Pennzoil’s Liedke Still in a Hurry : Winning Battle With Texaco Would Make Firm a Major Player
J. Hugh Liedtke, the chief executive of Pennzoil, always has been a man in a hurry.
At the tender age of 16, the Tulsa boy was already studying pre-law at Amherst College. By age 21, freshly armed with an MBA from Harvard Business School, he was fighting for his country on an aircraft carrier in the Pacific. He raced through the University of Texas Law School in two years. And, when he was still wet behind the ears in the profession that he had selected for himself when he was just a youngster, oil, he had already set his sights on running a major oil company.
Now 63, Liedtke is still racing the clock.
With only 13 months to go before he reaches 65, mandatory retirement age at Pennzoil, Liedtke has yet to build Pennzoil into the major oil company of his dreams. What’s more, he faces the grim prospect of devoting many, and perhaps all, of those remaining months to settling a score with the company that he accuses of sabotaging his best shot at achieving his dream: Texaco.
‘Crimp in Our Plans’
“This has put a real crimp in our plans,” says the imposing, gravelly voiced chief of the nation’s 36th-largest oil company. “So much of our energies now are devoted to getting this matter resolved.”
“This matter” is a nasty dispute with Texaco that has escalated into the biggest civil case in U.S. history.
It all started in January, 1984, after the much-larger Texaco announced that it was buying Getty Oil, a prize that Pennzoil thought it had won two days before after a marathon two-day bargaining session with the feuding Getty owners.
Pennzoil sued. And after a sometimes acrimonious, 17-week trial, a Texas jury decided last month that Texaco was indeed guilty of misdealings in the takeover game. The fine: $10.53 billion, the largest civil damage award ever, dwarfing the $1.8 billion won--but never collected--by MCI in a 1980 suit against AT&T.;
Texaco had plenty of company in dismissing the award as a fluke that would never stand up to judicial review. But last week, a Texas state judge added some punch to the verdict. He upheld the jury’s decision and the full award stood. With interest, Texaco owes Pennzoil $11.1 billion.
Threat of Bankruptcy
A stunned Texaco has vowed to seek a new trial, or failing that, to appeal. It also has raised the specter of bankruptcy, a threat that Liedtke has labeled “baloney they have been spreading around.”
In the days following that ruling, pressure for a settlement has intensified. But while the two sides have been in almost daily contact, and both say they are quite sure there will be a settlement before the fight reaches an appeals court, the two camps characterize the prospects for a quick settlement as improbable. Their ballpark settlement figures are still too far apart.
Neither side will publicly divulge its bargaining stance. But Liedtke, advised that lawyers and securities analysts are betting on a final settlement of $2 billion to $3 billion, replied in an interview last week in his office on the 34th floor of Pennzoil Place: “That’s what they were saying before the judge’s ruling. Do you think you would settle for the same thing if you’d just won an $11-billion judgment?”
Texaco’s highest offer so far is believed to have been in the range of $1 billion to $1.5 billion, a far cry from what Pennzoil is believed to be seeking: at least $5 billion, principally in assets.
“We’ll listen to anything,” said Liedtke, “but our business is oil and gas. Too much cash makes oil guys nervous.”
Liedtke, whose imprint is on the company as indelibly as Armand Hammer’s is on Occidental Petroleum or Fred Hartley’s is on Unocal, is by all accounts an “oil guy” par excellence.
“There is no question, in terms of a strategist and classic wheeler dealer, there is nobody better than Hugh Liedtke,” said Marc D. Cohen, a longtime Pennzoil watcher for New York brokerage Kidder, Peabody & Co.
But while his reputation in oil circles is as one of the last great wildcatters, in recent years his successes have been largely due to some financial wizardry. He has earned high praise from analysts and competitors for engineering the formation of several innovative, quasi-public ventures that have allowed Pennzoil to ably compete with the majors in the exploration and production of oil and gas, even though it hasn’t the huge financial resourses of the industry giants.
Pennzoil traces its origins to the same man who controlled much of this country’s oil production in the late 1800s, John D. Rockefeller.
Among the 33 companies formed when Rockefeller’s Standard Oil empire was split up in 1911 was South Penn, which got the Standard Oil business in Pennsylvania and West Virginia, a booming oil area before the turn of the century. But over the next 50 years, the oil industry moved west to Texas, Oklahoma and California, and South Penn--which even as far back as 1916 was selling motor oils under the Pennzoil name--went steadily downhill.
Vehicle for Expansion
No one was more displeased with that deterioration than an investor who owned 10% of the company, J. Paul Getty. As luck would have it, Getty had once lived in Tulsa, Okla., and was acquainted with Liedtke’s father, who worked there as corporate lawyer for Gulf Oil. Liedtke heard about South Penn and Getty’s displeasure and decided that it would be the perfect vehicle for growing his own small oil venture in Midland, Tex., into the major company that he dreamed about even then.
Liedtke’s route from Tulsa to Midland was a circuitous one. First there was Amherst, a Massachusettes college that attracts mostly old Eastern families and in those days had only about 1,000 students--all men. “My father picked that out for me,” Liedtke recalled. “And in my house, what he said you did. They had small classes and I was so young. He thought it would put me more in contact with my classmates.”
After Amherst, he earned an MBA at Harvard, joined the Navy and then went to law school at the University of Texas. In his last year of law school, Liedtke married his childhood sweetheart, whom he had first met when they lived a block apart in Tulsa.
Practically everyone who had influenced his life up to that point had been in the oil business, including his father, his uncle and his father-in-law. Liedtke said he “always knew I wanted to be in that business, too.”
He and his bride and his brother moved to Midland, where the brothers opened a law firm. But they devoted most of their time to forming oil and gas partnerships. There they became friends with a salesman for Dresser Industries, George Bush, now the vice president of the United States.
With a fourth partner, John Overbey, Bush and the Liedtkes in 1953 raised $1 million from friends in Tulsa and from some Eastern and foreign investors who were clients of Bush’s uncle. They formed their own oil company, which they named after the Mexican revolutionary Emiliano Zapata.
‘Terrorized Our Investors’
“There was a Zapata movie playing at that time, starring Marlon Brando,” Liedtke recalled. “We needed a name, something that would pique people’s curiosity, and we thought that sounded pretty good.” (On his wall at home in an exclusive neighborhood west of downtown Houston, the same neighborhood where Bush long lived, hangs a picture of the revolutionary painted by a man who knew Zapata.)
The four partners then “terrorized our investors,” Liedtke recalls, by spending $850,000 of their $1 million on a single oil field in Coke County, Tex. They surprised everyone by drilling 137 wells, all of them successful. They are still producing oil today.
Overbey bowed out when the others decided to form a drilling firm. And Bush parted company--amicably, Liedtke says--in 1959 when the Liedtkes wanted to concentrate on exploring for oil and gas and Bush saw more of a future in contracting out offshore rigs.
Three years later, not long after Liedtke approached J. Paul Getty about taking over South Penn and was told to show his real interest by buying some stock in that company, Liedtke was named president of that company. And a year later, in 1963, Zapata, South Penn and a third company owned by his brother, William C. Liedtke Jr., merged to form Pennzoil.
“From that point forward,” says Texas oilman T. Boone Pickens, who says he has “always kind of thought of Hugh Liedtke as one of my mentors” and whose first entry into the offshore business was with Liedtke, “the personality of the company has been the personality of Hugh Liedtke.”
His personality, says Joseph Jamail, the nationally known personal injury lawyer whom Liedtke chose as Pennzoil’s lead lawyer on the Texaco case, is “very direct; very straight.” Liedtke, he says, is “a gregarious man and sensitive to other people’s feelings. He loves life, he eats too much, he’s volatile at times, but he’s lots of fun to be with.”
Baine Kerr, a Pennzoil director who just retired as the company’s president after eight years in that job, says Liedtke runs Pennzoil “in an entrepreneurial style.” It is, he says, “a less structured organization than any other I am familiar with.”
“I believe in giving people authority and letting them run with it,” said Liedtke, who says he plans to spend his retirement years fishing, bird hunting and riding horses on his ranch in northwest Arkansas.
He is also a man of action. “There is no question who runs Pennzoil,” said one executive.
Despite his ambition of running a major oil company, Liedtke over the years has spun off several companies that either no longer fit Pennzoil’s long-term strategy or weren’t moneymakers for shareholders. James S. Jordan, an analyst with Lovett, Mitchell, Webb & Garrison in Houston, says Liedke championed shareholders’ rights long the subject became fashionable.
“He has the best record in the entire industry for working for the shareholders,” said Jordan.
Jordan estimated that Liedtke has doubled the value of Pennzoil’s stock over the last year and a half, even discounting the impact of the Texaco award.
Most recently, he has engineered a restructuring to withdraw from most of the company’s mining operations to instead concentrate on oil and gas, refined petroleum products and sulphur. Pennzoil operates the largest Frasch sulphur mine in the Free World, and one of the most efficient.
Recent Restructuring
As part of the restructuring, Pennzoil in August spun off to shareholders its Battle Mountain Gold properties, and it has bought back 20% of its own stock since last year. Those actions have made it a smaller company in sales and capitalization.
“Size per se, isn’t important,” says Liedtke. “But we would like to be more of a major factor in the oil business. The capital structure of big companies enables them to play in areas with long lead times and tie up large sums of money we can’t.”
Getty, he figures, was his best shot at joining the majors because the many oil industry takeovers in recent years has sharply diminished the list of possible acquisitions. But, with a settlement of $2 billion or more, analysts say, Pennzoil would still join the lower rung of big producers, moving into the top 20.
Assuming a settlement includes some cash, analysts widely expect Pennzoil to reduce its long-term debt, which has risen to over $1 billion, partly because of the stock repurchases. And, given Liedtke’s record with shareholders, many expect Pennzoil to make a special dividend distribution to shareholders with part of any cash settlement.
And if there is no settlement and Pennzoil were to lose on appeal? “That would mean Pennzoil would have spent four years of fighting and trying to establish our rights and rectify a great wrong,” says Liedtke, “and we would have drilled one huge dry hole.”
Times researcher Joanne Harrison contributed to this story. PENNZOIL AT A GLANCE The Houston-based company is primarily involved in oil and gas exploration and production, and petroleum refining and marketing. It launched a major restructuring in 1984, withdrawing from metals and potash mining and buying back its own shares.
9 months Year ended ended Sept. 30 Dec. 31 1985 1984 1983 1982 1981
Revenue 1.7 2.4 2.3 2.3 2.7 Billions of dollars
Net 154 214 164 189 222 income Millions of dollars
Assets: $3.24 billion Employees: 8,000 Common shares outstanding: 43 million 12-month stock price range: $34.00-$72.00 Friday’s close: $66.125
