and production companies in the United States. The company is active in approximately 80 fields in some of the nation’s most prolific producing areas, including the Gulf of Mexico, the Gulf Coast, the Oklahoma/Arklatex and the Rockies/Hugoton regions. In addition, our drilling rigs are exploring for new reserves both onshore and in the promising shelf and deepwater Gulf of Mexico drilling plays, the latter the site of rising industry activity and excitement.

Several discoveries in the Gulf of Mexico fostered optimism; the company announced 12 favorables out of 16 attempts,

including the “King” prospect being drilled by the leased Ocean Victory drilling rig (this news was tempered by an engine room fire which forced the rig to be taken off-site for repairs). Shell and BP were minority partners in this effort. By contrast, Vastar’s properties on the Gulf Coast, many of which had been producing for 50 years, were described as mature. In April 1998, Vastar Resources traded some deepwater properties in the Gulf of Mexico south of New Orleans to obtain a 25 percent interest in a well being drilled for Shell Deepwater Development Inc. The company planned to participate in four or five deepwater wells in 1998.

In May 1998, the company announced plans to invest at least $700 million to support its growth, a record level of investment. The company had spent $672 in capital expenditures in 1997. Development of 80 fields accounted for little more than half the 1998 budget. Given Vastar’s historically impressive return on investment, it would seem to be money well spent.