Gulf Oil's Painful Surgery

Rumors have been swirling for months through business circles from Wall Street to Houston: Gulf Oil Corp., the nation's eighth largest industrial concern (sales last year: $17.8 billion), is in trouble. Though there is no question about the company's survival, it is in the midst of a painful struggle to overcome years of bad luck and fumbling management.

Squeezed for cash because of overinvestment and declining earnings, Gulfs chiefs have been wielding a heavy ax to cut costs, jettison losing properties and clear a path out of past mistakes. The company's fleet of planes has been reduced from six to three, and the executive dining room has been closed. More important than these symbolic moves, this year's capital budget, originally set for $2.5 billion, is being cut drastically. At headquarters in Pittsburgh, and in branch offices from Houston to Tokyo, cutbacks in staff are reaching into the hundreds. Public affairs has been pruned severely; its chief, Senior Vice President Jayne Baker Spain, a former vice chairman of the U.S. Civil Service Commission, is the highest Gulf officer to go so far; at least two more vice presidents also are out. The Gulf Transportation and Trading Co., which directs the firm's fleet of 76 tankers, has also been caught in a shower of pink slips. Says Gulf Chairman Jerry McAfee: "I will be surprised if we don't find more than 1,000 employees who are not essential."

To take some of the sting out of the firings, Gulf has hired a Manhattan firm, Thine., which specializes in helping axed employees find jobs. Still, morale among many of the remaining 59,000 employees is scraping bottom, and quite a few are nervously looking for other jobs.

Gulfs crunch came in 1975. Kuwait, where Gulf had poured the bulk of its foreign investment money, took over the company's share of Kuwait Oil Co., with its wells, refineries and other facilities, cutting off Gulfs biggest and most profitable source of crude. Venezuela also took over Gulfs holdings. General Atomic, a joint Gulf-Royal Dutch/Shell venture, pulled out of the production of high-temperature nuclear gas reactors after heavy losses. Meantime, Gulf had missed out on most of the big U.S.oil strikes--the Rocky Mountains, west Texas, east Texas and Alaska.

Bob R. Dorsey, McAfee's suave and articulate predecessor, responded to the end of the era of cheap oil with an ill-conceived diversification program. Gulf bought heavily into real estate, including the "new town" of Reston, Va., and a chain of recreational vehicle parks, Venture Out in America Inc. About $100 million was invested in high-technology companies, with dreary results; none came up with anything promising. When in 1974-75 reports came out that Gulf had made huge illegal payments to U.S. and foreign politicians, Dorsey was forced to resign, and McAfee, a big, bluff, humorous technician, was brought in from the company's Canadian subsidiary.

Under McAfee, Gulf has been busy trying to sell off its real estate and other unprofitable properties, while concentrating on its basic business of oil and gas. The company spent more than $200 million last year in stepped-up onshore exploration in the U.S. It also paid $314 million last June to acquire twelve drilling tracts in the Gulf of Mexico. Gulf spent $400 million to $500 million to build its Cedar Bayou ethylene plant near Houston; it opened last year but, say industry sources, has never operated at more than 60% of capacity, causing a substantial drain on Gulfs petrochemical earnings. Gulf also acquired for $455 million Kewanee Industries, a specialty chemical firm. In all, the company's 1977 capital spending came to $3 billion, much more than that of bigger companies such as Texaco and Mobil.

While all this was going on, a temporary global glut of crude kept a lid on prices, stretching Gulfs once bountiful cash reserves and cutting into earnings. Last year profits fell 7.8%, to $752 million; in this year's first quarter, they fell another 7%. The need for a drastic reduction in outlays became urgent.

Gulf is also enmeshed in a web of lawsuits growing out of allegations that it secretly participated in a worldwide cartel to manipulate supplies and raise the price of uranium. Though the cartel's impact on U.S. prices remains uncertain, the world price of uranium has gone from $6 a pound in 1972 to about $44 today. At worst, Gulf, which denies the charge, could be forced to pay $1 billion or more in damages to companies in the uranium business. McAfee predicts that, at most, the various court actions could cost Gulf no more than $360 million. Last week the company pleaded no contest in the U.S. Government's case growing out of the cartel arrangement, and was fined $40,000, but it still faces a wave of private suits.

Despite these troubles, McAfee is convinced that Gulfs investments in increased exploration and production will eventually pay off. McAfee is under no illusion that the company's problems can be resolved soon. Gulfs turnabout, he says, should be about complete when he is ready for retirement at 65--and that is not for another 3 1/2 years.

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