WALL STREET, FRESH FROM DIRECT hits on the fast food franchisers and the real estate investment trusts, is zeroing in on the offshore oil and gas companies. “The Street” has an overkill capacity in these matters that makes the deliverable megatonnage of the Strategic Air Command look like a mild threat of rain. The devastation is particularly intense when aimed at a fresh new investment vehicle.
In modern times the most awesome destruction has been inflicted on the fast food franchisers. Back when Colonel Sanders was a lieutenant in the war against empty stomachs, Wall Street wasn’t paying too much attention to the group. Consequently, the companies involved, though few, were doing very well. But the investment community suddenly realized there was gold in them thar chickens and pizza and hamburgers and roast beef and fish and chips and…
There was a need for good, consistent, fast service restaurants that could serve healthful meals quickly and economically. The Colonel proved that. So did McDonald’s Hamburgers. There was a need, all right, but not for a franchise on every corner.
Wall Street cranked up the power and every jakeleg entrepreneur who could latch onto a celebrity’s name or a new approach to the opportunity of filling America’s affluent stomachs hustled up to New York and found a friendly investment banker. We got everything from Minnie Pearl to Broadway Joe. The result was a wasteland on franchise row that made formula TV look like Shakespeare in Central Park.
Fresh from a kill in the fast food franchise veldt, Wall Street aimed its overkill capacity at the real estate investment trusts.
Twelve years ago there were two such trusts. The public could buy shares in either of these two vehicles and own a package of mortgages and other loans producing a generous yield. Real estate investment trusts were not very exciting investments, but their dividends were substantial and growing with a high degree of regularity.
By 1969 the number of REITs available for public investment had doubled. There were four. Then Wall Street got wind of the idea, and friendly investment bankers went to work. At this writing there are more than 200 real estate investment trusts public. There are several more in registration just waiting to make their debuts. While the REITs haven’t been clobbered as spectacularly as the fast food franchisers were, Wall Street overkill has, at the very least, put a lid on their price appreciation potential by offering new trusts and additional securities of existing trusts almost constantly.
Now Wall Street is focusing its bomb sights on the latest better mousetrap of investing, the offshore gas and oil companies. Precursor of this group was an unique vehicle with the improbable moniker of a comic strip character, POGO.
Pennzoil Offshore Gas Operators splashed onto the scene in November, 1970. Pennzoil United, the parent, knew a lot about the offshore leases to be sold by the federal government in the lease sale scheduled in December, 1970, probably more than any other company. There was just one thing holding back an aggressive bidding stance by Pennzoil: lack of money. The answer to the problem was POGO, a new company formed to let the public in on the opportunity to bid for offshore leases.
The public offering of POGO broke new ground. It was an innovative and complex package: convertible bonds sporting an escalating interest rate combined with shares of common stock. Although the offering was adequately promoted and well distributed, the innovation was a little too much for investors. After all, from offering date to the first black ink on the bottom line in one of these ventures requires a minimum of two years. It just naturally takes that long to drill, discover, and produce from offshore leases. It goes with the territory.
Offered at par, the POGO units went to an immediate discount, trading more than 20 per cent below the offering price within a month after the issue.
That experience didn’t stop Ocean Drilling and Exploration from offering a similar deal in May, 1971. Although POGO cratered, Pennzoil had raised $122,687,500 to use in the December lease sale and had, indeed, used it successfully, winning more leases than any other company. So Ocean Drilling went ahead with its offering, selling one million shares of Ocean Oil and Gas for net proceeds of $23,250,000. But OOG, too, was a turkey, trading in the aftermarket at a substantial discount.
With these two examples fresh in the minds of both investment bankers and investors, Wall Street cooled off on the offshore opportunity. But while Wall Street was cooling off, POGO was heating up. Offered at the equivalent of $5 per share, POGO declined to $3, but then vaulted to $17 before settling back around $10.
After that action, Wall Street took another look. Still, it was some 18 months after POGO before PLATO, son of POGO, was offered to the public in August, 1972. This entry was also sponsored by Pennzoil and was anagrammed PLATO for Pennzoil Louisiana And Texas Offshore. The in-breeding becomes fairly severe in this arrangement since POGO owns 25 per cent of PLATO. But the new entry raised another $122,687,500 to bid on leases offered in September, 1972.
PLATO was the third company formed to solicit the public’s money to bid on offshore oil and gas leases. The concept was new and unproven, but Wall Street didn’t have any trouble counting up the commissions enjoyed by the brokers who brought the first three companies public. Gross commissions on the original POGO offering alone were $7,312,500.
Also, the winter of 1972 was both early and severe, transfering the gas shortage from the realm of prediction into reality. Gas prices must go up to encourage new exploration, and the only substantial undiscovered domestic supplies of natural gas are said to be offshore.
There were three offerings of the POGO type between November, 1970, and September, 1972. In the next three months, we were treated to three more, Louisiana Land Offshore, Tenneco Offshore and Zapata Offshore. In each case the securities of these companies went to immediate discounts after the offering.
Now it’s becoming a traditional battle between the investment bankers and the so-called “smart money.” Convinced the offering will go to a discount, institutions layoff and buy in the aftermarket at lower prices. Since institutional demand is necessary for the success of this type of offering, the technique is self-fulfilling.
But there is an energy crisis, and Wall Street is rubbing its hands and counting the companies who are candidates to spawn offshore gas and oil vehicles to attract the public’s money. There are going to be many more opportunities to buy this concept, and some of these new offerings are going to be worthwhile investments, depending on how successful they are at discovering natural gas and oil. There may not be as many offshore gas and oil companies as there are fried chicken franchises, but the gates are open, and at least a minor flood is likely.
Acronyms will have their finest hour.
There’s POGO and PLATO. Louisiana Land Offshore is called LLOXY in boardrooms, and the new Tenneco Offshore is lovingly rererred to as TOGO. Gulf Oil could easily offer GOGO. Exxon could offer Humble Offshore Production and Exploration, HOPE. Forest Oil might bring Forest Exploration And Revenue, FEAR. Some investors would shudder, but we could even have Gulf Resources Energy Expansion Dynasty, GREED.
There’ll be no end of it until Wall Street overkill reaches maximum power and comes up with Underwater Holes Of Hope.