Burlington Resources Inc.

1849–1989

Burlington Resources Inc., the nation's largest independent natural gas exploration and production company, functioned in the mid-1990s as a holding company for its main operating subsidiary, Meridian Oil Inc. Originally created as a holding company for all of Burlington Northern's non-railroad assets, Burlington Resources quickly emerged as a powerful, domestically oriented energy company. After divesting properties deemed incongruous with its core operations, Burlington Resources entered the mid-1990s as a growing energy concern sharply focused on the exploration, production, and marketing of oil and natural gas. From its principal oil and natural gas properties located in the San Juan Basin in northwest New Mexico, the Willston Basin in North Dakota, the Permian Basin in Texas and New Mexico, and on the Gulf Coast of Texas and Louisiana, Burlington Resources stood poised to garner a substantial share of the country's future oil and natural gas market.

After nearly 130 years of existence, Burlington Northern, one of the pioneer railroad companies in the United States, had become many other things besides a railroad company. In 1849, the company's predecessors began laying a vast network of railroad track beginning in the midwestern United States and extending westward, acquiring along the way, both through its geographic growth and through its maturation as a corporate entity, many properties unrelated to the railroad business. The largest of these assets included the largest private coal reserves in the nation, one of the largest oil and natural gas reserves, 1.5 million acres of forestlands, and a number of real estate properties. These resources combined with its railroad operations made Burlington Northern a multi-billion dollar corporation by the latter half of the twentieth century.

By the 1980s, the management of this diversified giant, led by chairman Richard M. Bressler, decided to focus Burlington Northern's business on railroads, turning back the clock to more than a century earlier, when operating a railroad was Burlington Northern's sole function. This shift was prompted by looming railroad labor problems in the early 1980s, primarily the possibility of an extended strike by Burlington Northern's railroad workers that Bressler perceived would drain the company's profits. He decided to divide the company in two, reasoning that if indeed the imminent strike would adversely affect Burlington Northern's financial condition, it would only afflict the railroad-related assets of the company.

In 1988, a separate, publicly held corporate body was created to function as a holding company for the non-railroad assets of Burlington Northern. The aptly named Burlington Resources Inc. was thus born as a $1.75 billion resource and energy company. Burlington Northern sold a 13 percent stake in Burlington Resources in an initial public offering in July 1988, then distributed the remaining 87 percent to Burlington Northern stockholders five months later, on the last day of 1988. Initially, Bressler served as both Burlington Northern's and Burlington Resources' chairman, until he devolved his responsibilities at Burlington Resources to Thomas O'Leary, in 1989.

was thus born as a $1.75 billion resource and energy company.

1982–1990

O'Leary had joined Burlington Northern in 1982, and was charged with building up the non-railroad business of the company. During his tenure, O'Leary added the El Paso Natural Gas Co., a pipeline concern that supplied 60 percent of the California market for natural gas, Southland Royalty Co., an oil and gas company, and several other interests to Burlington Northern's roster. By 1987, the company had amassed sufficient additional assets to mitigate the potential hazards of a labor strike, but in that year the U.S. Supreme Court upheld secondary boycotts by rail unions, which essentially enabled railroad labor to stage a nationwide strike and confer its settlement to U.S. Congress. Bressler's decision to divide the company was meant to protect the assets O'Leary had helped to acquire, and O'Leary was the ideal choice to head the new company.

One year after the company's creation, O'Leary stood at the helm and found himself in the midst of a hostile takeover, though he was now on the receiving end of an unsolicited purchase. Pennzoil Co., recently awarded $3 billion in a legal settlement with Texaco Inc., purchased eight percent of Burlington Resources' stock in February 1989, roughly one month after Burlington Resources became a separate company. O'Leary recognized the signs of a hostile takeover and adopted a corporate stock plan to prevent such an acquisition from taking place--commonly known as a 'poison pill' stock plan--and filed a suit against Pennzoil declaring it had misrepresented its 'true purposes.' Meanwhile, Pennzoil maintained that its purchase of Burlington Resources' stock simply represented an investment in the company and did not reflect an attempt to gain control. In the end, either dissuaded by Burlington Resources outcry, or genuinely intending to merely invest in the company, Pennzoil sold its stake in Burlington Resources and realized a 20 percent net gain on its highly contested investment.

Against this backdrop, Burlington Resources had been trying to form its own identity, rather than just existing as an amalgamation of what Burlington Northern no longer wanted. Toward this end, Burlington Resources did essentially what Burlington Northern had done, selling or spinning-off unwanted assets and pursuing what it perceived as its core business. For Burlington Northern this meant focusing solely on the railroad business; for Burlington Resources the shaping of its new corporate identity meant focusing on gas and oil exploration, development, and production.

By 1990 Burlington Resources had collected more than $1 billion from the sale of assets deemed tangential or completely unrelated to its core business. Leading the departures were the Glacier Park Co., Burlington Resources' real estate subsidiary, which was sold for approximately $450 million, timber properties worth over half a billion dollars, and several subsidiary companies involved in mineral excavation. The proceeds from these sales were then funnelled into Meridian Oil Inc., Burlington Resources' primary operating subsidiary, for which Burlington Resources served as a holding company. In 1989, Burlington Resources spent $442 million on oil and gas capital expenditures; the following year, it spent $399 million to acquire all the producing properties of Unicon Producing Co., which amounted to more than 500 billion cubic feet of natural gas.

1990–2000

Although the company had substantial oil and natural gas assets, Burlington Resources had grown larger as a result of its aggressive pursuit of additional oil and gas properties. By the early 1990s, the company represented a powerful force in the energy market, ranking just behind the six major oil companies. For over a decade, the prospects for the natural gas market had been disheartening, as oversupply had lowered prices and forced many natural gas companies to abandon the business. Nevertheless, during this period Burlington Northern increased its presence in the natural gas market, acquiring properties while other companies sold properties. When Burlington Northern's stake in the natural gas market was later transformed into Burlington Resources, the company that emerged had a considerable lead over its competition.

As Burlington Resources became more entrenched in the oil and gas field, prognostications for the natural gas market improved significantly, at last justifying the company's investments during the 1980s. Industry pundits, looking forward from the early 1990s to the turn of the century, had several reasons to be optimistic, not the least of which was the expected greater demand for natural gas as an alternative fuel for the 1990s. As dictated by federal legislation, 70 percent of new vehicles purchased by large fleet owners were to be powered by alternative fuels by the year 2000. The number of natural-gas-powered automobiles was expected to increase from 30,000 in the early 1990s to 3.8 million by the end of the decade, and by the mid-1990s the amount of natural gas consumed by new gas-powered electric power plants was expected to double.

In the face of these encouraging figures, Burlington Resources stood in an enviable position, strengthened by its oil and gas acquisitions during the late 1980s and early 1990s. By 1992, it was a $1.14 billion company, principally due to its Meridian Oil subsidiary, and represented the nation's largest independent natural gas exploration and production company. Divestiture of non-core assets continued as Burlington Resources spun-off or sold 1.5 million acres of timber land, nearly one million acres of real estate, a 22,000-mile network of gas pipelines, and an assortment of mining operations. In 1992, Hurricane Andrew caused the permanent loss of 600 million cubic feet of daily gas production from the Gulf of Mexico, but Burlington Resources was not the only natural gas concern adversely affected by the storm. Other natural gas production facilities were destroyed, which tightened supply and, in turn, engendered natural gas price increases, a boon for Burlington Resources despite its production loss.

In its fifth year of business, Burlington Resources recorded $1.25 billion in annual sales. Although sales were less than the $1.87 billion the company had generated three years earlier in 1990, the company's operating income had increased an average of 16 percent annually, overshadowing its decline in gross sales. Partly attributable to this increase was the technological superiority established by the company in the sophisticated yet cost-saving methods it used to locate and produce natural gas. Burlington Resources' cost were considered to be roughly half the industry average.

1994

Burlington Resources' low operating cost earned it the reputation as the 'Wal-Mart' of the natural gas industry by some observers, but the company's talent for finding and producing gas at substantially lower costs was not predicated on economies of scale as much as on its utilization of innovative, technologically advanced excavation methods. By adopting new horizontal drilling techniques and using advanced reservoir simulation technology, Burlington Resources was able to recover gas from fields abandoned in the 1950s and 1960s, giving the company an advantage its competitors did not enjoy.

Bolstered by its ability to locate and produce natural gas more efficiently than rival companies, and encouraged by its firm grip on domestic reserves, Burlington Resources entered the mid-1990s looking to expand further. In 1994, the company purchased an 87 percent interest in Diamond Shamrock Offshores Partners L.P., an offshore oil operation in the Gulf of Mexico, for $287 million from Maxus Energy Corp. With plans to acquire the remaining 13 percent of Diamond Shamrock, Burlington Resources, a comparatively recent entrant into the oil and natural gas market, was positioned as one of the industry's leaders and stood poised for further growth.