Business: Gulf Oil's Painful Surgery

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Under McAfee, Gulf has been busy trying to sell off its real estate and other unprofitable properties, while concentrating on its basic business of oil and gas. The company spent more than $200 million last year in stepped-up onshore exploration in the U.S. It also paid $314 million last June to acquire twelve drilling tracts in the Gulf of Mexico. Gulf spent $400 million to $500 million to build its Cedar Bayou ethylene plant near Houston; it opened last year but, say industry sources, has never operated at more than 60% of capacity, causing a substantial drain on Gulfs petrochemical earnings. Gulf also acquired for $455 million Kewanee Industries, a specialty chemical firm. In all, the company's 1977 capital spending came to $3 billion, much more than that of bigger companies such as Texaco and Mobil.

While all this was going on, a temporary global glut of crude kept a lid on prices, stretching Gulfs once bountiful cash reserves and cutting into earnings. Last year profits fell 7.8%, to $752 million; in this year's first quarter, they fell another 7%. The need for a drastic reduction in outlays became urgent.

Gulf is also enmeshed in a web of lawsuits growing out of allegations that it secretly participated in a worldwide cartel to manipulate supplies and raise the price of uranium. Though the cartel's impact on U.S. prices remains uncertain, the world price of uranium has gone from $6 a pound in 1972 to about $44 today. At worst, Gulf, which denies the charge, could be forced to pay $1 billion or more in damages to companies in the uranium business. McAfee predicts that, at most, the various court actions could cost Gulf no more than $360 million. Last week the company pleaded no contest in the U.S. Government's case growing out of the cartel arrangement, and was fined $40,000, but it still faces a wave of private suits.

Despite these troubles, McAfee is convinced that Gulfs investments in increased exploration and production will eventually pay off. McAfee is under no illusion that the company's problems can be resolved soon. Gulfs turnabout, he says, should be about complete when he is ready for retirement at 65—and that is not for another 3½ years.