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Tenneco’s strategy to support depressed firms paying off

July 20, 2017 GMT

This story appeared in the Chronicle on Dec. 4, 1982. The headlines and text are reprinted.

Not too long after Houston’s Tenneco Inc. acquired Newport News Shipbuilding & Dry Dock Co. in 1968 the purchase looked like a mistake. For much of the 1970s, its business was in the doldrums and profit margins were slim.

The shipyard was doing so poorly that Tenneco would have sold it if the purchase price had been right, says Tenneco Chairman James L. Ketelsen. “It so happened that the industry was in such bad shape at that time that no one was willing to offer a viable price. So, we kept it and worked on it.”

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Two new drydocks were installed, the yard was expanded for the modular manufacture of aircraft carriers and other capital expenditures were made, at a cost of more than $444 million.

“As a result of what Tenneco did in the mid-1970s, we were able to capitalize on the business that came in the late ’70s and early ‘80s,” said Edward J. Campbell, president at Newport News. “I really doubt the yard could have survived the ’70s otherwise.”

The Virginia shipyard’s backlog has grown to $8??billion from $1.6 billion at the end of 1979 on the strength of large U.S. Navy contracts. Shipyard operations have become one of the most profitable businesses at Tenneco.

“It was very difficult to see that the shipyard was going to end up being as profitable and operating as efficiently as it is right now,” said Ketelsen. “I think we learned something from that.”

The strategy that market conditions forced on Tenneco at Newport News - feeding a business in recession from prospering operations - is a key to how Houston’s second-largest public company manages a $17 billion conglomerate operating businesses that range from growing grapes to building tractors, submarines and Monroe shock absorbers.

Tennessee Gas Transmission Co., one of the nation’s largest interstate pipeline systems, was the seed from which the firm began to grow in 1944.

Tennessee Gas originally was a venture of a group of investors who had obtained a Federal Power Commission permit to run a pipeline from Louisiana to Tennessee. When that venture failed to get off the ground, Tenneco’s founders purchased the permit and instead ran a pipeline from South Texas through Tennessee and into Appalachia.

Almost from the beginning, management looked toward new lines of business.

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“There was a big concern on the part of the founders at that time about being in strictly a regulated business,” Ketelsen said. “There was a recognition that for maximum growth and viability, the company needed to get into non-regulated businesses as well.”

From its foundation in the natural gas pipeline business, Tenneco evolved into an integrated energy firm in the 1950s with its entry into oil and gas exploration, production, refining, petrochemical processing and marketing.

The pipeline business, which accounted for almost all the firm’s revenues in 1950, fell to 63 percent by 1960. However, the preponderance of the firm’s business remained in the energy sector.

The decade of the 1960s, during which many of the largest conglomerates were built, brought diversification on a broader scale - shipbuilding, manufacturing of automotive parts, J I Case construction and farm equipment, chemicals, packaging, fruit and vegetable farming, food packaging and real estate development. By 1970, energy was bringing in only about 40 percent of revenues.

But the oil price shocks of the next decade reversed the trend. Tenneco’s energy businesses boomed through recessions in 1974-75 and 1980-81, growing to account for 65 percent of the firm’s revenues in 1982 and 80 percent of its operating income.

Many non-energy businesses were depressed during that period. Shipbuilding had one of its worst years in 1978. The construction and farm equipment and chemicals businesses fell apart after 1979. Earning in automotive in 1980 were less than half of what they were two years earlier.

However, growth in the energy sector - particularly in integrated oil operations - more than compensated. The company’s overall net income grew at a compound annual rate of 16.8 percent from 1975 to 1980.

Although Tenneco closed or sold inefficient plants and excess capacity in its slack non-energy businesses, it did not resort to the same wholesale divestitures that took place at some of the other largest conglomerates.

Most of Tenneco’s purchases had been of very large firms, which, “if they weren’t the leader, certainly were chewing right at the heels of the leader in that business,” said Ketelsen. Other conglomerates “found themselves in fifth or sixth position in an industry with an ne’er-do-well company in a business totally unrelated to anything else” and had to go through a weeding out process.

With the fall in energy prices and expectations of growth in non-energy operations in a national economic recovery, the pendulum at Tenneco is swinging again. But because energy has grown to a much larger portion of the firm’s business, the swing hasn’t been strong enough to prevent a fall in corporate income.

“That (national recovery) does tend to change the balance somewhat,” said Ketelsen. “It generates more opportunities and a different level of business activity in the non-energy sector and we are taking advantage of that.

“Our forecast is that non-energy will grow more rapidly than energy in ’84 and ‘85,” he said. “So that by the time you look at ’85 vs. ’81, the percentage makeup of the company will have changed rather dramatically.”

Unfortunately, Ketelsen noted, the shift toward non-energy now is taking place with oil and gas businesses actually on a decline. For the first nine months of the year, operating earnings at Tenneco’s oil exploration and production operations are off about 28.9 percent.

Amid the oversupply of natural gas, Tenneco will concentrate on oil production next year. Capital expenditures will be down a little from 1983, but the number of wells drilled should be about the same, Ketelsen said. The drop in the budget will come from a decline in acreage acquisition after large lease-sale purchases in the Gulf this year.

Shipbuilding and automotive parts manufacturing are leading the charge. Operating earnings in the shipyards are up 30.5 percent in the first nine months. Automotive is up 28.2 percent.

The backlog at Newport News could carry the business through about 1990, said Campbell. Navy contracts account for 95 percent of the business, while “commercial shipbuilding is almost non-existent,” he said. Campbell doesn’t see that business returning anytime soon.

Taking a lesson from its parent, Newport News plans to diversify its own operations. “The Navy constructions business is very subject to fluctuations based on the mood of the country,” said Campbell. “It’s very costly to have those big swings.”

Although he was reluctant to discuss the firm’s plans for diversification, Campbell noted that a subsidiary, Newport News Industrial, is seeking to expand its servicing of electrical power plants. For the next five years, Newport News will continue growing, but not at the rate of the early ’80s, he said.

The automotive parts operations, which were the target of productivity-increasing programs, grew right through the latest recession. “Automotive essentially had a very strong year last year,” said Ketelsen. “This year will be up even better and next year even more so.”

Because Tenneco automotive’s business is heavily oriented toward the repair market, it benefited from the growing age of cars on the road as people postponed purchases of new automobiles.

Although the firm’s packaging business saw increased business early this year, prices and profit margins fell. Ketelsen explained that as business prospects improved, manufacturers started to become more competitive to get the new business. Prices, and therefore margins, were driven downward for many of the packaging operations’ paper products.

Prices since have begun to move up, he said, and packaging will end up ahead of last year.

The largest problem remaining in the non-energy area is that of J I case, which with $2 billion in revenues last year was Tenneco’s largest business outside of oil and gas operations and the only segment to post an operating loss. This year will be worse, with operating results down 33.7 percent in the first nine months.

Case unfortunately finds itself in two down markets - construction and agriculture. Excess inventory has prompted “ferocious” price cutting, said Case President Jerome K. Green. Case is financing some dealer inventories for nine months interest-free.

An increase in farm income and a pickup in construction activity foretells an increase in sales at the dealer level next year. However, because inventories remain high, Green projects it won’t be until at least the fourth quarter next year before business begins to pick up at the manufacturing level.

One indication that next year holds somewhat better prospects is the fact that Case has no plans to shut down manufacturing operations, as it did for six weeks in early 1983. “In 1985, we could have a record year,” said Green.

Ironically, Ketelsen sees natural gas transmission, the business that started it all 40 years ago, as the segment with the greatest potential for growth in the next decade as deregulation proceeds in the industry, either through legislation or market innovation.

Natural gas transporters say the key to prospering in the new environment will be finding ways to create new markets for gas and sell it aggressively. Ketelsen said Tenneco’s experience in marketing many different lines of business should give it an advantage over some of its competitors.

For the time being, Tenneco is in a transition as its non-energy operations slowly pick up the slack left in the energy sector and market forces transform the firm into a more balanced conglomerate.

UPDATE:

Low energy prices during the mid-1980s hit Tenneco hard. The company was laden with debt that it took on to acquire new lines of businesses. Tenneco sold off its oil and gas operations in 1988 for more than $7 billion, using the money to pay down debt and buy back its stock. The company eventually ended up selling itself off, piece by piece.

One piece still exists. Headquartered in Lake Forest, Ill., Tenneco makes automotive parts to improve air quality and boost ride performance.

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