Wright Energy Had Counted on Whittaker’s Bankroll : Oil Firm Bitter About Its Broken ‘Engagement’ With Conglomerate
They seemed like the perfect couple.
Wright Energy Corp., a tiny, struggling Newport Beach oil exploration company with aging, but productive Kentucky oil fields, had been borrowing millions of dollars since 1979 and desperately needed a massive infusion of capital to stay alive.
Whittaker Corp., a $1-billion-plus Los Angeles conglomerate, was flush with cash from a lucrative Saudi Arabian health-care contract and looking to invest in the oil industry.
So, Whittaker agreed to loan Wright up to $10 million, with the option to either buy Wright or its oil fields.
But a marriage that seemed made in heaven was never consummated.
Whittaker never exercised its options. Last March, Wright, swamped by $26 million in debt, filed for protection from creditors under the federal bankruptcy law. In November, Wright sued Whittaker for $112 million in federal court in Los Angeles. The suit alleges Whittaker committed fraud by failing to merge with Wright or purchase the Kentucky fields. The suit also claims that Whittaker tried to take control of Wright’s Kentucky oil fields without paying Wright shareholders.
The suit is still pending, and Whittaker officials have denied all the charges. Meanwhile, Whittaker has lined up behind Wright’s other major creditor, Barclays Bank International Ltd., in an attempt to collect its $9-million debt. Wright owes Barclays $13.7 million.
Typical of Many Firms
Wright is typical of a large number of small oil exploration companies that sprang up during the domestic drilling boom of the late 1970s and early 1980s. Many of these companies poured all their resources into exploration, believing economists and industry experts who predicted oil would be selling for $50 or more a barrel by now. Scores of these tiny companies have perished; others, like Wright Energy, are struggling to survive with the prices of $25 to $26 a barrel paid now for domestic crude oil.
Wright’s tale of woe shows the difficulties that can arise when attempts are made to unite a small company with a large one. In the case of Wright Energy and Whittaker, sources close to both companies say, personality conflicts between independent-minded Wright Chief Executive Don Wright and Whittaker’s representatives helped spoil what seemed to be, on paper, a perfect fit.
“I’ve written off my share of this and it hurts,” said Harry Derbyshire, executive vice president and chief financial officer of Whittaker. “I should be suing them (Wright).”
Donald Wright, the affable, sandy-haired president, chief executive officer and treasurer of the company bearing his name has another view of the imbroglio.
Classical Situation
“This is a classical situation of a lender, in this case Whittaker, over-reaching its power,” said Wright. “The day Whittaker started advancing us money, they took over control of Wright Energy.”
Wright said he spends virtually all his time trying to raise funds to keep the company alive. “We are really broke,” the 53-year-old Wright said.
Wright said he wants the bankruptcy court to let his company borrow another $785,000 to continue operating. Wright believes that, with the additional funds, he can boost oil production and begin to pay off creditors. But there is a hitch. The lender, Newport Beach businessman Jack Bennett, wants to be repaid before Barclays Bank, Whittaker and Wright’s other creditors. An attorney for Barclays and Whittaker executives have said they will oppose this plan.
The controversy surrounds 6,300-acres of oil fields, in the heart of Appalachia southeast of Lexington. Wright bought the fields in 1980 for about $7 million. Seeking proven reserves, Wright said he based the purchase on information he found in public government reports.
Wright needed Whittaker’s money to boost oil production in the shallow fields. After protracted negotiations in the spring of 1983, Whittaker agreed to pay for an experimental water-flooding program which injected millions of gallons of water into the Kentucky wells in an attempt to raise the oil to the surface.
Dispute Doomed Deal
Wright and Derbyshire agree that a dispute over the water-flooding project ultimately doomed the deal.
Several oil men who invested in Wright stock because they believed Whittaker would buy the company or the fields, said there was one basic problem: Wright wanted to drill new wells and develop the fields quickly to boost oil production so it could begin paying off its bills. Whittaker, taking a more long-range view, wanted to complete the sophisticated water-flooding program to determine just how much oil was in the ground before agreeing to buy the fields or the company.
Sitting in his office overlooking Westwood Village, Whittaker’s Derbyshire tells a tale of bad faith and poor communication with Don Wright. He said Wright met with him and Whittaker President Joseph Alibrandi in March, 1984, to iron out their differences and try to salvage the deal, but Wright went ahead and filed for bankruptcy a few days later without telling them.
Derbyshire, who admits to knowing very little about the oil business, said he had to learn about it quickly after Whittaker’s board voted to spend $50 million on oil projects. He said Whittaker was willing to “gamble several million dollars” to find out if Wright’s oil fields had the potential to be successful.
Relations Were Strained
But, by the end of 1983, Whittaker had already lent Wright about $9 million and “relations between us were strained,” said the cigar-smoking Derbyshire in a recent interview. “I was very unhappy with the way the water-flooding project was being managed.” He said the water-flooding project, which including drilling scores of new wells, was not even half finished although most of the money had been spent. Derbyshire went back to Kentucky to see if there was any impropriety. Finding none, he said he decided more professional engineers should run the project and hired some.
Frustrated by the tangle of court suits and bankruptcy proceedings, Derbyshire said he is sure Whittaker will end up with “absolutely nothing.” He said Whittaker, which spent about $40 million of the $50 million it committed to oil-related projects, is getting out of the oil business once and for all, although its two other small oil projects were very successful.
U.S. Bankruptcy Judge Ralph Pagter, based on an independent appraisal, ruled in mid-November, that the Kentucky properties have a fair market value of $30 million.
Barclays Bank petitioned the court to order Wright to sell the fields. But Pagter, who declined to be interviewed, ruled that Wright could continue operating them while the company drafts a reorganization plan due in mid-March. He also ordered Wright to continue paying Barclays Bank $15,000 a month interest.
Wants Money Back
“The bank just wants its money back,” said Barclays’ San Francisco attorney Ronald Friedman in a recent interview. “Nobody knows what the fields are worth.”
No one has argued that the Kentucky oil fields are worthless. Petroleum engineers hired by Wright estimate that the fields contain about 9.3 million barrels of oil. Wright’s consultants also estimate that it is economically feasible to extract between $72 million and $100 million worth of oil from the fields.
Wright contends that he lost control of his company operations in the fall of 1983, when Derbyshire, unhappy with the way Wright’s engineers were handling the water-flooding program, began paying Wright’s bills directly. Before Derbyshire cut off the funds to Wright in February, 1984, Whittaker had paid $8.3 million of the $10 million it agreed to lend the struggling oil company.
Wright, who worked for Shell Oil’s geophysical department in the 1950s, said the relationship between the two companies was strained from the start. He said Kenneth Poovey, Whittaker’s attorney, changed the merger agreements at the last minute and disregarded concerns expressed by Wright’s attorneys.
In a recent interview, Poovey said the series of agreements which gave Whittaker the right to either merge with Wright or purchase the Kentucky fields alone, “started off on the wrong foot.”
Made New Demands
Poovey said he was aware that Don Wright “did not trust me,” but didn’t think that should have soured the deal between the companies. He said he was upset with Don Wright because a few weeks after Wright signed the initial agreement with Whittaker in April, 1983, Wright repudiated the agreement and demanded that it be rewritten. Those demands came after Whittaker had bought $750,000 worth of Wright stock from Wright himself.
Wright confirmed the stock purchase, but said he changed his mind about the way the agreement was worded after his lawyers raised questions about its fairness to Wright shareholders. Revisions were made and a new agreement took effect in July, 1983.
“I don’t think the problem was in personality conflicts,” Poovey said. “Don Wright is primarily a promoter, as opposed to being an oil and gas man. He didn’t want to be in a situation where the property was proved to be not economically feasible. He wanted to shift the risk to Whittaker before Whittaker wanted to take the risk.”
