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'98 Year In Review
December 17, 1998

Loser #4 - Rutherford-Moran Oil Corp.

by Brian Graney (TMF Panic)
Down 87.4% as of 12/15/98

Any way you look at it, it's been a tough year for companies in the oil and gas business. In case you spent the majority of the past 12 months as a participant in the Whitbread 'round-the-world sailing race, here's a quick timeline of what you missed.

-- Late last year, the oil and gas industry's market of the future, Asia, suffered a financial meltdown, leading to lower demand throughout the region and throwing the delicate global oil demand and supply balance out of whack.

-- Around the same time, the OPEC oil production cartel boosted its supply of oil by 10% to 27.5 million barrels per day, anticipating higher global oil demand at precisely the wrong time.

-- Abnormally warm winter weather in many regions around the globe did little to ease the oil oversupply problem, which quickly reached "glut" status. Production cuts by OPEC and non-OPEC producing nations followed in March, but were not restrictive enough to restore the balance in the oil markets.

-- The upshot? The price of the benchmark near-month West Texas Intermediate Crude futures contract steadily drifted downward from a high closing price of $21 per barrel on Nov. 14, 1997, to a 12-year-low close of $11.13 per barrel on Dec. 1, 1998, causing pain throughout the oil and gas business.

To say that most oil-related companies did not factor historically low near-term oil prices into their earnings models for this year would be understating things a bit. Future earnings expectations turned to mud as the price of oil fell, prompting the industry to start looking for ways to cut costs -- fast. The ensuing uncertainty wrecked the year-to-date returns of scores of companies in various segments of the business. One of the hardest hit firms among the oil service and supply companies has been Global Industries <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: GLBL)") else Response.Write("(Nasdaq: GLBL)") end if %>, which has lost 65.8% of its value since the beginning of the year. In the land of the contract drillers, ENSCO International <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ESV)") else Response.Write("(NYSE: ESV)") end if %> has topped Global's loss with a 72.1% decline of its own.

But, the low oil price environment has perhaps caused the most bloodshed among small oil and gas exploration and production (E&P) firms. In this sector, Rutherford-Moran Oil Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: RMOC)") else Response.Write("(Nasdaq: RMOC)") end if %> stands out among its beaten-down peers. Not only did it experienced a share-price free-fall, eclipsing the slides of everyone else in the business, its decline offers a one-stop-shopping view of how low energy prices and reduced expectations for the oil business have brought companies throughout the industry to their knees this year.

The Company's Biz: Rutherford-Moran is an independent exploration and production company whose sole asset is its Thai Romo Ltd. subsidiary, which owns production rights to a block of oil and gas fields in the Gulf of Thailand. That's it. That's the whole enchilada.

The Story: Rutherford-Moran's basic problem is fairly simple -- the company is spending an awful lot of cash to develop and produce a relatively small amount of oil and gas. According to its latest 10-K, the company estimated Thai Romo's total proven oil and gas reserves (the estimated total quantities of oil and gas that are recoverable with "reasonable certainty") to be about 358 billion cubic feet of natural gas equivalents. Put another way, the discounted net present value of the cash flows those proven reserves will generate in the future is estimated to be $63 million.

Unfortunately, Rutherford-Moran posted $56.5 million in total expenses through the first nine months of this year just trying to get a portion of those proven reserves out of the ground. Interest expense alone totaled $13.3 million during that time, so the burden of the company's debt load by itself could likely burn through those estimated future cash flows in a mere four years or so.

Of course, Rutherford-Moran's management isn't oblivious to the fact that their company is eating up cash faster than William "The Refrigerator" Perry scarfing down a helping of chicken wings. Chase Manhattan was brought on board in January to explore "strategic alternatives," including a possible sale of the company. To date, no takers have emerged, although the company recently said it is in "exclusive" talks with one possible unidentified buyer.

But the chances that a sale is forthcoming appear to be getting slimmer by the day. Oil producers, big and small, are cutting exploration budgets, trimming upstream staff, and even merging with each other to deal with the current low oil price environment. Many potential buyers simply aren't willing to plunk down the cash for such a small amount of proven reserves in a place like the Gulf of Thailand, where exploration and production expenses are relatively high and the domestic financial situation is tenuous at best.

How You Could Have Avoided This Loser: As pretty much a development-stage company in an industry with huge up-front capital costs, most of Rutherford-Moran's $467 million market valuation at the start of this year was based on projected future cash flows from Thai Romo's potential reserves, rather than its more tangible proven reserves. So the company's shares carried a greater degree of inherent risk right off the bat than those of E&P companies with more diverse and predictable production strategies and cash flow streams.

As oil prices sank lower and companies in the industry started cutting costs en masse, it became apparent that Rutherford-Moran was in a race against the clock. Ready access to capital is vital to any young company in a capital-intensive industry, but especially so to a small firm in a commodity-based industry where the market price of the product it is producing is steadily declining. But with so much uncertainty in the oil and gas business due to the oil price collapse, the company's lenders are closing their wallets. Rutherford-Moran now finds itself without the financial lifeblood it needs to convert its potential reserves into proven reserves, boost its cash flow, and build shareholder value down the road.

The Future: The company has admitted that its future consists of two possible scenarios, neither of which is particularly appealing. Either the company will be sold (possibly at a discount to its current $54 million market capitalization), or it will run out of operating cash by January. Rutherford-Moran's bank credit line was already extended once this year, to $200 million from $150 million. However, the company's lenders are saying that's the limit. With $172 million of that credit line already spoken for and another $120 million in long-term debt currently outstanding, the company's financing options are beyond bleak and border on nonexistent. And as was noted above, other companies are not exactly jumping at the chance to buy Rutherford-Moran's sole production asset, even at an asking price that can easily be termed "distressed."

However, one thing seems fairly certain. The company's race against the clock is well past the two-minute warning, so Fools will likely know Rutherford-Moran's ultimate fate before another Super Bowl champion is crowned next month. As for oil prices in general, where they are headed in the next 12 months is anyone's guess.

Rutherford-Moran Company Information:
Trades on Nasdaq under symbol RMOC
Current Quote
Rutherford-Moran's Chart

Other Related Rutherford-Moran/Oil Company Links:
Coal in the Oil Stocking -- Fool Plate Special -- 12/17/98
Oil Producers Cut Back -- Fool Plate Special -- 3/23/98

That's It for the Losers. Now, Off to the Timeline.
Next -- First Quarter 1998