But survival in the Byzantine world of oil also requires skill and strategy. "We tried to take advantage of the Niagaran reef trend," says Hall. "Our philosophy is to go the extra mile, because on the extra mile there's no traffic." In first assessing the trend's potential, Hall weighed the same publicly available seismic and geological evidence other companies did; he was privy to no special information. He says the trial-and-error lessons of his youth helped him glean insights from esoteric charts and graphs that others couldn't.
Drilling on the Niagaran reef by major oil companies gathered momentum, and Hall suspected the discovery of a huge trend was imminent when he noticed that new finds were sprouting up at an exponential rate in a swath between Lake Huron and Lake Michigan. The finds and the subsequent leasing of land stretched in a wide arc toward both coasts. He surmised correctly that the trend was an extinct sea and that it extended farther than other companies had projected.
First, Hall bought up mineral royalties from landowners who had already leased their land to the majors. He added to capital by selling part -- usually three-fourths -- of the rights to a property at a profit and keeping an interest that paid him some of the bounty when drilling succeeded. He soon acquired bank loans and leases that permitted him to act as operator, recovering his lease-and-development costs by selling some of the working interest to investors.
Reef has had very few problems in attracting capital, although tight capital is one reason the oil industry is hurting. Banks are especially jittery about lending to oil companies since early in 1982, when the speculative investing of Penn Square Bank in Oklahoma City brought its sudden collapse, costing other banks and oil-venture investors hundreds of millions of dollars. The major oil companies tend to draw from large pools of internal funds, but most independents are strapped.
Reef's success rate, on the other hand, has given the company a good reputation with investors and bankers, and it rarely goes begging for capital. Roger Thompson, vice-president of the Energy Division at Empire National Bank of Traverse City, says, "We've got a lot of money out to them, and we feel they're a good return on an investment. They've got a charisma that everybody wants to be part of."
Also easing Reef's path to capital is its affiliation with Reef Energy Corp., a public company incorporated in 1979 when Reef Petroleum's 12 limited partnerships wanted liquidity and rolled themselves into one entity. The investors bought shares for about $4 million and entered into an operating agreement with the private company whereby Reef Energy has the right to as much as a 10% participation in any project Reef Petroleum undertakes. The public company also has the right to invest in the projects of other oil companies. Reef Energy pays about 4% of its roughly $2.5 million a year in revenue to Reef Petroleum for management costs. A major advantage is that Reef Petroleum knows it has a participant waiting in the wings for whatever it does.
The relationship in which the private company manages the public, which has no employees, is rare but not unique. It is common for oil companies to drill, produce, or lease in a partnership, in order to raise capital more easily and to spread risks. David Hall heads both companies; two people sit on both boards; three other directors of the public company own stock in both companies and are original investors in the private one; and H. Terry Snowday Jr. is a director of Reef Energy and vice-president of Reef Petroleum.
Reef has posted a stunning performance over the last 10 years, but it will soon have to face market realities and tighten its belt. Domestic spending for the entire industry is forecast at about $40.1 billion in 1983, a 12% drop from the 1982 level. The majors, accounting for about 50% of total industry expenditures, will spend about 0.3% less on domestic exploration and production. But among independents, spending is expected to plummet an average 23%. Reef's spending this year may drop as much as 20%, and only 20 to 30 wells will be drilled, with 10 or 20 other prospective wells farmed out to contractors.
The worsening oil market caused the company's 1982 sales to drop about 23% from the 1981 level, largely because of a one-time sale of assets in 1981 of reserves of sour gas, a type of gas considered difficult and dangerous to extract. At the same time, Reef has accumulated more valuable oil and gas reserves and plans to expand its seismic test program dramatically. "Our acreage position is going to be the envy of a lot of independents," Hall says of Reef's 256,000 acres under lease in Michigan.
Still, growth plateaued last year, and the ordinarily cash-soaked company has cut some of its flashy indulgences -- fewer expensive cars and no repeat of Christmas 1981, when women employees got fur coats and men got cashmere jackets.
Hall is nevertheless confident, saying, "the drilling prospects for 1983 are selective and probably the best in our history. The future is going to be even brighter than the past has been." One reason for forming Reef Energy, Hall says, was to test the waters in case Reef Petroleum wanted to go public. He equivocates on that likelihood, to avoid running afoul of Securities and Exchange Commission rules. But he does say that "our intent is to develop a reputation and a rapport with the public, so if we decide to go public with the main company, we will have a good track record." Squinting as if at a distant horizon, Hall adds, "It's a bridge to the future that we hope to walk over someday."
