Oil, Real Estate and Banking Interests in Doldrums : After Fox, What’s Next for Marvin Davis?

In relinquishing his film mogul role to Rupert Murdoch, oilman Marvin Davis is reaping a profit far larger than that of any movie produced by 20th Century Fox during his four-year ownership.

The $325 million in cash that he is due to receive from Murdoch for his remaining 50% stake in Fox compares to his initial equity investment of $50 million in the studio.

That coup, however, masks a string of problems and retrenchments that have affected, sometimes severely, nearly all of his businesses--difficulties that could influence his future business strategy.

- Last April, Davis sold off what is believed to be nearly all of his producing oil and gas wells and the bulk of his most promising developmental acreage to Minneapolis-based Apache Petroleum for $180 million. Davis also last year liquidated most of his other oil-related assets, including a 150-mile pipeline in Wyoming, where he has concentrated his activities since the 1960s.

- The headquarters staff of Denver-based Davis Oil has been cut back, offices have been closed and Davis’ oil and gas operations have been reduced to some very modest drilling, mainly for gas near the Louisiana coast.

- In July, Aetna Life & Casualty, which had made a $168-million investment in Davis Oil properties, sued Davis alleging fraud. Aetna also claimed that, in June, Davis had reneged on a settlement that he had earlier accepted obligating him to buy out Aetna’s properties for $50 million. Davis Oil denied the charges.

Other prominent Davis investors, most of whom asked that their names not be used, have told The Times that they are also unhappy, and one group recently notified Davis that it may sue as well.

- Davis’ plans--fashioned in the 1960s--to build a major banking network in Colorado have been set aside. Metro Bank Corp., a holding company controlled by Davis that owns Metro National Bank in downtown Denver, lost $6.6 million last year, which wiped out two-thirds of its net worth. Metro National’s assets have declined from $196 million in 1983 to $173 million today. The holding company experienced such severe cash-flow problems late last year that it was briefly in default on a loan from Texas Commerce Bank. A much smaller Davis bank in the suburbs also has been losing money.

- Development of real estate properties held by Miller-Klutznick-Davis-Gray Co., a partnership in which Davis has the major interest, has been delayed, mainly due to poor market conditions.

To what extent difficulties with Davis’ businesses have affected his personal financial condition is impossible to say. There is evidence that they have produced so little cash over the past few years that Davis came to have most of his liquid assets (equity plus at least $160 million in loans) tied up in Fox. This and Fox’s urgent need for more capital, some sources argue, may have been a motivation behind his initial recruitment of Murdoch as a partner last April.

Davis Oil is owned by Davis and his family, and Davis is extraordinarily private, especially about his finances. He almost never talks to the press and declined to be interviewed for this story. But a Davis spokesman contends that Davis’ cash position has never been better.

There have been reports that Davis, who owns a large house in Beverly Hills, is now interested in making a run at another entertainment firm, perhaps Warner Communications, or starting an independent movie production company. There also has been speculation that Davis may renew his effort to lure a major league baseball team to Denver.

Some believe that Davis may simply relax and enjoy his money for a while. But those who know him well disagree.

“I would be absolutely dumbfounded if Marvin were just to pull out and retire,” says former President Gerald R. Ford, a longtime friend who has invested with Davis. “That just isn’t Marvin.”

Opportunities in his traditional business ventures, however, have been dampened, mainly by current economic conditions.

Real estate at first might seem a candidate for Davis’ energies, though Davis to date has been just a passive investor in the MKDG firm. Under his deal with Murdoch, MKDG, in return for relinquishing its interest in most of a 63-acre plot around Fox’s Century City headquarters, will obtain full ownership (and assume considerable associated debt) in two major Fox holdings--Pebble Beach Co. and Aspen Skiing Co.--of which it now holds 50%.

Largely Vacant Land

The soft real estate market, however, has adversely affected all of the Davis holdings, which are largely vacant land. Though MKDG (including a predecessor firm) has been operating for nearly eight years, it has not served as lead manager for a single completed new development. It has been more active recently in reducing its exposure by selling off interests in its properties.

Construction of a large hotel-condominium-golf course complex on a small piece of a 3,700-acre tract at Pebble Beach near Monterey, which was scheduled to begin in 1983, is just now getting under way. MKDG and Fox tried to sell the property last year for $230 million, according to a former Pebble Beach executive. They also recently disposed of a half-interest in Aspen Skiing, which operates six ski areas, for a reported $80 million.

Though the firm has holdings in a Boston office building and a site in New Orleans, what is thought to be MKDG’s biggest investment is an interest in 235 acres of largely vacant land near the Denver Technological Center, a large development in the southeast suburbs.

A hotel and an office building on a small part of the property are nearly completed, but the prospects for quick and successful development of the rest of the land are less than outstanding. Denver is one of the most overbuilt commercial real estate markets in the country. According to an analysis by REIS Reports, a New York real estate research firm, the region near the MKDG holdings will have as much as a 4.2-year supply of vacant office space by January, 1986.

“If they (MKDG) throw up a lot of space, it will be a long time before it is filled,” says David E. Jones, a manager with Marcus & Millichap, a Denver brokerage firm.

MKDG and other investors in the land have disposed of major portions of their interests, most recently a 50% stake to Prudential Life, which says it will probably provide most of remaining developmental financing.

A depressed market also has adversely affected Davis’ oil and gas business, once the core of his wealth. And at the same time, some of his methods of running that business have come under criticism.

Davis has always employed well-regarded geologists, but he has never relied simply on trying to be better than others in finding oil. Indeed, statistics from Petroleum Information Corp. indicate that Davis Oil’s success ratio has been only average. In some years, such as 1981 and 1984, it was among the lowest of the major wildcatters.

Volume the Key

Instead, Davis pursued a philosophy employed by his father, who used to run a New York dress business: volume.

Though many wildcatters during the 1960s financed their drilling with internal or borrowed funds, some pursued a technique called “a third for a quarter.” Under this system, an outside investor puts up a third of the cost of a well and in return receives a quarter interest in the production if the well strikes oil or gas. The wildcatter in turn receives a quarter interest for organizing the venture and supplying the expertise.

The wildcatter thus gets a piece of the action if the well hits. But as long as he has three one-third investors, he has nothing to lose if the well is dry. The optimal strategy for the wildcatter is to drill as many holes as possible. That, in turn, requires lots of investors, and it was in this, more than anything else, that Davis excelled.

“I’ve never seen anyone in the business raise money like Marvin does,” one Denver wildcatter says admiringly. “Marvin gets deals done that nobody else in the industry could do.”

Relatively little of that money is believed to have come from major oil companies, especially in recent years. If Davis Oil had favorable acreage close to holdings of a major, Davis and the major would often work out a collaborative drilling deal under which the two firms would share costs and revenues. But for the most part, majors--who usually take a more scientific and restrained approach than Davis to exploratory drilling--prefer to invest in their own drilling programs. Perhaps the major portion of Davis’ capital, interviews with Denver oil sources indicate, came from outside the industry.

During the 1970s, Davis became surrounded by a larger-the-life mystique that became his main promotional allure.

Although he eschewed press interviews, Davis pursued highly visible extracurricular activities, such as attempts to buy the Denver Post and lure the Oakland Athletics to Denver. His office issued press releases about oil strikes, and the press began terming him a billionaire in admiring profiles.

Rich and Famous Friends

He threw lavish parties and cultivated relationships with political figures such as Gerald Ford, former Secretary of State Henry A. Kissinger and Sen. Gary Hart (D-Colo.). He attracted money from numerous business and entertainment figures.

Among them, according to federal and state drilling records, were Ford, Kissinger, former Labor Secretary Raymond J. Donovan, heart surgeon Michael E. DeBakey, former CBS Chairman William S. Paley and such Hollywood notables as George W. Lucas Jr., Lucille Ball and her husband Gary Morton, show business attorney Milton (Mickey) Rudin and several present and former Fox executives, such as Alan J. Hirschfield, Norman Levy and Harris L. Katleman.

His roster of investors also came to include cash-flush corporations like Aetna and countless private individuals such as doctors drawn in by tax-shelter purveyors.

Propelled by the flood of investors’ money, much of it unsolicited, Davis Oil became the second-largest wildcatter in the country after Amoco Production, a subsidiary of giant Standard Oil (Indiana).

In March, 1981, Davis pulled off what one oil analyst calls “one of the greatest sales in the history of the oil business.” After encouraging a heated competition between several majors, he sold off his interests in 830 wells--said to be about 80% of his oil production and half his gas production--to Toronto-based Hiram Walker Resources for $630 million.

Huge Bank Debt

Davis may have been prescient, for early 1981 turned out to be close to the top of the energy market. Or, as some observers have suggested, he may have simply needed the cash to help repay the huge bank debt he took on to buy Fox.

Hiram Walker, a distilled spirits concern that only recently had gotten into the energy business, looked more closely at its newly acquired properties and discovered that there was less oil and gas in the ground than it had first thought. Due to that and falling energy prices, it took a $140-million write-down on its investment.

Hiram’s president suggested to reporters at the time that Davis might have misrepresented the properties’ reserves and said he was considering legal action. No suit was ever filed, and Davis denied that there was any misrepresentation.

Questions continued to be raised about Davis Oil’s operations, however. The third-for-a-quarter investment approach used by Davis Oil and other drillers creates inherent friction with investors. While more drilling meant that Davis had more chances to find oil, more could mean less for investors, who bore the full cost of the dry holes.

Further, unlike other independents who contracted for oil-field services and sold their oil at the wellhead, Davis, starting in the late 1970s, became vertically integrated, principally in Wyoming’s Powder River Basin.

Usually in partnership with a Casper, Wyo., oil operator named John A. Masek, Davis organized and is listed as a founding director for several Wyoming companies that supplied oil-field equipment, drilled wells, did construction, operated pipelines and marketed oil.

Firms in which Davis had an ownership interest--such as Crude Co. and its subsidiaries, Powder River Pipeline, Independent Producers Marketing and Admiral Construction--regularly did business with Davis Oil properties, according to oilmen.

Such integration often raises sensitive issues about who is charged what and who really profits.

While some individual investors have only begun to raise such issues in the wake of the Aetna lawsuit, a number have been upset with the performance of their investments for some time. A Davis spokesman acknowledges some disenchantment but denies any wrongdoing and puts the blame on the decline in the overall oil and gas market.

Several prominent investors say Henry Kissinger has told them directly of his distress over the results of his investments. Kissinger, who would not comment, has reportedly more or less severed his once close relationship with Davis.

Gerald Ford says his relationship with Davis remains “warm and friendly.” But Ford seems less than enthusiastic about his oil dealings with Davis: “I’d say it’s been about 50%, half of them dry, half OK. That’s the risk you take. We’ve done all right. We all hoped it could have been better.”

Goes Back 8 Years

Davis has bought back the interests of some investors. A spokesman acknowledged that the buy-backs have involved such disparate individuals as Greek shipping magnate Stavros Spyros Niarchos, “Star Wars” producer George Lucas and a subsidiary of Northwest Industries (now part of Farley Industries). None of these investors would comment.

The suit by Aetna, one of the nation’s largest insurance companies, represents a rather startling falling out between two companies whose collaboration, mainly in real estate, goes back over eight years. Until last year, Aetna’s then-chairman, John H. Filer, served on Fox’s board.

In its complaint, Aetna, which had little prior experience in the oil business, asserted that “the success ratios and return on investment from (Davis Oil’s) operations had fallen far below the industry average.” It alleged numerous “misrepresentations” and irregularities, contending that Davis Oil’s “cost overruns far exceeded the industry average,” that it padded acreage costs and that it failed to pass along volume discounts from vendors.

When Aetna tried to audit its investments, the complaint claims, Davis Oil first resisted and then, after consenting, engaged in “concealment” of records.

The Aetna suit has stirred a pot of discontent, a number of prominent investors told The Times. Chicago-based Greenwood Securities, general partner of an oil and gas partnership called Petro Equities that invested about $2 million with Davis Oil, recently wrote Davis saying that, unless its investment was returned, it would take appropriate legal remedies. The Petro Equities grievances parallel those of Aetna, a Davis spokesman says.

Robert Shoup, a spokesman for Deere & Co., one of the limited partners, acknowledges that “we have a problem with Mr. Davis” but refuses to elaborate.

Investor disenchantment has been only one of Davis’s recent difficulties. Falling oil prices have brought about a reduction in Davis Oil’s operations since the Hiram Walker sale. In 1984, according to Petroleum Information, Davis Oil’s production was only about two-thirds the level of 1980. Drilling activity also slowed, from a high of 327 wells in 1982 to 171 last year, Petroleum Information’s data show.

While Davis Oil was the most active Rocky Mountain wildcatter in 1984, its overall national ranking in total wells drilled has declined substantially.

Davis put what appears to have been most of his oil and gas assets on the market last year. In July, 1984, he and partner Masek sold nearly all of the assets of Independent Producers Marketing, Crude Co. and Powder River Pipeline to a subsidiary of Getty Oil (now part of Texaco).

Davis’ oil and gas production properties initially attracted no buyers at an asking price of about $350 million, according to several industry executives in Denver. He eventually concluded a deal with Apache early this year, which has a reputation as one of the savviest independents in the business.

More Properties

According to James E. Kneser, Apache vice president for acquisitions, the final price of $180 million for interests in 392 Davis wells was “significantly short of Mr. Davis’ desire for the sale.”

In addition, Kneser said, Apache bargained Davis into including more properties than the package had originally contained, especially non-producing acreage with “substantial development potential. Four years ago, people would never sell these kinds of properties because that is where you really make your money.”

A comparison of Securities and Exchange Commission filings by Apache with production statistics from Petroleum Information suggests that Apache acquired virtually all of Davis Oil’s oil production and around 90% of its gas production.

Davis’ spokesman contended that Davis actually sold less than half his production to Apache and points out that the Petroleum Information figures do not include Davis interests in wells operated by other producers.

Apache’s Kneser says, however, that he believes that Apache purchased “substantially all of (Davis’) properties that had matured to the developmental stage.”

Financial data in the SEC filing indicate, if that is true, that Davis Oil in recent years has been a much smaller operation than is popularly believed.

In 1984, the properties purchased by Apache had total sales of just $36.6 million, which, if included in the Oil & Gas Journal’s tabulation of 400 leading oil and gas companies, would have ranked 157.

The $180 million that Davis received from Apache may not have gone toward financing new oil activity. A knowledgeable source says the money was used to pay down Davis Oil’s outstanding borrowings at New York’s Mellon Bank, which recently purchased the Davis Oil loan from Continental Illinois Bank & Trust of Chicago.

Davis’ spokesman claims that none of the $180 million was used to retire bank debt.

Nonetheless, it’s clear that Davis has not given up drilling. But raising money seems more difficult than it once was. Denver oil sources say a planned 50-well drilling program in Wyoming was recently canceled due to lack of financing.

And though Davis is conducting limited operations near the Louisiana coast, sources say that instead of straight third-for-a-quarter deals, some of Davis’ partners have been demanding that Davis kick in a good portion of the drilling costs himself.

DR, MATT WUERKER