Pennzoil Seen Losing Leverage Over Texaco : Bankruptcy Move Dims Prospects of Big Settlement

Pennzoil was sometimes viewed as an also-ran in the big leagues of the oil industry until an $11-billion jury verdict against Texaco in 1985 promised to propel it to new heights.

But Texaco’s dramatic bankruptcy filing on Sunday has effectively taken away Pennzoil’s main leverage in the dispute--the authority to seize billions of dollars worth of Texaco assets while their courtroom battle makes its way through the long appeal process, some observers said Monday.

“The attempt by Pennzoil was to hold Texaco’s feet to the fire,” said Rosario Ilaqua, an oil analyst at L. F. Rothschild, Unterberg, Towbin in New York. “Now that strategy won’t work. It seems to me Pennzoil’s bargaining position has deteriorated.”

The stock market apparently agreed with that analysis. The price fetched by a share of Pennzoil stock sank by $15.25, or 17%, to $77, on heavy trading. Texaco’s stock fell by just $3.375, or 11%, and closed at $28.50--a far milder reaction than Wall Street observers had predicted.

Pennzoil said the market “overreacted,” and its lawyers immediately pledged that they would challenge the “sleazy” bankruptcy petition on grounds that it is a misuse of the bankruptcy laws. But a top company bargainer said that decision hasn’t been made and sought to downplay the strategic importance of Texaco’s move.

“They seem to be telling people in New York about this great coup, but I don’t see how they’ve improved their position,” insisted Baine P. Kerr, a director and former Pennzoil president who is the company’s chief negotiator.

In effect, analysts said, the stock market was writing down Pennzoil’s prospects for a multibillion-dollar settlement of its bitter, drawn-out battle with Texaco that has its roots in the two companies’ wooing of Los Angeles-based Getty Oil and its vast California oil reserves in 1984.

A jury awarded Pennzoil the billion-dollar damages after concluding that Texaco had wrongly interfered with Pennzoil’s plan to acquire part of Getty Oil and ended up acquiring Getty itself. That Texas verdict and subsequent court opinions raised the prospect that Pennzoil could seize billions of dollars worth of Texaco assets while the case was appealed.

The bankruptcy filing precludes that possibility, as a Texas appeals court affirmed Monday by canceling a scheduled hearing on whether Texaco must post a nearly $12-billion bond to pursue its appeal. The court said Texaco was now protected from such a requirement by the bankruptcy court.

Analysts convened by Texaco on Monday in New York said they were told that, moreover, the size of the damage award itself--even if upheld on appeal--could shrink because the bankruptcy courts differ from Texas state law in determining the size of claims pending against bankrupt companies.

If true, “the award is less today than it was yesterday,” said analyst Andrew Gray III of Pershing & Co. in New York. “The circumstances certainly have changed. Yesterday, Pennzoil had the ability to put a lien on Texaco’s assets. Today they don’t.” Gray said that because of Pennzoil’s abrupt loss of leverage in negotiations toward an out-of-court settlement, the company’s stock could fall further.

“We said it was overpriced by 25 or 30 points because of the damage award,” Gray said. “It’s a $62 to $67 stock on its own.”

Those hoping for an out-of-court settlement of the case saw reason to believe the bankruptcy filing, rather than prolonging the dispute, might hasten an agreement by seeming to take away a Pennzoil advantage. The two sides are said to be anywhere from $1 billion to $3 billion apart on any settlement.

“My guess is the gap is smaller now,” Ilaqua said. “I don’t know if it’s going to be closed.”

But Pennzoil’s Kerr said a settlement might be more difficult to reach now because of the bankruptcy court’s involvement. In any case, he said: “There’s no feeling in the market of a fundamental shift in the leverage that one company’s got over the other.”

If that is wishful thinking, Kerr has a believer in oil analyst Don Bustos of Duff & Phelps in Chicago. He said nothing important has been changed by the bankruptcy case, and described the Pennzoil stock decline as “panic selling” that would be corrected.

“Texaco’s total assets are still more than adequate to cover all its obligations, and if this thing runs its course, Pennzoil can still realize a full settlement,” Bustos said. “They can challenge the bankruptcy filing--that’s the first order of business--and they can continue settlement negotiations. This doesn’t place any additional pressure on Pennzoil at all.”

Times staff writer Michael A. Hiltzik in New York contributed to this story.