McFarland Energy : Firm Squeezes New Oil From Old Fields

McFarland Energy Co. recently agreed to pay $800,000 for a small oil property near Bakersfield that is producing a mere 15 barrels a day through seven wells, hardly an impressive operation by oil industry standards.

But the Santa Fe Springs, Calif.-based company expects to drill more wells in the field, pump steam into the ground to loosen up the heavy oil and get perhaps another 700,000 barrels out of the prospect.

One Wall Street analyst estimates that, after all the development costs are taken into account, McFarland will have paid less than $2.50 per barrel for the oil, which it should be able to sell for more than $20 per barrel.

It is just such a knack for squeezing more oil out of a field where others have given up that, in just a few years, has turned the small firm--it has only 60 employees--into one of the most successful independent oil companies in California.

And, unlike many oil firms that are depleting their reserve base because they are producing more oil than they are finding, McFarland is believed to have increased its reserves for the sixth consecutive year in 1984.

Used Internally Generated Cash to Fuel Expansion

But its accomplishments have been due to more than good luck and skillful planning. Conservative, slow growth, combined with just a touch of long-shot drilling, has enabled the firm to remain profitable through the current industry slump and even to capitalize on the failures of other, less well-managed oil companies that were forced out of business.

“I think we’re in for a couple of more lean years in the industry, but McFarland isn’t going to be hurt much,” President John C. McFarland said. “We’ve been successful in both the peaks and the valleys of the cycle in a very steady pattern.”

His assessment is backed up by oil industry analysts.

“They’ve got good people and money, and that’s 90% of the battle,” said William Craig, an analyst with the Wall Street brokerage of E. F. Hutton & Co.

Until last year, McFarland had no long-term debt and was financing its expansion purely from internally generated cash. In the first nine months of 1984 (full-year results are not yet available), the company earned $2.99 million, a decline of 3% from the previous year, on revenue of $12.96 million.

Profits and revenue have been fairly flat for four years now, but analysts see this as a major accomplishment at a time when most of the industry has fallen into a slump.

In 1984, McFarland took out its first major loan, borrowing $2 million that, with $3 million of its own funds, was used to buy a 41% interest in a huge oil field in Kern County. The field had produced 75 million barrels of oil since it was first discovered in 1936. But in recent years, the former owners, Pacific Lighting Corp. and Pacific Gas & Electric Co., have used the underground oil reservoir primarily for storing natural gas.

McFarland and its partners expect to restore oil production in the field to the 700 barrels a day being pumped before the utilities bought it. Geologists estimate that the field may still contain more than 2 million barrels of recoverable crude oil.

The key to the acquisition was having the available capital. Since the energy lending debacle of 1981-82, bankers have shunned small oil firms as being too risky. While that works against most companies, it can be an advantage to those with money in the bank who want to buy good prospects.

Founded in 1972

“We can strike a pretty hard bargain in today’s environment because we have capital,” said McFarland, 38. “That’s in shorter supply now than it was. So we kind of thrive in this environment.”

The company was founded in 1972 by Lee C. McFarland, John’s father, after a career as a petroleum engineer for both large and small oil companies operating in California. Lee McFarland, 64, said the last company he worked for was Gulf Oil Corp., after it had acquired a smaller firm he was working for.

But he said Gulf “was too big for me,” and he resigned to start his own consulting business. Within a few years, he acquired some oil-producing properties and formed his own company with a number of partners, all of whom are still involved with the company.

The firm’s 13 original stockholders wanted more liquidity for their investment, so, in 1975, McFarland merged with Seaboard Oil & Gas Co., a publicly traded firm that had just emerged from bankruptcy reorganization.

Seaboard thus became McFarland, giving the combined company instant trading status on the over-the-counter market and providing the founders a way to convert part of their ownership into cash.

The firm continued to expand slowly, investing the profits from oil production in buying new oil fields and spending a little each year exploring untested prospects.

Many of its wells are in the Los Angeles area, including an operation adjacent to Farmer’s Market where, through a single production facility, the company has drilled 29 wells in all directions to tap the oil reserves under a 600-acre lease.

Within the last few years, McFarland has expanded to the Gulf of Mexico off the coast of Louisiana. With a group of partners, McFarland found oil in an area where another firm had drilled a dry hole. McFarland then sold its interest in the lease for $7.5 million and used part of the profit to finance its recent purchase of the huge field near Bakersfield.

The company continues to be active in the Gulf, however, and is currently preparing to drill in a new area off the coast of Texas.

John McFarland thinks one of the keys to the firm’s success is keeping personnel costs down.

“We always probably need a few more people than we have, but that’s by design,” he said. “We take as many risks as the next person when it comes to wildcat drilling, but in terms of personnel, we are cautious about hiring them, and then we try to take care of them while we’ve got them.”

Thomas A. Petrie, a Denver-based analyst with First Boston Corp., said McFarland nearly made some of the same mistakes other oil companies made in 1980-82 when it began stretching its resources to explore in Colorado and other “boom” areas that it didn’t know well.

“But they saw they were making no money, so they went back to their California operations focus,” Petrie said. “One of their strengths is that, on any given deal, they know they don’t have to own the whole thing and they don’t have to own it forever.”