For James Musselman, tilting at windmills turned into a success

08:19 AM CST on Monday, November 5, 2007

James Musselman originally invested in Triton Energy Ltd. because he admired the oil company's moxie. The firm was founded in Dallas by L.R. Wiley in 1962. Over time, it distinguished itself from other independents by competing with the majors for high-risk, high potential oil and gas deposits overseas.

Much of Triton's assets lay in Third World countries in West Africa, Southeast Asia and South America. From its offices overlooking North Central Expressway, Triton went global long before global was cool.

The upstart had an uncanny ability to capitalize on oil and gas opportunities overlooked by others. It enjoyed tremendous success until the oil bust in the latter half of the 1980s.

That's when the company began a prolonged spiral downward. Sales dwindled from $209 million in 1991 to $110 million in 1993. Between the early '90s and 1998, Wall Street viewed the company as overweight and unfocused.

Overhead costs had doubled as fat and happy management opened offices across the globe.

Try as they might, neither Wall Street nor Triton's board could right the listing company.

Mr. Musselman, an entrepreneur himself, was disenchanted with the company's lackluster performance. Poor management and a weak balance sheet were driving Wall Street to undervalue the stock, he felt.

As self-appointed knight errant, Mr. Musselman gathered shareholder allies who favored a change in management. Once he thought he had sufficient backing, Mr. Musselman told the CEO that he had enough shareholder support to topple him.

The CEO responded that he was on the verge of selling the company and any restructuring could adversely affect the precarious sale. Mr. Musselman's group backed off.

But oil prices were falling precipitously at the time, and the sale to fell through. On the day the sale's failure was announced, Triton's stock price fell 32 percent. The board announced the CEO's resignation the same day, and Mr. Musselman went about righting the enterprise as Triton's newly appointed interim CEO.

Hicks to the rescue

It didn't take a wizard to know that the company's balance sheet had to be fixed if it was to get back into Wall Street's good graces. The organization needed a large injection of capital to pay down debt and continue searching for oil and gas in far-away kingdoms.

He approached his long-time friend, private equity investor Thomas O. Hicks of Hicks, Muse, Tate & Furst Inc. Given that the private equity firm had not previously shown interest in an oil and gas play, that the price of oil was gulley-low, and that Triton's reputation as an investment was abysmal, others in Mr. Musselman's position might not have risked involving a friend.

But Mr. Musselman had faith that, with a solid capital infusion and slashed expenses, the stock price would rebound. He convinced Mr. Hicks that Wall Street had been blinded by past mismanagement and that the assets' break-up value was significantly greater than the stock price.

Between the fall of 1998 and early 1999, Hicks Muse became Triton's financial partner, buying 38 percent of the company for $350 million. The Hicks Muse infusion was used to repay loans and for exploration. Mr. Hicks became chairman of Triton's Board.

Bloated overhead

Mr. Musselman and his management team set about winnowing engorged overhead. Under previous management, the company had become disjointed and siloed - every idea and request had to go up and down an extensive and inefficient chain of command. Employees felt stifled.

Mr. Musselman transformed the company from vertical to horizontal so, for instance, the drilling department could speak directly across a narrow hallway to the geophysical department. This culture change enabled highly talented people who had been buried by bureaucracy to thrive. And, as silos tend to be filled with extraneous employees, those who preferred the old silo-oriented culture were terminated.

Triton cut its employee roster and other overhead by about half. Gone were the planes and the perks and overspending embraced by previous management.

But keeping the best employees was not easy. Questions over whether Triton would make it engulfed the organization. The company had already fired many and for years had had a bad financial balance sheet. Also, astute employees realized that Hick Muse's private equity money was expensive and that it would want a quick return and exit.

Mr. Musselman and senior management asked employees to accept less-than-market salaries by convincing them that the company would turn around and produce great upside. He gave remaining employees - from receptionist to the penthouse - liberal stock options. As Mr. Musselman notes, "People will work for lesser salary when they're allowed to thrive and they have a vested financial interest in the enterprise's upside."

Intrigued by the possibility of an upside rank and file employees rarely see, the superstars stuck.

The combination of new capital, lower overhead, and continuing oil field discoveries apparently worked.

In July 2001, when oil sold for $27.50 per barrel, Amerada Hess Corp. said it would buy Triton for $3.2 billion - a 50 percent premium on the stock's price and 8.13 times Triton's revenue. Hicks Muse profited a cool billion in less than three years. And Mr. Musselman did all right himself.

Today, no longer a small, unknown investor, Mr. Musselman runs privately held Kosmos Energy LLC.

Warburg Pincus and Blackstone Capital Partners have committed $300 million so Kosmos can pursue oil and gas ventures in West Africa.

Kosmos relies on that same free-working, low bureaucracy culture that proved successful at Triton.

It is known for giving every employee - from the receptionist on up - stock in the enterprise and for having the moxie to take chances few other small companies will.

Pauline Graivier is president of Dallas-based Verbal Communications Inc. Rob Hoffman is a partner with Gardere Wynne Sewell LLP.