Vintage Petroleum, Inc.

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Vintage Petroleum, Inc.

110 West Seventh Street
Tulsa, Oklahoma 74119
U.S.A.
Telephone: (918) 592-0101
Fax: (918) 584-5704
Web site: http://www.vintagepetroleum.com

Public Company
Incorporated: 1983
Employees: 764
Sales: $806.18 million (2000)
Stock Exchanges: New York
Ticker Symbol: VPI
NAIC: 211111 Crude Petroleum and Natural Gas Extraction

Based in Tulsa, Oklahoma, Vintage Petroleum, Inc. is regarded as an oil and gas exploration and production company. Although it engages in some drilling on undeveloped properties, Vintage primarily buys mature wells at prices below industry averages, then cuts operating costs, lowers overhead, and applies advanced technology to squeeze out any remaining gas and oil, historically resulting in increased reserves, production, and profitability. By carefully choosing its acquisition targets, the company has grown steadily since its foundation in 1983. In North America, Vintage operates in four principal areas: the West Coast, Gulf Coast, east Texas, the mid-continent region of the United States, and Canada. Since 1995 the company has also broadened its activities internationally, acquiring properties or concessions in Argentina, Bolivia, Ecuador, and Yemen. Approximately 60 percent of its total production is generated in North America, with nearly an equal split between gas and oil production.

Cofounders Working Together in the 1970s

The cofounders of Vintage, Charles C. Stephenson, Jr., and Jo Bob Hille, earned degrees in Petroleum Engineering from the University of Oklahoma and the University of Tulsa, respectively. Their first independent oil and gas company was Tulsa’s Andover Oil Co., which they built and ran from 1972 to 1982. They sold the business to Santa Fe International for $400 million, out of which $250 million retired outstanding debt. In 1983 the pair launched Vintage, based on some oil and gas properties they retained from their days at Andover. Cash flow from the wells, plus personally guaranteed loans, allowed the new company to gain its feet. Stephenson took over as president, while Hille became executive vice-president as well as treasurer and secretary. In 1987 Stephenson became chief executive officer and Hille became chief operating officer.

Because of a collapse in oil prices in 1986, Vintage’s cash flow was hindered, and after servicing debt the company was unable to purchase major new assets. To raise money, the company sold convertible preferred stock, totaling 15 percent of its outstanding shares. Half of the issue was taken by Prudential Capital, which also purchased $20 million worth of ten-year notes. Thus, by 1988 Vintage was able to begin an aggressive acquisition program. Just as they had done with Andover, Stephenson and Hille applied two basic principles when evaluating a possible acquisition: the economics of a purchase had to be sound, and the property had to possess a greater potential than just its current cash flow. As Stephenson explained to Oil & Gas Investor, “We look very closely at the economics and if they’re not there, we don’t buy. We know what we have to do with the banks, so there’s not a lot of leeway. A deal that’s uneconomic, but which might make sense for other reasons, eats up equity and restricts our ability to make further acquisitions.” It was Hille’s responsibility to evaluate potential deals, which involved considerable engineering work to determine the hidden worth of a property.

Early in 1988 Vintage spent $19.8 million in cash to acquire oil and gas properties in Oklahoma. In September of that year, the company spent approximately $48 million in cash and agreed to an assumption of liabilities to buy oil and gas properties from Donald Slawson, a Wichita independent. In that same month, a wholly owned subsidiary, Vintage Pipeline, Inc., bought Prairie States Gas Company for $5 million, plus the assumption of $3.25 million in debt. Another responsibility of Hille’s was to make the potential of a new property a producing reality. Engineers and operations people would meet regularly to control costs and plan an extraction strategy, using all available means to force mature wells to give up their remaining resources.

Going Public: 1990

By 1989 Vintage participated in 56 wells, generated $44.4 million in revenues, and posted a net income of $3.6 million. Early in 1990, with oil prices down, the company saw a chance to take advantage of a difficult environment, pay down debt, and position itself to acquire additional properties at bargain prices to increase its oil and gas reserves. Vintage decided to make an initial public offering of stock, a move that Stephenson had considered with Andover but opted against when economic conditions were less advantageous. In August 1990 Vintage sold eight million shares on the New York Stock Exchange at $5.25 each, netting $32.8 million. In that same month, the company acquired oil and gas properties in Louisiana from Chevron, paying approximately $14 million. In December 1990 it paid Shell Western $2.4 million for properties in Mississippi. Fueled by its acquisitions, Vintage reported significant gains in 1990, with net earnings of more than $6 million on $51 million in revenues. Those numbers would balloon in 1991. Revenues exceeded $141 million and net income approached $25 million. Despite weak oil prices, company revenues grew to $102 million in 1992.

After acquiring additional oil and gas properties in Texas and Louisiana in 1991, Vintage began a concerted effort to expand into new regions. In April 1992 the company purchased three California oilfields, in the counties of Santa Barbara and Ventura, from Shell Oil. Later in 1992 Vintage completed its largest acquisition to date, adding to its California holdings. Although originally announced as a $90 million deal, the purchase of Atlantic Richfield’s 15 oil and gas fields came to $76.4 million. Two of the fields were located in Ventura County and the remainder in Kern County. The purchase increased the oil and gas reserves of Vintage by 60 percent. To help pay off debt incurred by the acquisition, in January 1993 the company sold an additional 7.8 million common shares of stock in a two-for-one adjusted split at $6.75 each, netting almost $45 million. It then bought three more oil and gas properties located in Ventura County, paying $38.1 million to Dupont’s Co.’s Conoco Inc. Overall, the company had tripled both its revenues and reserves in just three years.

In 1994 Stephenson, while remaining chairman of the board, gave up the chief executive officer position to Hille. Replacing Hille as the company’s chief operating officer was S. Craig George, who had worked for the Andover subsidiary of Santa Fe International before joining Vintage in 1991 to serve as a senior vice-president of the company. Also in 1994 Vintage would become involved in an incident that would remain a concern for the next six years and the subject of frequent reporting by the Los Angeles Times .

On August 10, 1994, according to the Los Angeles Times, a crew working for contractor Pride Petroleum Services was redrilling a 50-year-old well when a geyser of water shot 15 feet above the wellhead. Three of the men jumped into the work pit to try to contain the leak with a five-gallon bucket, but were unaware that the drill had hit a pocket of hydrogen sulfide gas, a colorless gas that in lower concentrations is recognized by a rotten egg smell. In such concentrations, between 20 and 150 parts per million, the gas can cause eye and upper respiratory irritation. In concentrations of 500 parts per million and 30 minutes of exposure, hydrogen sulfide causes headaches, dizziness, diarrhea, bronchitis, or bronchopneumonia. In extremely high concentrations of 800 to 1,000 parts per million, such as in this case, the nervous system is paralyzed, resulting in suffocation, unless a victim is immediately removed and given artificial respiration. The contracted workers, unaware of any potential danger, were not wearing gas masks. The three men were instantly killed and four others were subsequently injured while attempting a rescue. Several days later, it was learned that just hours before the accident, supervisors disconnected a temporary flow line, a standard safety measure that would have diverted water, oil, or gas from flooding into the well. The victims’ families sued Vintage and others. In the drawn-out court case that followed, Vintage maintained that the supervisor as an independent contractor was responsible, not the company. Its position was bolstered by the findings of both California OSHA and the Department of Oil, Gas and Geothermal Resources, which did not cite the company with any violations of safety or workplace rules. A judge in 1998, however, ruled that the well belonged to Vintage and the supervisor represented Vintage, plus the company failed to properly weigh the geologic risks at the site. The judge then awarded more than $6 million in damages to the workers and their families, but the judgments were frozen when Vintage decided to appeal the case. It was not until June 2000 that the appellate court upheld the lower court’s ruling. Vintage considered taking its case to the California State Supreme Court, but in the end decided against the move. Almost six years after the Ventura accident, the company announced it would pay the judgments.

Company Perspectives:

Vintage’s growth has been achieved from its proven strategy of acquiring properties with significant upside potential and subsequently realizing that potential through our exploitation and exploration expertise. Vintage’s goal is to continue to build shareholder value by applying its proven strategy .

Vintage Looks Overseas in the Mid-1990s

While Vintage acquired a number of new oil and gas properties in Louisiana, Texas, and California in 1994 and 1995, spending more than $60 million, the company also began to look overseas, expanding its emphasis on new exploration. The first opportunity came in Argentina. Vintage purchased approximately 72 percent of the common stock of Cadipsa S.A. for $12.4 million in cash. It then bought BG Argentina, S.A. for $37 million in cash. In addition Vintage paid more than $50 million for concessions owned by Astra Compania Argentina de Petroleo S.A. The company’s holdings in southern Argentina were greatly enhanced in 1999 when in two separate transactions it acquired an exploitation and exploration concession near Santa Cruz. First the company bought a 70 percent interest from France’s Total S.A., followed by a purchase of the remaining 30 percent held by Repsol S.A. In order to help finance the total cost of nearly $122 million, Vintage sold nine million common shares of stock at $9.50 per share. In September 2000 the company expanded into western Argentina by acquiring two concessions held by Perez Companc for $40.1 million in cash.

Vintage entered Bolivia with the 1996 acquisition of Shamrock Ventures for $37 million in cash. The purchase of a three-dimensional seismic survey of its concessions in 1998 led to the identification of a number of potential wells, but the company did little drilling until late 1998, when it increased activity in anticipation of a Bolivia-to-Brazil pipeline that was completed in 1999. Vintage made its first acquisition in Ecuador in 1998, paying $18 million to Brazil’s Petroleo Brasileiro S.A. The company then added to its holdings in late 1999. When the Ecuadorian government authorized the building of a new pipeline, Vintage stepped up its activities in the country. Also in 1998, Vintage became involved in another portion of the world, Yemen, when it entered into an agreement with TransGlobe Energy that would give it a 75 percent interest in an exploration concession covering in excess of one million acres, in exchange for an $11 million preliminary exploration commitment. Vintage then looked northward to Canada. In November 2000, it purchased Cometra Energy for $46.3 million, a deal that also brought with it an exploration interest in Trinidad. The 13 producing fields were mostly located in Alberta and British Columbia, with some also in Saskatchewan. Vintage also gained processing and pipeline facilities and 146,000 underdeveloped acres. The company completed a far more significant deal just a few months later when it bought Alberta-based Genesis Exploration Ltd. for $593 million.

By 2001 Vintage was well positioned to pay for Genesis Exploration, although it had a rough patch to endure. When Hille stepped down as CEO in 1997, the company had generated record revenues of $416.6 million and a net profit of almost $55 million. George took over as the chief executive officer but suffered through a difficult 1998, when soft oil and gas prices battered both revenues and profits. Sales fell to $328.9 million and the company posted its only loss since going public, $87.6 million, although some of that was the one-time result of a change in accounting. In 1999 Vintage began to divest itself of properties that were either marginally economical or no longer fit in with the company’s emphasis on core regions. Vintage sold more than 225 leases for approximately $9.5 million. It sold properties in northern California to Calpine Corporation for $70 million. It also sold certain royalty interests in the Los Angeles area for $8.2 million. These sales helped to pay for the $29.6 million purchase of properties from Neuvo Energy in early 2000, adding to the company’s presence in the Ventura, California, area. The close proximity to other Vintage properties allowed overhead and operating costs to be lowered considerably.

The company’s fortunes rebounded in 1999, helped in large part by divestitures and rising oil prices. Vintage reported $503 million in sales and $73.4 million in net profit. Soaring oil and gas prices in 2000 would lead to even more impressive gains. Vintage saw its revenues exceed $800 million with a net profit of $195.9 million. Although the company could not count on high oil and gas prices to continue, Vintage was taking advantage of the flush times to enter Canada and invest in exploration efforts in South America and Yemen. After many years of exploiting inherited wells, Vintage was clearly looking to enter a new stage in which it was able to risk the costs of drilling for resources in exchange for even greater payoffs should it succeed. The company’s reputation for paying attention to detail, and a strong emphasis on engineering, boded well for its future success.