Pennzoil Won’t Drive Texaco to the Poorhouse

The final stage in J. Hugh Liedtke’s battle with Texaco begins in a Houston courtroom on Monday--unless there is an out-of-court agreement or other dramatic action before then--when the Texas Court of Appeals hears arguments over how much of a bond Texaco must post against the now-celebrated $10.3-billion damage award won by Liedtke’s Pennzoil a year and a half ago.

The amount of the bond may indicate the size of the eventual settlement for Pennzoil, and Texaco is taking the matter very seriously--even threatening to put itself into bankruptcy if the bond is set too high or if it fails to get a pledge from Pennzoil that its assets won’t be seized.

A lot of such talk is tactical, however, and in the unlikely event that Texaco had to post even a $10-billion bond, it wouldn’t have to file bankruptcy.

In fact, the irony is that Liedtke would make out best if whatever settlement he gets were paid in Texaco stock. Shares in the giant oil company, which had more than $30 billion in revenue last year, are likely to rise sharply after the Pennzoil settlement--if Texaco management doesn’t blow things.

But we get ahead of the story. Liedtke, 65, is the chairman of Pennzoil, the diversified oil and gas outfit he put together over the last 34 years by adding one company to another, starting in a partnership called Zapata Petroleum with now-U.S. Vice President George Bush.

Demonstrated Principle

Pennzoil’s revenue now approaches $2 billion and would have been higher if Texaco hadn’t shoved Liedtke aside for the acquisition of Getty Oil in 1984.

Liedtke, an Amherst and Harvard-educated lawyer’s son who has a law degree himself from the University of Texas, sued to regain what he saw as value wrongly denied his company. He has won his point at almost every turn in the long legal battle, including in the U.S. Supreme Court last Monday, and demonstrated the vital principle that the American system supports the individual entrepreneur even to the discomfort of the giant corporation.

But principle is cold comfort for Liedtke if he doesn’t get some money from his legal victory. The stock market is saying he will, pricing Pennzoil at a level--more than $85 a share--that anticipates Pennzoil’s getting $3 billion or so from Texaco.

Pennzoil could use it. Earnings have declined since 1984 as Pennzoil has suffered, along with almost every other oil company, from falling energy prices and an inability to find new reserves of oil and gas at anything close to an economic cost.

Liedtke saw that difficulty coming, which is why he was so delighted in 1984 when he thought he had acquired more than 1 billion barrels of Getty’s 2.8 billion barrels of California oil. The partial acquisition, for $3.6 billion, would have made Pennzoil secure with immense oil reserves and possibly could have led to a friendly merger of Pennzoil and Getty.

Opportunity Vanished

But when Texaco took the deal away from him--by acquiring all of Getty for $10 billion--such opportunity vanished. Business people everywhere have blanched, and Texaco has fumed, at the size of the judgment Pennzoil won.

But Liedtke, a tough, shrewd bargainer, has said all along that nothing could compensate Pennzoil for what might have been. And he has said recently that he would not even accept a settlement of $2 billion.

So what will happen? The likeliest event is that Pennzoil will get a tax-free settlement in stock or properties worth roughly $3 billion from Texaco, the payment being made in such a way that each side can save face by putting its own estimate on the value.

Wow, you say, can Texaco afford to pay out $3 billion?

You bet it can. Texaco’s management talks of bankruptcy, but if the company truly were put into Chapter 11, its stockholders would be cheated and its creditors would get a windfall of some of the most valuable oil properties in the world. The asset-evaluating firm of John S. Herold & Co. estimates Texaco’s value at $71 a share, or $17 billion in total--and it’s clearly more than that. The Getty oil reserves alone, based on recent prices for U.S.-based reserves, are now worth $17 billion. Texaco, you’ll recall, bought them for $10 billion.

Securities analysts, such as Alan Edgar of Prudential-Bache Capital Funding, figure Texaco would be worth about $65 a share even after subtracting for the effect of a $3-billion Pennzoil settlement.

Many other analysts believe that after Texaco settles with Pennzoil it will attract a takeover offer, if it doesn’t bring value to its stock price by restructuring itself first.

Push Needed

But Texaco’s management, not widely noted for its acumen, probably will need to be pushed. The only time in recent years that Texaco stock traded significantly above its current level of about $32 was in 1984, when the Bass brothers of Texas threatened a takeover. Management at that time paid $50 a share “greenmail” to buy out the Basses, and the stock dropped back.

Since then, management has occupied itself mostly with criticizing Liedtke and the Texas court system. And there’s not much profit for anybody in that.