Independent Oil Marketers Caught in Cash-Flow Vise
It’s a business of tanker trucks and bulk plant terminals and gasoline and diesel fuel--a dirty business, but a living.
Lately, it’s been a much harder living.
C. O. Thompson Petroleum Co. of Orange is one of the larger so-called jobbers, independent petroleum marketers who buy bulk fuel from refiners and sell it to construction yards, auto dealers, farmers, mom-and-pop service stations.
Thompson delivers fuel to about 3,000 customers in Orange, Riverside and San Diego counties.
In normal times, it’s a tough business that depends on adequate cash flow. Jobbers such as Thompson buy fuel from refiners on short-term credit and sell it to customers on credit. They float on the thinnest of cash flows and profit margins and can’t control the volatility of the oil markets. In 1989, the company sold about $90 million worth of fuel. A few gallons at a time.
But the Middle East crisis and the prospect of a recession have put Thompson and other jobbers in a vise: Costs are going up while demand is falling. Revenues are shrinking, and credit is drying up.
As a result, Thompson was forced last month to file for protection under Chapter 11 of the federal bankruptcy code.
“The problem at Thompson was not access to product; they were always able to purchase fuel in the quantities they needed,” said Jeffrey W. Broker, a lawyer representing Thompson in its bankruptcy reorganization. The problem was cash flow, particularly when it came to paying state taxes, he said.
In addition, “they were also caught in the price squeeze at the producer level . . . When the price of petroleum products goes up, consumption goes down . . . That hurt them.”
Thompson is not alone. The impending recession and Middle East crisis have aggravated pressures on all independent petroleum marketers, already battered by high costs and fierce competition from major oil companies.
“It’s something everybody in the industry knows about,” Broker said. “There was a tightening that everybody felt the pinch on, a tightening that has not yet loosened.”
Jobbers act as middlemen for thousands of businesses and provide fuel for gas stations in outlying communities that would not be served by major oil companies. Some also operate their own private-brand service stations.
Some jobbers are large, like Thompson. But most are family-run shoestring operations. “If we were in the Old West, they’d be the ones out there herding cattle, living right out on the edge,” said one industry source.
Recent events have pinched some of these operators. Even before the Middle East crisis, the business was under strain from high taxes, environmental cleanup charges and stiff competition.
In the wake of the Iraqi invasion of Kuwait, Leigh Ross, president of Western Petroleum Inc. in Paramount, said his diesel fuel costs doubled to more than $1 a gallon. In order to supply his customers, he had to come up with more than $1 million in extra cash to buy the same amount of fuel, he said.
“We have had to borrow a substantial amount of money, but. . .a lot of these companies can’t step out and borrow $1 million,” he said.
Overall, the number of California jobbers has been shrinking by 15% to 20% in the past five years to about 450 to 500, said Jim Gigoux, executive vice president of the California Independent Oil Marketers Assn., a Sacramento-based trade group.
Wright Cos., formerly Wright Oil, is a large Las Vegas-based jobber with operations in the Los Angeles basin and San Diego. In December, it also filed for protection under Chapter 11.
That was converted to a Chapter 7 liquidation in July, and founder William Wright stepped down and now runs a chain of service stations.
The company continues to operate under an unusual court agreement, according to a source familiar with the bankruptcy. It was being squeezed by high debt, rising costs and ineffective management, said the source, who spoke on condition of anonymity.
Bill Wright bristles when discussing the bankruptcy. He feels unfairly blamed for the situation.
He argues that he helped the company make money and pay down debt while he was in charge. “I netted $1 million a year for the last five years,” he said. “Does that sound like mismanagement?”
Instead, he blames banks, who “hammered” him continually to pay his debt. “They don’t let up,” he said.
He also blames refiners for jacking up prices. “They’re your competition, and they don’t need a middleman, and they’re not going to use a middleman,” he said.
But, ultimately, he blames himself. He had taken time off to deal with personal problems, coming back only after oil markets were thrown into turmoil by the Exxon Valdez incident.
“My whole desire to be in the wholesale business--after the Valdez and the way the refiners treated us--my desire wasn’t there,” he said with resignation.
Jobbers have accused major oil company refiners, notably Atlantic Richfield Co., of predatory pricing practices aimed at driving them out of business.
George H. Babikian, president of Arco’s refining and marketing subsidiary, denied the charge. Prices and limits on sales to jobbers were intended to prevent a run on Arco’s refineries, which were already strained supplying product to its own dealers, he said.
“We have no intent or desire to drive the independents out of business,” he said. “We have told our distributors over and over again that we don’t have sufficient gasoline to supply all of their needs, and not to count on Arco for anything more than their contract volumes.”
Jobbers also accused independent refiners of excessive price hikes. But Roger Kemple, senior vice president of Golden West Refining Co., an independent refiner in Santa Fe Springs, argued that he had to buy crude oil on the open market--unlike major oil companies such as Arco, which have their own crude.
His prices for refined products did not even keep up with the increase in his own costs for crude oil, from which such products are made, he said. “We were caught in a bind too.”
David Atwater is president of family-run California Fuels, a jobber in Stockton. His company’s trucks deliver fuel to 1,500 to 2,000 customers in Central California, and the company operates seven so-called card-locks--24-hour automated fueling stations accessed by a card-key.
Atwater has not been hit as hard as Thompson: He remains solvent for now. But he has felt the effects of the crisis.
“Working capital has killed us,” he said. “We’re right to the top of our credit limits. Our accounts receivables have almost doubled . . . and costs of business have gone up by several thousand dollars a month, just the cost of borrowing money,” he said.
And he knows of others in trouble. “They’re trading dollars, playing cash-flow games to try to stay in business,” he said. “There’s a lot of scared guys and gals out there . . . We’re all running a little scared and trying to take it one day at a time.”
