What Happens When Well of Innovation Runs Dry

Whatever happened to Atlantic Richfield? That’s the question people ask as they see the humbling of once-splendid Arco, a dynamic company that developed oil in Alaska, led California industry and ranked high in the councils of world oil.

Bad times and bad luck have forced Arco into an emergency restructuring, in which it is firing 900 of its employees and cutting back on international development. Arco top management is vacating art-bedecked executive offices to move to simpler quarters. Perhaps priceless Henry Moore sculptures are a little too grand for a company cutting employees.

But as the saying goes, sometimes you make your own luck. Arco’s difficulties stem in part from its own mistakes--a flagging of spirit at one point, unrealistic ambitions internationally at another.

Yet Arco is more than a cautionary tale. In working out its present difficulties, it presents a signpost to the economy’s future and holds lessons for all business.

And if Arco can recover its old vigor, it has the potential to demonstrate just how much a smart middle-sized company can accomplish in a global industry dominated by giants.

The company’s immediate challenge is to recover its profitability and avoid being bought out cheaply. Arco, which this year will have approximately $11 billion in revenue, is suffering sharp earnings declines, as are most oil companies. But Arco’s stock price, $70.69 on Friday, is low relative to the prices of major oil companies. Its oil and gas reserves, of about 4 billion barrels of oil and their equivalent in natural gas, can be bought on the stock market for roughly $7 a barrel.

That’s a bargain price, analysts say, in a time when major oil companies are buying each other as they haven’t since the mid-1980s.

And if a major oil company were to buy Arco, it would get a lot more than oil and gas in the ground. Arco holds the leading share, 20%, of California’s gasoline market, the world’s largest. Arco’s refineries, finely tuned to the specific gravity of its Alaskan crude oil, are among the industry’s most efficient.

On top of that, Arco has ownership in a huge gas field in Indonesia and shares in promising projects in Venezuela and the North Sea.

If a big oil company makes a bid for Arco, it will signal that the industry believes oil prices will rise in the next year from their present $14-a-barrel level. Arco, now having sold off chemical and coal properties, is what financial people call a “pure play” in oil and gas production. So if oil prices rise, Arco’s profitability goes up rapidly, just as its profit suffered dramatically this year as oil prices fell.

Still, while takeover is a real possibility, an Arco comeback would be a more interesting story. It would demonstrate that a company can regain lost entrepreneurial energy.

Arco’s heritage is innovation. It rose to grandeur with Robert O. Anderson, a larger-than-life figure who turned an investment in Atlantic Refining, an old-line Philadelphia firm, into a greater company through a 1966 merger with California company Richfield Oil.

Richfield was the property of a wildcatter named Charlie Jones, who had discovered oil at Alaska’s Prudhoe Bay. With Anderson, the combined company developed the find into the largest modern U.S. oil field.

“It was the biggest project since the pyramids,” says Arco’s present chairman, Mike R. Bowlin, recalling the excitement of that time.

Arco pioneered the idea of convenience stores at gas stations. Long after Anderson had retired, it was still pioneering, with a gasoline called EC1 that is modified for environmental concerns.

The company is in trouble today because its sense of innovation and its confidence wavered. Arco holds lessons for all companies, particularly those in industries that appear to be in decline. The lesson is: Don’t lose faith and stop investing in the basic business too quickly.

Arco in the early 1980s, as Anderson phased into retirement, was among the first to see that OPEC was a leaky cartel and that oil, then at $42 a barrel, would decline precipitously. In 1985, the company undertook a massive restructuring to prepare for hard times, just as the now-retired Lodwrick Cook became chairman and chief executive. So the company was ready when oil plummeted to $12 a barrel in 1986.

But troubles ensued in the late 1980s as attempts to develop new oil wells in Alaska proved disappointing. The oil industry, Arco included, went through a crisis of confidence.

At Arco, disappointment led to under-investment “in our basic business,” says Bowlin, 55, who became chief executive in 1994. “We were looking for another way to step up earnings,” by diversifying and adroit management of finances. “And we just weren’t putting money in the base oil and gas business sufficient for us to grow.”

It proved a mistake, because after a spurt, Arco earnings declined. As it happens, Arco in the 1990s has reversed the decline in Alaskan oil production by drilling pockets of oil around the Prudhoe Bay area.

Those efforts in its basic business have paid off. Production in the field, which has been flowing for 30 years, will increase for three to five more years, says Arco President Michael E. Wiley.

Arco made other mistakes. Having realized ever since Anderson’s day that it needed to develop international oil resources, Arco fanned out in the 1990s, trying exploratory ventures in 29 countries. It invested heavily where larger companies held back--in Russia, for example.

The international experience left Arco overstretched--a condition it is correcting with the current pullback--and facing losses in Russia.

To be sure, Arco has had successes in international exploration. It has discovered a giant gas field in Indonesia and made a good partnership with the Venezuelan national oil company on future reserves in that country.

But developing such properties will take time and large amounts of capital. The oil industry these days is demanding that companies have huge resources to stay the course on big projects.

That’s why giant companies are now acquiring other companies to become even more giant, as British Petroleum is doing by buying Amoco.

“To operate in today’s oil world, scale in capital and employee skills are needed,” says analyst Arthur Tower of Howard, Weil, Labouisse, Friedrichs, a New Orleans investment firm.

Arco is probably too small to attract the capital needed to develop properties such as Indonesia. And that is why sooner or later, one way or the other, Arco will probably merge with another company.

For Los Angeles and all of California, the hope has to be that Arco, in a merger or on its own, can regain its footing and continue the philanthropic efforts for which it has become noted--and occasionally criticized. To some critics, Arco’s charities, often matching grants for employee contributions, are “giving away stockholders’ money.”

But Bowlin doesn’t see it that way, and neither did his predecessors Anderson and Cook. Arco is a major marketer to consumers in California, Bowlin points out.

“Do you put money into communities where your employees live and you market your product? I think there is a long-term return to that,” he says.

That’s Arco, a company that succeeded by thinking differently from the herd. Time will tell whether it can continue to do so.

James Flanigan can be reached by e-mail at jim.flanigan@latimes.com.