New Chevron CEO tries to prove fossil fuel companies aren't fossils

Journal Record, The (Oklahoma City), Jun 1, 2000 by Michael Liedtke Associated Press

SAN FRANCISCO -- David O'Reilly's education as Chevron's new CEO included a crash course in New Economics 101. Lesson One: No matter how impressive their profits are, companies born in the 19th century have a tough time getting the stock market's attention in the 21st century.

Boosted by the highest oil prices in 20 years, Chevron marked the beginning of O'Reilly's tenure as CEO with a $1.1 billion operating profit in the first quarter -- a record for the 121-year-old company.

Yet those numbers hardly caught the eye of Internet-infatuated investors who seemingly have lost sight of Old Economy companies that make lots of money, but generate little buzz. Even after a rally that began earlier this month, Chevron's stock isn't matching the pace of its recent earnings growth.

Chevron's profit quadrupled during the first three months of the year, and industry analysts expect robust results in the months ahead. Yet Chevron's stock is trading in the $94 range -- right where it stood at a year ago.

Other big oil companies are getting an even frostier reception. Shares in Texaco Inc. -- seen on Wall Street as a possible takeover target for San Francisco-based Chevron -- are nearly 20 percent below their price at this time last year.

Wall Street's reaction to Chevron's performance has disappointed securities analysts.

"Chevron is going to have a banner year, but the stock seems to be going nowhere," said Fadel Gheit, an oil industry analyst with Fahnestock & Co. in New York. "They have already posted record earnings, so what do you do for an encore?"

For his part, O'Reilly is determined to prove his fossil fuel company isn't a fossil.

"We are on the cutting edge," O'Reilly said. "We are a technology- intensive company. We have to do a better job of explaining that to people."

O'Reilly, 53, isn't behaving like a relic from the industrial age.

Since he became CEO Jan. 1, O'Reilly has pushed Chevron into e- commerce by setting up a business-to-business market exchange for convenience stores in a partnership with Oracle and Wal-Mart.

He also is fluent in the vernacular of the technology industry, so much so that Oracle recently invited O'Reilly to speak to its troops about the challenges of e-commerce.

O'Reilly relishes Chevron's proximity to the Silicon Valley, although his company -- second only to Hewlett-Packard in terms of revenue in California -- frequently is upstaged by nearby technology companies. Just last year, Santa Clara-based computer maker Intel joined the Dow Jones Industrial Average of 30 bellwether stock at the same time Chevron was bounced from the elite club.

Motorists incensed by this year's spike in gas prices might not realize it, but O'Reilly is acutely aware that technological innovation is far more profitable than refining oil.

In this year's first quarter, for instance, Chevron pocketed a $10 profit on every $100 in revenue. During the same period, Intel made a profit of about $31 on every $100 in sales.

"I think being near the Silicon Valley is an advantage," O'Reilly said. "We see what's going on over the fence and we can apply it inside our business to improve our performance. I see a tremendous (upside) in the old economy coming from the new economy."

But while technology can work wonders, industry analysts aren't counting on it to turn Chevron -- or any other oil company -- into a hot investment any time soon.

"You can change with the times all you want, but there are only so many ways that you can reinvent the wheel," said Eugene Novak, who follows Chevron for ABN AMRO in New York. "It's still going to be an oil and gas company. That's not going to change." Nonetheless, Novak rates Chevron as one of his top stock picks.

O'Reilly, a 32-year Chevron veteran, is confident the stock market eventually will regain interest in well-run oil companies. Following the lead of Chevron's previous CEO, Ken Derr, O'Reilly wants the company to set the oil industry standard for shareholder returns over the next five years. Derr didn't always hit his ambitious targets, but Chevron's stock held its own during his decade-long tenure, nearly quadrupling in value.

O'Reilly thinks he can achieve his goals largely through expense control and prudent capital investment.

Others believe O'Reilly needs to do something bold, like buying White Plains, N.Y.-based Texaco. The two rivals held merger negotiations last year, but the talks reportedly unraveled when Derr and Texaco CEO Peter Bijur clashed over control of the combined company.

Proponents of a Chevron-Texaco marriage believe O'Reilly's arrival as CEO gives him a chance to renew the courtship. The pro-merger argument goes something like this: Chevron needs more muscle to compete with Exxon Mobil and BP Amoco while Texaco needs a white knight to rescue its depressed stock.

"I am absolutely convinced that Chevron must make a mega- acquisition like Texaco," Gheit said. "What Chevron is trying to do is like trying to play center in the NBA when you are only 6-feet tall. You turn around and you see someone towering over you."