Corporate Focus

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By DANIEL TAUB

Staff Reporter

The rock-bottom crude oil prices of the last several months are expected to hit Los Angeles-based Atlantic Richfield Co. harder than other big oil companies.

Analysts note that the impact on Chevron Corp., Exxon Corp., Mobil Corp. and others is being cushioned because of their diversification into other businesses, including coal and mineral mining and even consumer lending.

While those companies may take a hit of 5 percent to 6 percent on their 1998 earnings because of the drop in crude prices, Arco, which is far more dependent on oil and gasoline, will take a hit of about 12 percent, said analyst Jay Wilson of J.P. Morgan Securities Inc.

“It’ll hurt. It’ll hurt quite a bit,” Wilson said.

Arco officials acknowledge that rival oil companies are better positioned to ride out the low prices.

“In some sense they’re more diversified,” said Dennis Schiffel, vice president for investor relations. “It’s the independents (such as Arco) that will be hurt.”

In fact, Arco has become even less diversified after selling its interest in several non-oil-related businesses over the last year.

Last September, it sold a 49.9 percent equity stake in Lyondell Petrochemical Co., which manufactures and markets chemicals. Last month, it agreed to sell its U.S. coal assets.

Analysts generally have applauded those moves because those units had not produced revenue to the same degree as Arco’s core oil and gasoline businesses.

“Over the long term, they will be able to use that capital for a much more positive perspective than keeping in the coal business,” said analyst Frank Knuettel of PaineWebber.

Knuettel added that the appointment in January of former Executive Vice President William E. Wade Jr. as president a position that had been vacant for nearly three years will give Arco the leadership it needs.

“Looking forward, they’re probably in better form now than they have been at any point in the last four or five years,” Knuettel said.

Analyst Brian Eisenbarth of Collins & Co. calls Arco a “niche player,” primarily competing with other oil companies by selling to retailers at lower prices than its competitors. Its gasoline often sells at 5 cents to 10 cents less per gallon than fuel sold at gas stations served by other oil companies.

That strategy is typically successful, Eisenbarth said, but the company has taken a hit over the last year as crude oil prices have dropped, and other oil companies have started selling their gasoline at lower prices.

“Now with gas prices coming down, their strategy is kind of being invaded by other companies that have never tried to come into that area,” he said.

Wilson of J.P. Morgan said his company ranks Arco’s stock as a hold, but not a buy.

“We think it’s pretty fairly valued, and we have a positive view of the company and its prospects,” he said.

But the company says it performs well in comparison to eight other large oil companies, including Exxon, Chevron, Mobil and Occidental Petroleum Corp.

Among the nine companies, Arco ranked third in total shareholder returns, which are based on stock performance combined with dividends paid, at 25.6 percent in returns.

“Arco does have an above-average dividend return ($2.83 a share in 1997), which helps,” Wilson said.

Arco’s net income for fiscal 1997 was $1.8 billion ($5.41 diluted earnings per share), compared with net income of $1.7 billion ($5.09) a year earlier.

In the fourth quarter of 1997, the latest reported period, Arco had net income of $382 million, compared with $380 million for like period a year earlier.

Arco’s quarterly income fluctuates widely. For example, the company had a net income of $483 million for the first quarter of 1997, but its net income for the following quarter was only $390 million.

Schiffel said the drop in the second quarter was mostly due to an annual decline in oil production in Alaska. The pumps and other equipment operate best in temperatures of 50 degrees below zero and lower. Once temperatures rise above that, pumping oil becomes a slower process.

In the third quarter of 1997, Arco’s net income had a large spike in connection with the Lyondell Petrochemical sale.

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