Western Company of North America

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Western Company of North America

P.O. Box 56006
Houston, Texas 77256
U.S.A.
(713) 629-2600
Fax: (713) 629-2720

Wholly Owned Subsidiary of BJ Services, Inc.
Incorporated: 1939
Employees: 2,616
Sales: $350 million
Stock Exchanges: New York
SICs: 1389 Oil & Gas Field Services; 1381 Drilling Oil & Gas Wells

The Western Company of North America is one of the most prominent and innovative companies in the oil and gas services industry. During the late 1930s and throughout the 1940s, the firm was one of the pioneers of the “acidizing process,” a method of improving the flow from gas and oil wells. The company is divided into three separate divisions: Western Petroleum Services, which provides gas and oil well acidizing, fracturing, and cementing services; Petroleum Services International Company, which provides equipment, construction, and management and engineering services to natural resource companies around the globe; and Western Oceanic, Inc., which provides offshore drilling services to oil companies on a contractual basis. Although Western Company of North America has always been in financial good health, its acquisition by BJ Services, another prominent firm in oil and gas services, indicates a growing tend toward consolidation within the industry.

Western Company of North America was founded by Eddie Chiles. Born in Itasca, Oklahoma, Chiles graduated from the University of Oklahoma School of Engineering in 1934 and went to work for the Reed Roller Bit Company located in Houston, Texas. Chiles sold rotary bits to companies that drilled for oil. After a five-year stint at Reed, however, Chiles had amassed enough information to start his own company, so he traveled to the Permian Basin in West Texas and, with his partner, Bob Wood, established a new firm. Chiles and Wood were convinced their company would be successful for four important reasons: 1) the nascent conservation movement in the 1930s, strongly supported by the federal government, emphasized the recovery of oil and gas by acidizing, gas injection, and water flooding, new and highly experimental methods which were the center of research at many engineering schools across the U.S.; 2) from his previous work experience Chiles believed that he knew exactly where oil and gas services were needed; 3) the new method of acidizing was rapidly replacing nitroglycerine as the preferred way to improve the gas and oil flow of wells; and 4) the most important oil boom since the one located in East Texas was just beginning.

Situating their business in Seagraves, Gaines County, Texas, the two partners owned one automobile, purchased an acid pump truck, rented office space in an old building and an acid storage tank near the Santa Fe railroad yards, and had run up a debt of approximately $10,000. Chiles served as salesman, district manager, and service engineer while Wood took care of all the company’s administrative and financial responsibilities. The first contract was arranged with the Aloco Oil Company in 1939, and soon the new venture was servicing numerous oil and gas wells in the Permian Basin.

Chiles and Wood were pacesetters within the oil and gas services industry through their use of engineered acidizing. The acidizing process is one in which hydrochloric acid is used to dissolve limestone and dolomite rock with extremely low permeability. The fields throughout the Permian Basin in Southeast New Mexico and West Texas were crowded with these hard rock formations, and the acidizing process was more effective than the old method of using nitroglycerine to improve the flow of oil and gas wells. In addition, the acidizing process was much less expensive than purchasing nitroglycerine. By 1948, the company had zoned and treated over 4,500 liquid petroleum and natural gas wells in the Permian Basin region. In order to develop even more efficient acidizing processes, Western Company constructed a geological, engineering and chemical research facility in Midland, Texas. By the end of the 1940s, the firm was garnering a well-deserved reputation for setting records in providing services for its customers in the Permian Basin. One such record was the 30,000-gallon treatment of the Ellenburger formation at a depth of approximately 9,000 feet. From a small local operation in 1939, Western Company of North America had developed into one of the leaders in the gas and oil services industry.

Beginning with the 1950s, the firm implemented an expansion policy that lasted for nearly three decades. At first Western Company expanded its services to companies working in the Anadarko Basin of Kansas, Oklahoma, and Texas, and also started providing its services to firms operating in the Texas-Louisiana Gulf Coast as well as other Mid-Continental regions. These services included such new methods as hydraulic fracturing and cementing. By 1959, the company had grown so large that a new headquarters building was constructed in Fort Worth, Texas. To Chiles and Wood, this move signified Western Company’s growth from a regional firm to a national business. However, the boom days of the East Texas and West Texas oilfields were almost at an end. Although there were still significant amounts of fossil fuel to be recovered in those areas, oil and gas were getting harder to find and harder to extricate. Consequently, the exploration and drilling processes were growing more and more expensive. The major oil companies in the United States began to shift their operations to fields in the Middle East, where crude oil was cheaper. Both Chiles and Wood had foreseen the coming of declining markets in America, and began searching for new areas of growth and development.

Along with the search for new markets, the company also implemented a new management system that Chiles and Wood dubbed “Management By Objectives.” This new style of management included a goal-oriented management strategy that demanded the participation of executives at all levels of the firm’s operations. The most important part of the management by objectives approach was the concentration on providing services exclusively for gas and oil well drilling. Chiles and Wood both hoped that their new management philosophy would form the cornerstone for future expansion and for the acquisition and development of capital resources.

By the mid-1960s, the new management style was beginning to pay huge dividends. Western Company had developed a reputation as the leader in acid stimulation design for oil and gas wells deeper than 20,000 feet. During this period of time, the company enhanced its image through a unique advertising campaign combining both wit and credibility. One of the television advertisements for the company included the tagline, “If you don’t have an oil well, get one—you’ll love doing business with Western.” The new management style and advertising campaign resulted in additional expansion, especially in the areas of offshore contract drilling. In order to continue funding their expansion activities, Chiles and Wood decided to take the Western Company public in 1968, and made its initial offering on the New York Stock Exchange.

With the coming of the OPEC oil embargo in 1973, the entire situation within the American oil industry changed dramatically overnight. As the price of crude oil skyrocketed from an all-time low of $4.00 per barrel to a high of $40.00 per barrel, the American federal government, including both the White House and Congress, called for reducing the country’s dependence on foreign-produced crude oil. Immediately, the domestic oil producing industry began a process of rebuilding. Western Company was well prepared for this opportunity, and offered more extensive services than most of the other American oil and gas companies. In 1974, the company built the Western Pacesetter III, a oil drilling rig in the gulf of Mexico. This was followed by two more drilling rigs, the Western Triton III and the Alaskan Star, also in the Gulf of Mexico, in 1976 and 1979 respectively. The Western Pacesetter IV, another oil drilling rig, was built in the North Sea.

By 1981, the United States had increased the number of oil rigs from a low of 975 when the oil embargo began to a high of 4,530 in December of that year. Western Company was one of the American firms that contributed significantly to that increased figure. In New Mexico, Texas, Louisiana, Mississippi, Oklahoma, and Wyoming, the company was providing improved services to ever-deeper oil and gas wells. Soon Western Company had grown to over $1 billion worth of assets, with operations in twenty states across America, and with 17 offshore drilling rigs located around the world.

The technical achievements of Western Company during this time were impressive. The company set numerous records in many areas, including: cementing 15,500 sacks, of 20-inch casings, at 8,930 feet for a well in Atchafalaya, Louisiana; hydraulic fracturing of 3.39 million pounds of sand at 11,000 feet for a well located in Harrison County, Texas; and acidizing 330,000 gallons at pumping pressures of 10,000 pounds pressure per square inch at 22,112 feet for a well situated in the Ellenburger formation in Terrell County, Texas. With its fleet of five semi-submersible oil drilling rigs and 12 jack-up oil rigs, the company was well prepared to operate wells at depths of 25,000 feet in more than 300 feet of water.

The resurgence of the oil drilling industry did not last long, however. By 1985, oil and gas drilling service companies across the United States were virtually in tatters. The bottom fell out of the market with the perception that the OPEC oil embargo had spent its course, and drilling for oil soon afterwards hit its lowest level of domestic activity in almost 40 years. There was an oil glut, and profits across the entire industry began to plummet. Western Company, still under the direction of Eddie Chiles, began to sell its assets and close down operations. In 1986, the company closed 7 out of a total of 41 on-shore service locations, and by the end of the year only 6 out of a total of 17 offshore drilling rigs remained in operation. During the same year. Western Company, short of cash and without the prospect of a rosy future, defaulted on over $550 million of its debts.

The attempted liquidation of Western Company of North America wasn’t entirely successful, and the company muddled through the late 1980s. Morgan Guaranty Trust Company, one of the firm’s bankers, put three of Western Company’s rigs up for sale. Located in the North Sea, they seemed ideal for a larger, more financially stable company in the oil and gas servicing industry to snatch up. But Morgan only received one offer, and that only amounted to two-thirds of the $120 million Western Company owed on the rigs. Other attempts to sell the company’s assets, including such items as trucks, fared no better. At one auction the trucks only garnered 20 to 30 cents on the dollar. Although it was no consolation, bigger companies like Schlumberger Ltd. and Haliburton Co. were also experiencing tough times.

Adding to Chiles’ problems was his ownership of the Texas Rangers baseball team. In 1986, the Rangers had already posted a consecutive losing streak of 13 seasons, and trying to rebuild the team was beginning to drain the Chiles family coffers. In 1985, the team lost $4 million, and it was projected to lose even more over the next season since Chiles didn’t have the money to make the team a winner. In fact, Chiles’ own stake in Western Company’s stock had dropped enormously. From a high of over $350 million in 1981, when Western Company was at the peak of its success, the worth of Chiles’ holdings declined to just $12 million by the end of 1986. Each share of Western Company stock was worth only one dollar.

By the early 1990s, Chiles was gone and Western Company of North America had new management. No longer a family enterprise, the new leadership was concerned solely with whether or not the firm could remain a financially viable enterprise in the depressed oil and gas services industry. Based on the potential for new customers in the North Sea, the company made a huge financial commitment to design and built a number of stimulation vessels, high-technology boats that provide services such as acidizing and fracturing. Although there were construction delays and cost overruns for the stimulation vessels, once they were fully operational they began to bring in significant numbers of customers in the North Sea region. Soon the company reported that approximately 75 percent of all its revenues were due to the activities of its stimulation vessels.

Having stabilized the financial condition of the company, management then decided to build upon its services. As a result, Betz Energy Chemicals was purchased from Betz Laboratories in 1994. The sale included everything from technology to product inventory in the field of specialty chemicals for oil and gas production. With the oil and gas services industry still plagued by a glutted market and too many companies in competition with each other, Western Company was caught up in the consolidation trend that hit during the mid-1990s. BJ Services Company, a leading supplier of pressure pumping services in the oil and gas industry, offered to purchase and merge its operations with Western Company. At first, management at Western Company rejected the offer, but finally accepted a sweetened deal for $500 million. BJ Services and Western Company planned to combine all their oil and gas service operations, and by the middle of 1995 the restructuring was well under way.

The combined resources of Western Company of North America and BJ Services should create a potent and strong oil and gas services firm. Both companies have created their niche within the industry and hope to develop new services to customers around the world. Once the oil and gas services market revives, which many Wall Street analysts expect in the not-too-distant future, Western Company and BJ Services will be prepared to take advantage of the opportunities.