Banks Give $1.6-Billion Credit Line to Texaco
Texaco said late Monday that it has completed an agreement with nearly 30 of its banks to obtain $1.6 billion in short-term financing.
The agreement reduces, for now, the chance of a credit crisis at the giant oil company, which is trying to negotiate its way out of a $10.53-billion damage judgment issued against it by a Texas jury last month in a case brought by Houston-based Pennzoil.
Details of the agreement with a syndicate of banks led by New York’s Manufacturers Hanover Trust were not immediately available. But it is known to require Texaco to turn over to the banks about $1.6 billion of receivables, or rights to money due Texaco from its customers. The financing is presumed to carry a higher interest charge than Texaco was paying in the commercial paper market, its customary source for short-term working cash.
Funding Source Limited
The commercial paper markets, in which companies float a form of IOU typically due in 30, 60 or 90 days, have been all but closed to Texaco since its financial stability was called into question as a result of the jury award and a Texas state law requiring the company to post a $12-billion bond before it appeals. Texaco, based in White Plains, N.Y., has said that the bond requirement in particular could force it to seek refuge in bankruptcy proceedings.
Meanwhile, industry observers said Monday that they expect any out-of-court settlement of the legal battle between Texaco and Pennzoil to involve chiefly the transfer of petroleum-producing properties, rather than cash.
Estimates of the possible value of such a transfer range from $1.5 billion to $2.7 billion--a large fraction of the $10.53 billion awarded to Pennzoil for its claim that Texaco had illegally interfered with its 1984 agreement to buy 42% of Los Angeles-based Getty Oil. Instead, Texaco acquired all of Getty.
Speculation on the most likely property for transfer to Pennzoil focuses on Texaco’s Kern River field near Bakersfield, which produces more than 110 million barrels of oil annually. The central California property was the crown jewel among the assets Texaco acquired by buying Getty, oil industry analysts say, and its reserves represented the bulk of the 1.2 billion barrels of U.S. oil reserves owned by Getty at the end of 1983.
Expensive Oil to Produce
“As far as Texaco is concerned, Kern River might be among the least objectionable properties to give up,” said Frederick P. Leuffer Jr., an industry analyst for the brokerage firm of Cyrus J. Lawrence Inc. Among other considerations, he said, Kern River’s heavy oil is particularly expensive to produce and the field is likely to be developed over the long term, meaning the immediate effect of its loss to Texaco would be cushioned. At the same time, Pennzoil has some expertise in the complex recovery methods needed to reclaim the California deposits.
Settlement talks between Pennzoil and Texaco apparently began in earnest late last week after Texaco won a temporary restraining order in federal court, preventing Pennzoil from enforcing the terms of the Texas jury’s award. It was Texaco’s first legal victory since the award and may have been a key one in giving the company the relief it needed to begin negotiations at better than a total disadvantage. Disclosure of the talks led a federal judge to adjourn a hearing scheduled over whether to make the injunction a permanent one or to lift it.
Before that, Texaco had faced the prospect of having to post a $12-billion bond to appeal the jury award--a mandate that may have been an even more daunting obstacle than the award itself. Many legal authorities believe that Pennzoil would face a high risk of having the record jury award set aside by a higher court if Texaco could manage to bring an appeal.
Both companies maintained their official silence Monday over the course of the negotiations. But analysts say they expect a settlement to avoid a cash payment because it would be almost impossible to structure as a tax-free transaction, while transfers of property can be manipulated to minimize tax consequences.
A settlement involving the Kern River property would have the internal logic of giving Pennzoil what it contends it was after all along: a share of Getty’s reserves. Nevertheless, the negotiations are expected to be complex, turning on ways to value Texaco assets, the comparable price Pennzoil would have to pay for reserves in the open market or in production, and whether there are other Texaco assets that might fit better with Pennzoil’s Midwestern and Gulf Coast properties.
Wall Street professionals say that even a mutually satisfactory settlement would leave serious questions about Texaco’s financial condition, which was not highly regarded even before the damage judgment. Texaco would be a viable company, analysts say, but not a healthy one.
If Texaco turns over a large chunk of the old Getty properties, “they would look like they did before they bought Getty, but with more debt,” said Sanford Margoshes, oil analyst for Shearson Lehman Bros.
To finance the Getty acquisition, Texaco quadrupled its long-term debt in 1984 to more than $10 billion, or 45% of its total net worth. The need to pay off that debt without the Getty assets for which the borrowing was incurred will be a major constraint on the company’s flexibility. Annual interest payments are about $1 billion.
Analysts say the company would be particularly vulnerable to a decline in oil prices. This might be a special consideration for Texaco stockholders now because of the stock’s position as a dividend play. With the stock currently trading around $30, its $3 annual dividend gives holders a generous 10% annual yield.
A drop in oil prices of $5, to $22.50 per barrel, would endanger that dividend, says C.J. Lawrence’s Leuffer. “The only issue to analyze is the safety of Texaco’s dividend,” he said.
