Arco Sale of Oil Reserves to Anderson Provokes Lawsuit

Robert O. Anderson might have retired from Atlantic Richfield, but he hasn’t quite left the company behind.

Anderson’s purchase of Arco oil and gas reserves last month for an estimated $180 million has provoked a lawsuit against him and the company by a disgruntled shareholder who claims Anderson got a sweetheart deal by virtue of his Arco contacts and knowledge.

Arco denied the accusations and said its former longtime chairman acquired the properties in a competitive bidding process conducted by an outside firm. The company also said it received a fair price for the properties.

Anderson, who lives on a ranch in Roswell, N.M., and operates through his Diamond A Cattle Co., couldn’t be reached for comment.

Anderson was Arco’s top executive for 17 years and retired as chairman last Dec. 31. He retained a key position on Arco’s board until September, when he severed ties with the company to revive his original career as an independent oilman.

One of his first deals, jointly with the British conglomerate Lonrho PLC, was with Arco. In a transaction announced on Oct. 28, Diamond A Cattle and Lonrho bought Arco’s interests in about 600 oil and gas fields in 11 Western states.

The deal was described then as including about 8,200 wells, nine gas plants and 900,000 acres that produce 10,000 barrels of oil and 40 million cubic feet of gas per day.

The announcement said Anderson’s group submitted the highest bid of the more than 80 bidders in a sale conducted by First Boston Corp., the investment banking firm. The terms weren’t disclosed.

But the announcement didn’t mention that Anderson’s group also acquired as part of the deal certain deep-drilling rights in West Texas. The lawsuit complains, and Arco confirms, that the drilling rights weren’t listed for sale.

Anderson’s bid was for about $180 million, according to reports at the time in oil trade publications and the British press. The other bidders, seeking only the properties in the original bidding documents, were said to have offered $70 to $100 million. They reportedly included Dallas computer tycoon H. Ross Perot.

Anderson’s bid “was effective only if Arco also agreed to sell the West Texas deep-drilling rights that, so far as all other bidders knew, Arco was not willing to sell,� says the suit by shareholder Rodney B. Shields of Chandler, Ariz.

The lawsuit said that the value of the package bought by Anderson is “far greater� than the price he paid and that Anderson knew its true worth because of his intimate knowledge of Arco’s properties. Anderson was still chairman of the board’s executive committee when Arco was deciding what to sell, the suit says.

“I think it was a going-away present,� said attorney Richard D. Greenfield of Haverford, Pa., who prepared the suit. He described his client as a lawyer and small shareholder, with no other ties to Arco, who was angered when he read of the sale to Anderson.

In a statement, Arco said it didn’t offer the drilling rights to the other bidders because “its management does not believe that the value of the deep drilling rights obtained by Diamond A Cattle is material to the total value of the package sold.�

Arco also said First Boston “assured the company that the process was competitive and fair to all concerned, and that Arco received maximum value� for the property.

It isn’t unusual for bids in oil deals to depart from the specifications of the seller. But Greenfield said that once Arco received Anderson’s apparently unique bid, “They should have said, ‘We have one guy bidding for apples and oranges, and we only put out bids for apples. Let’s see if anyone else is willing to pay more than $180 million.’ �

The suit contends it was a “procedurally unfair process� that constituted a fraud on Arco’s shareholders and a breach of the fiduciary duties of Arco management. In addition to Anderson, the defendants are Arco’s directors and First Boston.

Greenfield said he will seek company documents and geological surveys of the property to which Anderson bought drilling rights to test the veracity of the company’s statement that the value of the drilling rights was minor.

Oilmen note that the value of drilling rights can’t be known until the drilling is conducted and oil is or isn’t found.

“It’s a nebulous area,� said one independent oilman who is an active bidder on Texas properties. “You can get five engineers to do an analysis and get five different answers. Anderson will be able to dance around the issue. Whatever fire he’s created, he’ll damn sure be able to put it out.�

An investment banker familiar with oil transactions says that non-conforming bids are “a gray area� and noted that, whatever the properties sold, Arco got nearly twice as much money from Anderson as was offered by anyone else.

But lawyer Greenfield says the fact that Anderson was willing to pay $80 million more than everyone else for his package suggests there was evidence that the drilling rights could have a big payoff.

“Anderson is obviously no amateur at this,� said Greenfield. “Nobody bids that kind of money without some familiarity with what he’s buying. You’re not talking about sheer wildcatting here.�