Chapter 11 Filing Gives Texaco Breathing Room : Removes Specter of Pennzoil Seizing Assets, Makes Trade With Suppliers Easier for Now, Experts Say
If Texaco’s business and financial relationships have deteriorated as badly in the past several weeks as the company says, then it and most of its suppliers will probably be better off operating under the protection of the federal bankruptcy code, at least in the short term.
But if the bankruptcy drags on, the company may pay a price for having to operate under court-imposed constrictions.
Bankruptcy experts say that, given Texaco’s generally good financial condition, it will be easier to do business with the company now than it was with the growing specter of Pennzoil moving in to seize billions of dollars worth of Texaco assets.
Unlike routine bankruptcy candidates, Texaco’s business is generally healthy. Like such recent major cases as those filed by building products maker Manville Corp. and oil supply giant Smith International of Newport Beach, Texaco can pay its bills as long as Pennzoil leaves it alone.
But the company said Sunday that since an April 6 U.S. Supreme Court decision revived the prospect that Pennzoil might begin to attach liens on Texaco assets, major suppliers had begun refusing to deal with the company or were demanding cash in advance. Some banks refused to grant credit or canceled existing financing.
“Our ability to finance and operate our business in a viable manner had virtually ceased,” Chief Executive James W. Kinnear said in announcing the bankruptcy filing.
Kinnear didn’t elaborate, but Texaco said in other court papers filed last week that Manufacturers Hanover Trust and Bank of America had quit lending to Texaco on an unsecured basis, while Chase Manhattan Bank was requiring Texaco to maintain minimum balances in its accounts.
Such suppliers as Southern California Gas, which sells Texaco up to 100 million cubic feet of gas a day for use in its big Kern County, Calif., oil fields, have recently “worked out credit arrangements to minimize our exposure” to Texaco, said vice president Michael Neiggemann.
Neiggemann wouldn’t comment on how the bankruptcy filing might affect its dealings with Texaco. But George Friesen, analyst with Dean Witter Reynolds, said that “companies that have done business with Texaco will probably continue to do business with them.”
The Chapter 11 filing temporarily removes a cloud from Texaco’s day-to-day operations, bankruptcy attorney Martin J. Aronstein of Philadelphia said.
“If you were going to sell something to Texaco tomorrow, you’d get paid for it,” said Aronstein, professor emeritus at the University of Pennsylvania Law School. “You wouldn’t have to worry that someone (Pennzoil) was going to walk in tomorrow and seize their bank account.”
By the same token, he commented, the bankruptcy filing suggests that Pennzoil “may have been too hard-nosed” in the negotiations for an out-of-court settlement and that Pennzoil’s position has been weakened through the loss of its power to seize assets.
“But it’s not without cost to Texaco. This is a major disruption in its normal operations. They won’t have flexibility to operate as they might want. They will be operating under the umbrella, or the shadow, of the courts, depending on how you view it.”
Ultimately, Sunday’s filing under Chapter 11 of the code only buys time while Texaco awaits the outcome of the appeal of the $11-billion damage award Pennzoil won against it in 1985.
The Chapter 11 filing could be part of the continuing “high-stakes game of chicken,” Dean Witter analyst Friesen said. “It isn’t to Pennzoil’s advantage. That’s why you can’t rule out the possibility of a last-minute settlement.”
Without a settlement in the meantime, the first penalty for Texaco could come today on the New York Stock Exchange, where analysts are braced for a sharp drop in the price of Texaco stock, possibly to below $20 a share.
The chief reason, says Friesen, is that bankrupt companies are normally required by the courts to quit paying a dividend. The cancellation of Texaco’s $3-per-share annual dividend “takes away support for the stock,” Friesen said Sunday. “There will probably be a precipitous fall tomorrow.”
Texaco’s stock price has been skewed by the Pennzoil uncertainty for more than a year. Friday’s closing price of 31 7/8 assumed a $5-billion after-tax out-of-court settlement, Salomon Bros. analyst Paul D. Mlotok calculated. But without any Pennzoil litigation, he figures, the price would be $54.
