'The refineries are driving the ship'

Petroleum industry changes drive consolidation in distribution field

When Dallas Herron purchased Valley Oil in 1977, it was one of about 18 petroleum wholesalers in the Flathead.

Most represented a single oil company, distributing their branded fuel and petroleum products to retail gas stations, farmers, loggers and other customers around the valley.

"Just about every major brand used to be here," Herron recalled. "Chevron, Conoco, Phillips, Texaco, Union, Amoco, Exxon …

"Valley Oil was a Mobil distributor. I was under the belief that I'd have Mobil forever. Six months after I bought the place, they withdrew from Montana and left me without a brand."

Herron, who grew up in the Flathead, had spent 15 years working for Mobil as a marketing sales engineer before hocking his home and buying the distributorship. He was somewhat perturbed by his former employer's decision to leave, so he hired a lawyer.

Mobil responded with a tanker load of lawyers.

"If you want an exercise in futility, try suing an oil company," Herron said.

Eventually, he started looking for another manufacturer to represent. Other local petroleum wholesalers were going through the same turmoil, scrambling to survive as one major brand after another withdrew from Montana.

At the time, Herron explained, most oil refineries operated on "exchange agreements," whereby a refinery in one region would produce a certain number of gallons for a competing firm, in exchange for a reciprocal arrangement in another region. In this way, oil companies could market their brands nationally, even in areas where they didn't operate refineries.

"They had all these goofy arrangements," Herron said. "Sometimes the exchange agreements ended up being unprofitable. The oil firms also realized that it wasn't important for their brands be available in every state."

As the agreements evaporated, the variety of local gasoline brands began to diminish. Distributors here responded by going through a series of mergers and consolidations.

"Over time, I bought up about eight competitors," Herron said.

After merging with a Conoco distributorship, Valley Oil changed its name to Valcon. Another competing wholesaler, City Service, followed a similar strategy, buying smaller companies and growing larger.

Three years ago, City Service and Valcon merged, completing the transformation of the local wholesale landscape.

"From 18 distributors 30 years ago, it's now boiled down to one fairly large marketing firm - CityServiceValcon - and one small wholesaler in Whitefish," Herron said.

Gross revenues for CityServiceValcon should top $400 million this year, he said. The company employs about 160 people and operates in western Montana, northern Idaho and eastern Washington. Its aviation fuel division competes in 13 states.

"We're the largest industrial lubricant supplier in the area," Herron said. "We offer propane, biofuels, bulk delivery. We're basically a supply and distribution company. We buy fuel and redistribute it."

The company will wholesale about 190 million gallons of gasoline and diesel fuel this year, compared to 5 million gallons when he acquired Valley Oil.

With that kind of volume, even minor changes in gas prices can have a huge impact on the company's profitability. Recent volatility in the petroleum market also increases the uncertainty.

"This is probably the most volatile market I've seen in 36 years," Herron said. "In the old days, the oil companies would send you a telegram and give you two weeks notice for a price change. Now, we get multiple price changes in a day."

Ed Croymans, who runs CityServiceValcon's aviation department, said prior to the Sept. 11, 2001, terrorist attacks, the petroleum market responded to physical events, such as refinery shutdowns, and price changes were in the range of a quarter-cent to one cent a day.

"Now, the market is driven by larger geopolitical events, and price changes can be as much as a nickel or dime a day," he said.

It isn't unusual for the company to have $1 million worth of fuel sitting for several days in railroad tanker cars somewhere, waiting to be delivered. If prices jump during that time, CityServiceValcon benefits. If they drop - as they have in the past two weeks - the distributor takes the hit.

"The market used to offer 'harvest terms,' where farmers would pay once a year if they had a good crop," Herron recalled. "Today, the exposure is such that there's no way anyone could offer that. Most terms are seven to 10 days, and I envision that getting shorter and shorter. There's a trend towards quicker and quicker movement of money."

Given the increase in refinery direct sales to grocery stores and big-box retailers, as well as competition from other regional distributors that represent different brands, Herron doesn't see significant growth for CityServiceValcon's retail fuel deliveries in the Flathead.

Consequently, the company's future lies in expanding some of its other product lines, such as propane sales, alternative fuels and its aviation fuel business. Acquisitions also will continue to be part of its business strategy.

"The refineries are driving the ship - they're the ones who really determine how petroleum gets to the market place," Herron said. "I think the oil companies are heading towards writing contracts with larger marketers. We have to be at a certain scale to keep up with that."

Reporter Bill Spence may be reached at 758-4459 or by e-mail at bspence@dailyinterlake.com.