Shamrock Will Restructure to Discourage Bids

Responding to cheaper oil prices and the continuing threat of takeovers in the oil industry, Diamond Shamrock on Wednesday announced a major restructuring that includes creation of a master limited partnership, the substantial write-down of its Indonesian oil and gas properties and a $200-million stock repurchase.

The Dallas-based energy and specialty chemical company said it will transfer to the partnership its Gulf Coast oil and gas properties, regarded by analysts as among Diamond’s more valuable assets. Those properties, which include tracts in the Green Canyon, accounted for 35% of Diamond’s North American production last year.

The company said it would take an $810-million charge against its second-quarter earnings to reflect the lower value of certain assets, especially its Indonesian oil and gas properties. The company is reducing the book value of those assets by 41%, or $600 million. Diamond acquired the Indonesian properties in 1983’s $1.6-billion purchase of San Franciso-based Natomas.

Boosting Share Value

The company took two measures designed to increase the value of its shares. Diamond said it is increasing the value of its annual dividend to $1.90 from $1.76. Beginning in the fourth quarter, the company will reduce its cash dividend from 44 cents to 25 cents. But it will issue shareholders fractional partnership units worth 22.5 cents per share. The units can be converted into cash, the company said.

The company also said it will spend $200 million over the next 18 months to buy back at least 7 million shares, or about 5.5% of its 125 million shares outstanding. The company said the repurchase would be financed through its cash flow.

William H. Bricker, Diamond’s chairman and chief executive, said an “environment of severe competition and disinflation . . . reduced the market value of many of our assets. We’re simply recognizing that fact.” He said that, although the company will show a loss this year, its cash flow is strong. “All Diamond Shamrock’s operating companies remain solidly profitable,” he said.

He said that restructuring doesn’t involve “the fire sale of assets or crippling increases in debt that have accompanied many other forced restructurings of oil and gas companies.”

Arco to Hike Debt

As companies confront the reality of cheap oil, many have taken on large amounts of debt, bought back stock or swallowed another undervalued company in order to prevent hostile corporate takeovers. On Wednesday, Los Angeles-based Atlantic Richfield announced that it will float a $1-billion debt issue to help finance a previously announced $4-billion stock repurchase plan that was part of a major asset redeployment.

Bricker declined to say how large Diamond’s loss would be, but analysts estimated that the loss for the year would be about $4.70 a share. Last year Diamond earned $242.2 million, or $1.78 a share, on sales of $4.5 billion. All but 2 cents of the earnings was paid out in dividends.

With the restructuring, analysts said Diamond solved its most pressing problem--the need to retain its dividend. The investment community had been rife with rumors that Diamond would soon be forced to drop its dividend due to poor earnings performance. In the first quarter ended March 31, Diamond reported per-share earnings of 44 cents, just enough to cover its dividend.

“They’ve eased the strain on the cash flow without actually having to cut the dividend,” said Katherine M. Stults, an analyst with Dean Witter in New York. “It increases their flexibility considerably.” The company said the reduced cash dividend would save $100 million a year.

Investors reacted negatively, however. Diamond’s stock closed Wednesday at $18 on the New York Stock Exchange, down 37.5 cents.