Fortune Struggles to Succeed : Oil drilling: A tiny Agoura Hills energy company is still fighting to break even despite a recent surge in crude oil prices.

By JAMES F. PELTZ

Feb. 20, 1990 12 AM PT

TIMES STAFF WRITER

In mid-1988, when its oil prices were around $14 a barrel, Fortune Petroleum Corp. was barely breaking even. Yet the tiny Agoura Hills oil company figured it could still earn a profit even if prices slipped a bit further.

Instead, oil prices rose over the next 18 months. And while the oil Fortune pumps from the ground isn’t the best, the average price of a barrel of its crude has still jumped to about $19 a barrel, compared with higher quality, West Texas Intermediate grade, which is selling at around $22 a barrel.

Yet Fortune’s fortunes haven’t moved in tandem with oil prices--the company is still struggling to break even. It’s thinly traded stock also is ailing, trading Friday at 38 cents a share bid compared with 65 cents in mid-1988.

What gives? Fortune President Dan E. Pasquini said that despite the jump in prices, Fortune’s costs of operating its oil wells also have risen, and that its administrative costs (general overhead, government filing fees and the like) have not dropped as much as he planned.

Fortune owns or has a financial interest in about 40 oil and gas wells, 30 of them in Ventura County, and has leases covering 6,700 acres where Fortune hopes to find more oil and gas. It pumps about 45,000 barrels of oil--each barrel equals 42 gallons--and generates about $1 million in revenue annually.

In the first nine months of 1989, Fortune’s production costs jumped 20% from a year earlier, and Fortune posted a loss of $36,000 in the nine months on revenue of $734,000.

Pasquini admitted that two years ago, he “probably was a little bit optimistic” about Fortune’s ability to cut costs and turn a higher profit. His company is so small that a $10,000 bill here and a $20,000 expense there can decide whether Fortune is in the black or the red.

“Being small, you have to have a consultant in one place, an Arthur Andersen in another and an attorney in another,” he said. “To orchestrate this whole thing is a very difficult chore.”

Also, Fortune’s oil wells are not state-of-the-art. “We haven’t had the money to spend on them to keep them in top shape,” Pasquini said. “So if we have a breakdown it costs quite a bit to fix them.” Recently, he said, one of Fortune’s best wells broke down and three attempts were needed to fix it.

But he’s not afraid to make more predictions: If the price of Fortune’s oil stays near its current $19 a barrel, “we’re going to show a profit,” he said.

Some of Fortune’s biggest stockholders also give Pasquini the benefit of the doubt. “The future for oil in general, or for anybody in that business, is very positive,” said Andy Granatelli Jr., who helps invest funds for his family, which owns nearly 7% of Fortune. His father is the head of TuneUp Masters, a Newbury Park-based chain of auto repair shops, and a former race car owner.

Pasquini isn’t relying on oil prices alone to save Fortune. He’s convinced Fortune must grow to survive, and currently he’s arranging to acquire Western Energy Resources, an even smaller oil firm in Laguna Niguel, for 500,000 shares of Fortune’s stock. Why? Because Western would add nothing to Fortune’s overhead costs, but would provide Fortune with $120,000 in additional net cash each year after subtracting the cost of operating Western’s wells, he said.

Fortune wants to acquire more little oil companies and step up its exploration efforts. In the latter case, Fortune is like the wildcatters of old--looking for one big strike that will pay off in a gusher of profits.

In hopes of doing that, the company last week offered 825,000 units--each consisting of three common shares and a warrant--to its current stockholders for $1.95 per unit, and if the sale succeeds, Fortune would raise about $1.6 million.

The company would use $850,000 of the cash to pay off a note owed to RAPCO, the former Argo Petroleum Corp. in Santa Monica that filed for bankruptcy protection in 1987. Pasquini, a geologist, and his partner, Cecil O. Basenberg, had been Argo executives who acquired some of Argo’s wells during its reorganization to start Fortune later in 1987. (Basenberg is now Fortune’s chairman.) They bought the Argo assets in exchange for the note.

With that debt paid, Fortune would be virtually debt-free. That would enable Fortune to borrow additional cash for exploration or an acquisition. Or, if it kept its debt low, Fortune would be more attractive as a takeover target. Pasquini said he has received several feelers in recent months from parties, whom he would not identify, that indicated they want to merge with Fortune.

“I would like to have control of the destiny of the company,” he said. But he added, “I’m not turning my back on anything.”

First though, Fortune must successfully sell its new units. If its current stockholders don’t buy all of the new securities, the units will be offered to the public. But there’s no assurance that even Fortune’s biggest investors will want to invest any more cash in the company.

Morris S. Frankel, a Los Angeles dentist who founded Argo and remains Fortune’s biggest stockholder with an 18% stake, said he does not plan to buy additional Fortune shares--but for personal reasons. “I’m not turned off by the company,” he said.

Granatelli likewise called himself a patient investor in Fortune, but said he won’t decide whether to buy more shares until he’s had a chance to read the securities’ prospectus.

Still, Granatelli said he subscribes to Fortune’s goal of looking for one big oil strike. “In the case of Exxon, if they make a discovery it doesn’t have a major effect” on the company, he said. “But a company like Fortune, if they’re able to be successful, they could do quite well.”

That’s a big if. Pasquini said Fortune has several good prospects, and is arranging to drill for oil at new sites in Ventura and Santa Barbara counties.

Fortune also has an interest in a “decent prospect” in Montebello just east of Los Angeles, he said, where it is a partner in a group that leases the mineral rights to 900 acres. But the group’s initial drill at Montebello last year came up empty.

A COMPANY OUT OF STEP WITH ITS MARKET

Two years ago when top-grade crude oil sold for $17 a barrel, Fortune Petroleum Corp., a small oil and gas company in Agoura Hills, was earning a profit. Since then, oil prices have climbed above $22 a barrel, yet Fortune has been struggling to break even.

Crude Oil Prices*

Date Price

Dec. 29, 1989 21.82

Sept. 29, 1989 20.13

June 30, 1989 20.27

March 31, 1989 20.19

Dec. 30, 1988 17.24

Sept. 30, 1988 13.37

June 30, 1988 15.16

March 31, 1988 17.08

*Contract price for West Texas Intermediate grade

Source: New York Mercantile Exchange