Gulf Oil puts hopes for turnaround on search for reserves

It can take 10 miles to turn a supertanker around in the ocean. The chairman of Gulf Oil, James E. Lee, is finding it equally challenging to turn a giant oil company around.

Gulf Oil, known to motorists for its bright orange and blue logo, has been considered by some oil analysts to be a lumbering oil giant. The company has watched its oil reserves decline faster than it found new ones; in the early 1970s it signed contracts to supply uranium at prices it found it couldn't live with; and in 1964 agreed to sell one-third of its natural gas production to Texas Eastern Transmission at a price that management today considers uncompetitive. In addition, in 1973-1975 the company got involved with US political payoffs which tarnished its image, and in 1975 its properties in Kuwait were nationalized, hurting its pocketbook.

The result was a company with considerable problems.

On Wall Street, the feeling is that Gulf has started to turn itself around. Comments Constantine Fliakos, vice-president at Merrill Lynch, Pierce, Fenner & Smith Inc., ''Jerry McAfee, the former chairman (until 1981), started to slow the company's deterioration down. Let's hope that Jimmy Lee will be able to turn it around.''

William Craig, oil analyst for E. F. Hutton, states, ''I think they have been in the process of turning for several years. They are not like Texaco, which only recently started to change the company.'' He adds, however, ''Unfortunately , they are not a diversified company so when things go bad, they really get hurt.''

For example, Gulf is not in Aramco, the Arab-American Oil Company, a partnership of companies buying oil from Saudi Arabia. Thus, when oil was selling for $40 a barrel, Gulf had to compete with Aramco partners who could buy the oil for $28 per barrel. Now that oil prices have fallen, Gulf has contracts to buy Nigerian crude at $35.50 a barrel, which is higher than the present spot market.

Mr. Lee, in an interview, says he has a plan to change the direction of the oil giant. ''Our first priority,'' he says, ''is to concentrate all our resources on stopping the downward trend in oil reserves. We must replace the oil and gas reserves we produce to assure our viability.''

As part of Gulf's plan to do this, he says, the company is redeploying its capital, shutting down refineries in Europe, and getting out of many of its chemical operations. The company intends to improve on its exploration record. It missed getting into many of the frontier areas of the US, such as the deep gas finds in the Tuscaloosa trend in Mississippi and the Anandarko basin in Oklahoma. Instead of being an aggressive explorer, Gulf is known in the oil patch for being cautious. It drills wells around already established basins, finding smaller amounts of oil or gas.

According to Mr. Lee, the company's gas contract with Texas Eastern has forced it to be conservative since it couldn't afford not to find new gas reserves. When searching in previously unexplored areas, the chances of failure increase as do the potential rewards.

Now, however, Mr. Lee says Gulf will become more aggressive in its exploration program, especially in previously unexplored parts of the Gulf of Mexico, Alaska, and offshore California.

A recent $500 million pruning of Gulf's previously announced $4.5 billion capital spending program will mostly be in downstream operations, chemicals, and minerals, says Mr. Lee.

Gulf intends to spend more money on its gasoline stations. Mr. Lee says his goal is to maintain Gulf's share of market within the context of a declining total gasoline market. Although he is vague on how he expects to achieve this, he says he wants Gulf service stations to be known for ''quality products and service.''

According to Mr. Fliakos of Merrill Lynch, Gulf, like many other oil companies, is trying to emulate Shell Oil, which has reduced its total number of stations but increased its gasoline ''throughput'' (the amount of gasoline it can refine from oil). ''They have done this through having high volume and well-situated stations,'' he says.

Mr. Lee says Gulf is also trying to become more significant in diesel and jet fuel. The company intends to expand the number of Gulf stations selling diesel, and to offer a toll-free number to help customers locate Gulf diesel stations.

Gulf has also taken up the strategy of purchasing its own stock, which has been depressed like other oil company stocks. Last year the company bought 10 million of its own shares and this year intends to buy another 10 million shares.

Although some analysts disagree with this strategy, preferring to see the company reinvest its funds in finding new oil and gas fields, Richard Howard, an analyst with Fidelity Management & Research in Boston, says he considers it a good deal for the shareholders.

''It's important to know,'' he says, ''that if you take Gulf's working capital plus it's inventory values, the company is worth $25 per share.'' The company, with its stock currently selling at $32 per share, is greatly undervalued, he reasons.

Noel Casey, a securities analyst at the Prudential Insurance Company, likewise thinks Gulf is undervalued. He says, ''Gulf is sure to have rising earnings over the next several years, particularly once the Texas Eastern contract ends.'' In the spring of 1988, Gulf will be able to increase its prices on the 625 million cubic feet it provides to Texas Eastern.

Assuming that Gulf's oil prices average $33.07, this year, Mr. Casey is estimating Gulf's earnings per share will come to $6.32. However, by 1987, they will grow to $13.29 per share, assuming a 5.5 percent annual increase in oil prices. The dividend will grow somewhat slower, but by 1987, he says it could amount to $4.65 per share.