Thursday, July 5, 2012

Part 2: Historic Oil Wells of the Little Spokane River Valley

(all rights to this material retained by author)

A Review of the Historic Oil Wells
of the Little Spokane River Valley
Regions Around
(Part Two)


Wally Lee Parker


… known for floating oil and gas stock …

             Scores of petroleum prospecting companies were formed to exploit the major and minor oil excitements that flashed across eastern Washington State in the early decades of the 20th century.  Most of these, within several years of filing for incorporation, were stricken from the State’s biennial records due to their “failure to pay” the “annual license fee.”  As for why these corporations proliferated and dissolved as readily as snowflakes, in the State’s Seventeenth Biennial Report (October 1, 1920 — September 30, 1922), Washington’s then Secretary of State, J. Grant Hinkle, wrote, “There are very few of the States which do not now have Securities Acts, commonly called “Blue Sky” laws.  Thus far the State of Washington has never passed such a measure, although three attempts have been made.  The State of Washington is the easiest State in the Union in which to do corporate business.  It is the only State in which for Forty Dollars a corporation can qualify regardless of its capitalization and proceed with the sale of stock without having to give” the State “any account whatever … as to its activities or methods of conducting business.  For this reason, the State … is well and favorably known for floating oil and gas stock, and … is being exploited each year by these stock jobbers …”
            Without sufficient manpower or legislative recourse, there was little the state’s government was able to do regarding patently fraudulent operations.  Federal charges of using the U. S. Mail to defraud could occasionally be brought.  But even that was rare.
            Early newspapers and magazines often carried solicitations outlining the easy riches to be earned by investing in these speculative corporations.  As Secretary Hinkle explained, there were few rules these advertisements needed to follow.  He noted that “Domestic corporations must name their capitalization and the number of shares into which it is divided which virtually gives a par value to their shares.”  But even this could be turned to the promoter’s advantage.  Corporations are invariably entered with capitalization running into the millions, for the reason that it cost no more under the present laws to file a corporation having fifteen million dollars of capital than if the same corporation has only fifteen hundred dollars of capital.”
            The previously mentioned Clayton Oil Company was incorporated with a Capital Stock of one million dollars.  In its advertisement it listed a par value of ten dollars per share of stock — meaning the company was implying a guarantee that it would not sell any of its stock below that dollar amount (though any company could in theory sell shares for more than the stated par value, and the first public offerings of many corporations were — despite the implied par value guarantee — deeply discounted below the advertised par value).
            To figure out how many shares in all the Clayton Oil Company was offering — how many slices the company was being divided into — a potential investor needed to divide the listed Capital Stock by the stated par value.  This would break down to one-hundred thousand shares, which, in total, would equal 100% ownership of the company.  So, for ten dollars anyone could buy one one-hundred thousandth of the corporation.  If all one-hundred thousand shares of the company were sold at par value, said sale would raise the indicated one million dollars of capital.
            By stating Capital Stock and par value, the Clayton Oil Company was simply complying with the law in a manner that suggested great wealth — although the initial value of the company wasn’t one million dollars.  It was essentially zero.
            Normally the only way an oil company’s stock would become valuable was for the company to find oil.  At that point the investors could make money two ways.  They could draw an income from the dividends produced by the sale of oil, or the investor could sell their stock at whatever the going rate was for the now successful oil company — which assumedly would be more than the ten dollars per share originally paid.  If the company didn’t strike oil, the stock — minus any resalable assets the company may have accumulated — would become valueless.  And likely the company, essentially abandoned, would be allowed to dissolve due to the company’s “failure to pay” its “annual license fee.”
            The Clayton Oil Company wasn’t likely to sell a million dollars’ worth of stock.  And it didn’t have to.  If the company was a legitimate concern — or wanted to appear to be a legitimate concern — it only needed to gather enough money to begin drilling, and then do so.  In 1921 that would have likely been in the low thousands of dollars.  When that money was burned through, an attempt could be made to sell more stock and continue drilling.
            Of the dozens of eastern Washington oil wells drilled, none produced oil.  And some of the oil companies dissolved before even beginning to drill.  That’s not to say these companies — whether drilling or not — failed to make money.  Promotional fees often consumed as much as 15 or 20 percent of every dollar of stock sold.  Within these promotional fees were the commissions paid to “stock jobbers,” — the people attempting to sell the company’s securities locally, nationally, and internationally.  Then of course there were the often healthy monthly stipends paid the company’s officers and board of directors.  And just as now, there were the assumedly justifiable executive expenses — things like travel, hotels, and meals.  All told, the intimates within many of these companies, which collectively consumed hundreds of thousands if not millions of investor dollars, appear to have done quite well — though we can’t be sure since, as Secretary Hinkle noted, within Washington State they operated “without having to give any account whatever … as to … activities or methods of conducting business.”

… to be continued …

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