Tiny Fortune Petroleum Betting on Prospecting

“I’m not the kind of guy who needs a big paycheck,� says Dan E. Pasquini, who earns $70,000 a year as president of Fortune Petroleum Corp., a tiny energy company in Agoura Hills. “I’d rather have a smaller paycheck with some kind of pot at the end of the rainbow.�

A pot filled with black gold to be precise. Pasquini is in search of oil, and rather than work for more money at a big energy company, he has accepted his relatively modest chief executive’s salary in the hope of guiding Fortune to a rich strike in the oil patch.

Pasquini, a geologist, and his partner, Cecil O. Basenberg, were executives at Argo Petroleum in Santa Monica when Argo sank into bankruptcy reorganization in 1986 because a collapse in oil prices made its debts unbearable. Faced with looking for new jobs and with their Argo stock rapidly losing value, in July, 1987, the pair decided to start their own oil company and bought some Argo oil and gas properties--mostly in Ventura County--on credit by exchanging a $1.1-million note secured by the properties.

That created Fortune Petroleum with Basenberg, 63, the company’s chairman and owner of 8% of the stock, while Pasquini, 45, has less than 1%. Another 4,000 Argo stockholders joined in by swapping their shares for some of Fortune’s stock.

But Pasquini and Basenberg are not likely to retire to Monaco anytime soon. The oil properties they bought were not Argo’s most productive. Those went to Argo’s creditors. Instead, Fortune owns what Pasquini calls “the dregs.� And oil prices have tumbled to a 2-year low of $14 a barrel, down from $18 in April, amid signs the Organization of Petroleum Exporting Countries is pumping lots of oil into the market.

So Pasquini and Basenberg are staking their bets by prospecting for more oil and operating their existing wells less expensively than Argo did. The wells are run by fewer people, and only need to be pumped 10 to 12 hours a day, so Fortune has them pumping during off-peak electrical periods to save energy costs. And, of course, they hope oil prices go back up, but they contend they can still make money even if prices drop to $12 a barrel.

At some of Fortune’s oil wells, a truck driver comes by once a week to pick up the crude oil and haul it away to a refinery. At other wells, the crude is automatically fed into a pipeline. Fortune’s oil is sold to Koch Industries and Witco Corp., while Southern California Gas Co. and Unocal buy its gas.

Fortune’s properties include 40 oil and gas wells, about 2,000 acres of surrounding land, and leases covering an additional 6,000 acres where Fortune hopes to find more oil and gas.

The wells, which produced about 19,000 barrels of oil in the last half of 1987, should produce about 40,000 barrels this year, Pasquini said, which makes Fortune a pipsqueak oil company. By contrast, oil giant Occidental Petroleum produced an average 72,000 barrels per day last year. Fortune’s proved reserves of oil totaled 1.32 million barrels at year-end 1987; Occidental’s were 736 million.

In the first half of 1988, Fortune lost $9,000 on sales of $457,000. The company blamed the loss on start-up costs and expenses related to getting its stock listed on NASDAQ, the main trading system of the over-the-counter market. The stock currently sells for about 65 cents a share bid.

However, Doug Jones, vice president of Sit Investments Associates, an investment firm in Minneapolis that also owns 8% of Fortune’s stock, estimates the company’s assets are worth about $4 a share, so he is holding on to the stock. Sit owns the stock by default, having inherited the shares from the Argo reorganization. “I don’t feel like giving it away at 65 cents,� Jones said.

Profitable Company

Pasquini, a Bakersfield native, said Fortune is now turning a profit, and with its oil selling for $13 a barrel, Fortune earns about $1 per barrel after paying production costs and overhead expenses, he said.

But the drop in oil prices is rapidly eroding that margin, and recent history shows Fortune’s prospects are iffy. Because of cheaper oil, the number of independent oil companies nationwide has decreased to about 12,000 from 15,000 in 1980, according to the Independent Petroleum Assn. of America, a trade group in Washington.

Exploration also has dried up as lower oil prices have made it uneconomical. In 1981, there was an average of 3,970 drilling rigs looking for oil and gas in the United States; today the average is 944, estimates Baker Hughes Inc., a major drilling parts producer in Houston. In California alone, the rig count has plunged to an average of 62 from 155 in 1981.

More Projects

Pasquini isn’t deterred. He figures Fortune can generate enough cash with its present properties to bankroll more exploration projects, especially since Fortune will try to spread the cost of exploration by enlisting partners.

“If you’ve got undeveloped properties that are worth something, let somebody else come in and share it with you and get your cash flow up,� Pasquini said.

For instance, Fortune has high hopes for 900 acres of land in Montebello, just east of Los Angeles, that it half owns with Hershey Oil of Pasadena and is now preparing to drill. Previous testing of the area indicates the land might hold 10 million to 30 million barrels of oil, and “if it’s 30 million barrels, that makes us a $10-a-share company,� Pasquini said.

Pasquini got his start in the oil business after studying drafting at Bakersfield College. He went to work for Chevron in 1962, drawing maps and charts of energy fields. Six years later he moved to Occidental, where he learned geology, and then moved to Argo in 1980. By 1986, he was exploration manager in Argo’s Ventura office.

Partnership Evolved

Argo evolved in 1970 from a partnership, Imperial Oil & Gas, that was headed by Morris S. Frankel, a Los Angeles dentist. A decade earlier, Frankel had financed a proposal by Basenberg to use hydraulic tools to “fracture� oil-laden rock in a field just north of Fillmore, in Ventura County, as a means of retrieving the oil.

The plan worked, and Basenberg got a minority interest in the project. He later owned about 7% of Argo after the company went public in 1971, and he was executive vice president from 1976 until 1986. Frankel was Argo’s president and chief executive.

But all that changed in March, 1986, when Argo buckled under the weight of its debts. Under pressure from Argo’s bondholders, Frankel resigned and Basenberg was named to replace him. At the same time, Pasquini was appointed vice president.

Reorganization Filing

Five months later, Argo filed for reorganization under federal bankruptcy laws. Suddenly, Argo’s commercial lenders, bondholders, suppliers and stockholders all were vying for the company’s assets.

“I’ve never been through something so trying in my life as that bankruptcy,� Pasquini said. “You have more enemies than you know what to do with.�

To hear others tell it, Pasquini did not help his cause. Having been trained as a geologist, he was ill-equipped for the financial wrangling created by the bankruptcy filing, said Jones of Sit Investments.

“They were a little unsophisticated for what happened after I left,� acknowledged Frankel, who remains Fortune’s biggest stockholder with a 19% stake.

Pasquini’s “record in the oil field was good for Argo,� but once he was thrust into the executive suite and into the bankruptcy proceedings, “he was out of his depth, clearly,� Jones said. “He didn’t know anything about Wall Street.�

Pasquini conceded that at first, he “didn’t talk their language� when he met with the bankers and lawyers in the reorganization. But when it came to evaluating the energy properties, “I don’t think they had the upper hand at all,� he said.

Regardless, Pasquini and Basenberg said Fortune’s survival first depends on their ability to locate more oil.

“The way you get ahead of the other guys is to be better at finding oil, and then when you find it, to produce it more cheaply,� Basenberg said. Once you do that, Pasquini added, “it’s gravy� if oil prices go back up.