Chapter 4Crisis at Enron Oil Corporation: 1987

Ken Lay was a good story. Natural Gas Week described the man “who hopped from Transco to HNG, and then had InterNorth for breakfast, even fooling some people into thinking that he was picking up the tab.” But this momentum was gone. The $70 per share buyout of HNG stockholders made for a happy ending, but the same transaction made for a precarious beginning.

At Lay’s insistence, InterNorth had overpaid for HNG by $5 per share, probably more. If everything had gone right, the premium could have been worked down. But the Peruvian nationalization of 1985, followed by the industry’s price collapse the next year—both of which had warning signs—made the acquisition’s high debt load lingering and constraining. Nonrecurring earnings were propping things up, not recurring, quality earnings.

In their first 19 months together, HNG and InterNorth recorded losses north of $100 million. Debt remained at over 70 percent of capitalization, which also meant higher interest rates than a better capitalized company would have paid. Speculative-grade “junk” bonds from Michael Milken’s Drexel became Enron’s debt instrument of necessity.

Still, Lay set a tone of high expectations. He announced the restructuring complete with the stock buyback and ESOP programs; his management team was mostly in place; and moral victories abounded. After all, wasn’t Enron the industry’s most innovative natural gas company? It was high time to have a big 1987 to support ...

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