Corporate 'outsiders' sniff profits and inflation hedge in oil drilling

There are some new faces showing up in the "oil patch." Many of the new oil prospectors are companies one would least expect to find standing on a drilling rig. For example, insurance companies, usually known for their conservative attitudes, are investing in oil and gas deals. So are American Airlines and Borden Inc., which is better known for Elsie the cow than for its prowess in oil.

Some of the insurance companies that have been bitten by the oil bug are the Prudential, Aetna Life & Casualty, INA Insurance Company, and the Continental Insurance Companies. Still others are looking at the oil industry closely.

The entrance of companies without a long history in the oil industry is likely to accelerate, says Victor D. Alhadeff, chairman of ENI Companies, which specializes in oil and gas drilling tax shelter. "One year from today," he says , "the amount of money invested by institutional investors could outstrip the money invested by individuals." In 1979, $1.816 billion was invested in publicly registered oil and gas tax shelters by individuals and institutions. The bulk of the investment, however, about 90 percent, was made by individuals.

Among those looking at the oil and gas industry, Mr. Alhadeff says, are pension funds as well as insurance companies. Already, he says, ENI has signed up $6 million worth of pension money in oil and tax drilling and expects still more companies to join.

The attraction for the institutions is simple: It can be very profitable, as the major oil companies have found out.

Also, as the insurance companies insist, it is a good way to provide a hedge against inflation. Raymond Charles, senior vice-president at the Prudential, notes, "we are investing in oil and gas mainly to try to beat inflation."

The Pru, with assets of $55 billion, has invested $50 million in the last year and half, but expects that this pace might step up. Mr. Charles says if the programs yield concrete results he could envision the giant insurer investing $200 million to $300 million annually in such programs.

So far, he notes, the investments have been in conservative types of programs , not pure speculative "wildcat" wells. "We look for a partner with a proven field, that's not fully developed, who is looking for capital," he says. So far the Pru's investments have taken it to Louisiana and Texas. But Mr. Charles dosen't rule out an international involvement once the insurer starts to reap the rewards of its investments. "We expect to be in all the areas where there is a smell of oil," he states.

American Airlines entered the oil and gas business in 1977 when it acquired the Howard Corporation from the Republic National Bank, in Dallas. Howard had a subsidiary that was in the oil and gas business, which american renamed AA Development Corporation. At the same time it formed a sister company, AA Energy Corporation.

So far, according to Robert L. Caldwell, the president of the two subsidiaries, the company is producing the equivalent of 4,350 barrels of oil per day from the 57 wells it has an interest in. A spokesman at American says its goal is to produce about 15 percent of its total fuel requirements by 1985. In 1980, the company consumed 1.3 billion gallons of jet fuel and expects this to increase 2 to 3 percent a year. American Airlines expects to contribute $15 million annually to its energy subsidiaries, which will reinvest their cash flow.

Originally, says the airline spokesman, the company did not think of the oil business as a way to control the steady price escalation of oil. But "it's turned out that way," he says. Last year, American reports, its oil subsidiaries had a pretax profit of $1.7 million.

Borden Inc., the food and chemical company, decided in 1976 to enter the oil and gas business to help it supply a portion of the energy requirements for its chemical business. One of the benefits of the investment, says a spokesman, Maurice o'reilly, has been that the gas Borden has discovered has helped to lower its total enery costs. So far, he says, the company has been "moderately successful." Borden now has 50 billion cubic feet of natural gas reserves and intends to expand its drilling operations. in fact, the company announced Thursday that it would increase its expenditures for drilling from $100 million to $150 million over the next five years.

In one of the more profitable investments in the oil and gas business, Aetna Life & Casualty Company in 1973 bought a 32 percent equity position of a company called Geosource Inc., which specializes in oil field services. The company later became publicly owned, which gave it a market value for Aetna of $130 million. it originally cost the Hartford insurer $15 million.

John M. Galvin, senior vice-president of Aetna, says the investment was originally made because the company "saw a chance for a different approach in total appreciation in value vs. normal investment areas."

So far, with its 20 percent return on equity, the company has also provided the Aetna with an inflation hedge. In addition, Aetna has invested in oil and gas drilling deals.

INA insurance Company also says it has invested in the drilling programs to diversify its investment portfolio and protect itself against inflation. The company declined to disclose how much it has invested so far, noting it is less than $100 million. Through its subsidiary, Philadelphia investment Corporation, INA has joined up with others, including the Prudential and Transco, a pipeline company, in drilling in the Gulf coast region.