TIME: Almanac 1993/TIME Almanac 1993.iso/time/102891/1028200.000

Text File | 1992-08-28 | 10.7 KB | 218 lines

                                                                                BUSINESS, Page 78

GLOBAL INTRIGUE

The Wackiest Rig in Texas


When Bahrain's rulers awarded a high-stakes oil deal to shaky
Harken Energy, were they also trying to win favors from the
White House?

By RICHARD BEHAR/DALLAS -- With reporting by Jonathan Beaty/
Dallas and Richard Woodbury/Houston


    Few ventures in the oil industry have ever produced such
a gusher of speculation. Early next month, engineers will drill a
14,000-ft. well near Jarim Reef off the island of Bahrain, a
tiny Persian Gulf nation not far from the world's richest oil
deposits. If the exploratory pipe hits crude, it will enrich a
cast of investors that includes the Bass brothers of Texas, the
Rupert family of South Africa, the Harvard University endowment
fund and George W. Bush, the President's eldest son. If the well
is dry, the episode will prompt shareholders to wonder why they
ever put faith in a Texas-size enigma called Harken Energy Corp.

    The suburban Dallas company is surely one of the most
mysterious and eccentric outfits ever to drill for oil. Harken
consists of almost no assets besides an exclusive 35-year
contract to explore for crude in Bahrain. When the country's
rulers handed Harken that deal early last year, it puzzled oil
experts around the world. Why would Bahrain stake so much of its
financial future on an obscure, money-losing company with no
refineries and no experience in offshore oil exploration? "It
was a surprise," says Jay Gallagher, a senior analyst for
Petroconsultants, one of the world's largest oil information
outfits. "Harken is not traditionally a company that explores
internationally."

    The deal ignited oil-patch speculation that Bahrain's
rulers see the arrangement as a way to gain influence with the
Bush Administration. The President's son, known informally as
George Jr., is a Harken investor, director and consultant. No
one has produced evidence that Bahrain has won any favors from
the White House in return. Yet the financial connection has
caused the Administration some discomfort, most notably last
fall when reporters asked whether the young Bush's gulf
investment had any influence on his father's decision to send
troops there. Said Bush's son last October: "No, I don't feel
American troops in Saudi Arabia are preserving George Jr.'s
drilling prospects. I think that's a little farfetched."

    Yet the tiny country, with a population of 500,000 and a
land area only four times the size of Washington, D.C., is
unabashed in its desire to foster a warm relationship with the
U.S. Last week the President greeted Bahrain's emir, Sheik Isa
bin Salman al-Khalifa, with a 21-gun salute at the White House
in honor of his nation's role as the principal allied naval base
during the gulf war.

    The firm Bahrain chose to find its bonanza has a
freewheeling history, even by Texas standards. Harken director
E. Stuart Watson, a former executive for oil giant Atlantic
Richfield, calls the Dallas company's deals "convoluted" and
difficult even for industry veterans to grasp. Says Harken
founder Phil Kendrick, still a small shareholder: "Their annual
reports and press releases get me totally befuddled. There's
been so much promotion, manipulation and inside dealmaking. It's
been a fast-numbers game." Some former executives charge the
firm with routinely inflating its assets to make its balance
sheets look better. Harken's longtime chief executive, Mikel
Faulkner, insists the operation is "clean." But Faulkner, an
accountant, offers this advice for those trying to decipher
Harken's financial statements: "Good luck. They're a mess."

    Harken began life in the late 1970s as an unprofitable
collection of Texas oil wells for investors seeking tax
write-offs. That strategy changed in 1984 when Alan Quasha, a
lawyer and Harvard M.B.A., bought control and became chairman.
Quasha proceeded to trade large chunks of Harken stock for sick
oil companies, which owned not only wells but also pipelines and
retail gas stations. Aiming to salvage or spin off the assets,
Quasha generated a dizzying web of deals that would eventually
push Harken's debt past $100 million and boost its revenues to
more than $1.1 billion by the end of the decade.

    Along the way Harken began to suffer from the collapse of
oil prices, which depressed the value of assets it had
acquired. Yet Quasha managed to attract a steady flow of
investment capital from the likes of Harvard's endowment fund,
Hungarian-born superinvestor George Soros and the South African
liquor and tobacco barons, the Rupert family. Despite the
company's sloppy bookkeeping and long-shot prospects, all except
Soros continue to hold large blocks of stock. "Alan Quasha will
charm your pants off," explains a former Harken executive. "You
will take your wallet out and empty it into anything that he
suggests."

    George Bush Jr.'s affiliation with Harken began in the
oil-bust year of 1986, when he and a group of partners received
more than $2 million worth of Harken stock in exchange for his
floundering 180-well Texas oil operation, Spectrum 7 Energy
Corp., which had lost $400,000 in the six months before the
sale. "His properties were pretty well encumbered," recalls
director Watson. "The banks hadn't foreclosed, but that was in
the wind." Not long after Bush joined Harken's board, he took
charge of the Texas Rangers and shifted his attention largely
to baseball. Yet he remains a Harken consultant, earning annual
fees of $50,000 to $120,000.

    The year after Bush came aboard, a reclusive Saudi named
Abdullah Taha Bakhsh bought an 11% stake in Harken through a
Netherlands Antilles shell company. The Saudi, a tycoon with
global interests in oil, real estate and jewelry, hoped Harken
could someday serve as a vehicle for moving Saudi crude into the
U.S. But the strategy would never come to pass.

    That year Quasha made one of his worst investments, paying
$36 million (probably twice its real worth) for E-Z Serve, a
stodgy owner of gas pumps at 900 rural service stations and
convenience stores. It suffered every travail from management
infighting to IRS audits to environmental disasters. Seven
states have cited E-Z Serve for soil or groundwater
contamination.

    Harken's biggest flaw as a would-be Big Oil Company was
its lack of a refinery. In 1989 Quasha made a $190 million bid
for a publicly held refinery, Tesoro Petroleum. Tesoro never had
any interest in merging -- its board wouldn't even respond
directly to the offer -- nor did Quasha have any interest in
carrying out a hostile bid. The debacle wound up costing Harken
millions of dollars in expenses. The only party to make out
handsomely was Quasha himself; his law firm has collected more
than $1 million in fees since 1988 by handling these and other
Harken matters.

    On several occasions Quasha's deals have been marked by
apparent conflicts of interest. Last year he tried in vain to
get Harken to buy a privately held refinery, Frontier Oil, in
which he owned a sizable stake. In another instance Quasha sold
Harken's Hawaiian retail unit to a company controlled by both
his own family and the South African Ruperts. Harken booked an
$8 million gain on the deal, only to write it all off later as
a loss.

    One of Harken's few profitable ventures was its high-flying
commodities trading arm. But suddenly in 1989 the division
racked up a $17 million loss, prompting Quasha to shut down the
operation. Insiders say the oil traders never had careful
supervision, systematic controls or enough money in the bank to
ride out a downturn.

    By the end of the 1980s, Harken was bloated and indebted,
but it won a windfall. Bahrain, which produces a mere 42,000
bbl. of oil a day (Saudi Arabia's output: more than 8 million),
decided to hunt for more crude. In 1989 Bahrain officials
suddenly and mysteriously broke off promising talks with Amoco.
One minister then telephoned an old friend, Michael Ameen, the
respected former head of Mobil's Middle East operations. "They
wanted a small American company," claims Ameen, who says he drew
a blank. But 10 minutes later, Ameen got a call from an
investment banking friend in Arkansas, who recommended Harken.

    Yet Harken had almost no cash to carry out the job, so it
brought in the billionaire Bass brothers to finance the
drilling, which could ultimately cost $50 million. What remains
in explicable is why Ameen or the Bahrainis didn't go to the
Basses or other experienced wildcatters in the first place.

    With the Bahrain deal in hand, Quasha decided to dump
almost everything else. The company owned 1,000 wells and 600
gas-station pumps, all of which helped produce more than $40
million in losses in 1990. Earlier this year, Quasha spun off
Harken's debt-laden businesses into separate public companies
and then retired as chairman. "I've yet to find a business
that's had nothing but successes," says he. "We've obviously had
disappointments."

    George Bush Jr. was probably never a prime mover behind
the Bahrain deal. In fact, board members say he voiced doubts
about whether Harken had the means and expertise for such a
distant oil play. Even so, he has already earned a handsome
profit from it. In late June 1990, five months after the deal
was sealed and about a month before Iraq invaded Kuwait, young
Bush sold 66% of his Harken stake (or 212,140 shares) at the top
of the market for nearly $850,000, which represented a 200%
profit on his original stake. Yet he failed to report the
transaction until last March, in apparent violation of
Securities and Exchange Commission rules. Bush contended at the
time that the SEC had misplaced the report. Responds SEC
spokesman John Heine: "As far as I know, nobody ever found the
`lost' filing." Bush declined to comment on either the incident
or his involvement with Harken.

    Faulkner, Harken's current chairman, says his Bahraini
partners won't let him discuss terms of the deal, "even with
board members." Oil experts figure that Bahrain will keep about
75% of all potential profits, with the rest to be split between
Harken and the Basses. Despite a breakup value of about 70 cents
a share, Harken stock trades at $5 these days in anticipation
of a big initial find on Jarim Reef. Says Houston oil analyst
Charles Strain: "In a few years it's either going to be $30
stock or 30 cents, so it's a pretty easy choice for an investor.
You either roll the dice or you don't." The last wildcat well,
drilled in 1986 by the Kuwaitis, was a total dud. But the
hard-luck Harken may be due for a break. If it does find crude,
the President's son could be a multimillion-dollar winner.