Value of Texaco, Pennzoil Stocks Falls $1.5 Billion
The stocks of Texaco and Pennzoil lost a combined $1.5 billion in market value Monday as investors contemplated Texaco’s record bankruptcy filing and its devastating effect on Pennzoil’s prospects of collecting an $11-billion court judgment from the company.
“Texaco suffered a self-inflicted wound,” said Baine P. Kerr, the former Pennzoil president who has been his company’s chief negotiator in the rancorous legal dispute between the two oil companies over Texaco’s 1984 takeover of Los Angeles-based Getty Oil Co.
Reaction by Investors
But Kerr acknowledged that Pennzoil’s stock had suffered because investors were now ruling out the possibility of an early settlement of the fight.
The dual plunge in Texaco and Pennzoil shares occurred as the stock market suffered a broad loss. The Dow Jones average of 30 industrial stocks, which includes Texaco, suffered its fourth worst one-day drop ever, falling 51.71 points to close at 2,287.07, largely because of continuing fears of inflation and weakness in the bond markets.
Highlighting the market’s loss, however, was the action in the two oil stocks. Texaco, which under Chapter 11 faces considerable operational uncertainty and will be unable to pay its dividend of $3 a share, closed at $28.375, a loss of $3.50, or 11%. The drop pared $847 million from the stock market value of Texaco, which, with turnover of 12.6 million shares, was the most heavily traded issue on the New York Stock Exchange.
Pennzoil fell $15.25 to close at $77, a fall of 17% and a loss of $670 million in market value. The drop reflects investors’ perceptions that Pennzoil is perhaps the principal victim of Texaco’s maneuver, because under the bankruptcy code it is relegated to the position of an unsecured creditor.
Kerr said he knew of no settlement overtures to Pennzoil from Texaco executives since the voluntary bankruptcy filing Sunday. “It’s still possible to settle the case, and we would certainly consider an offer,” he said. Pennzoil’s position, he added, is that its own offer on Saturday to settle for more than $4 billion is the last one on the table. “It’s up to them (Texaco) if they want to come back,” he said.
Texaco executives have said they would not consider an offer higher than $2 billion.
Challenge Uncertain
Kerr said also that Pennzoil may not challenge Texaco’s filing as an improper use of the bankruptcy code if it cannot show that Texaco took the step in bad faith.
“I don’t think it’s proper, but I don’t know that we’ll contest it,” he said. “There’s no point in doing something if you don’t have a reasonable chance of success, and apparently companies have been getting away with this sort of thing.”
Texaco, the nation’s third-largest oil company and the biggest corporation ever to file for protection from creditors under Chapter 11 of the bankruptcy code, refused to comment on settlement talks.
Meanwhile, Texaco strove Monday to assure its 51,000 employees as well as investors on Wall Street that it considers its bankruptcy filing a temporary maneuver designed to keep Pennzoil from seizing its assets in their legal dispute.
Will Pay All Benefits
In a letter to all workers and a series of sessions at corporate headquarters in White Plains, N.Y., chief executive James W. Kinnear said the company would pay all accrued salary and benefits to workers as soon as permitted by the bankruptcy court and that the Chapter 11 filing would have no effect on promotions and raises.
Texaco executives told Wall Street analysts in New York that, temporarily relieved of the burden of paying dividends and debt interest but still generating $4 billion in cash flow annually, the company will experience a huge cash buildup during bankruptcy that may enable it to emerge with a great deal of financial strength.
In Houston, the Texas Court of Appeals recessed what, until Sunday, had been expected to be a key hearing on Texaco’s attempt to overturn state rules requiring it to post an $11-billion bond to protect its assets from Pennzoil liens during the appeal of Pennzoil’s jury award. Under bankruptcy rules, such proceedings are automatically suspended, although lawyers expect the bankruptcy court to eventually allow Texaco’s appeals in Texas state courts to proceed.
Pennzoil stock, which had been trading at exceptionally high prices on expectation of a multibillion-dollar settlement in the Texaco dispute, was the eighth most active stock, with 1.5 million shares changing hands.
Many institutional investors, who have been the predominant stockholders in both companies for the last two years, seemed Monday to accept Texaco’s position that it had no alternative to filing Sunday’s request for protection from creditors under Chapter 11. Texaco contends that its financial health was disintegrating as negotiations stalemated.
Holding On to Stock
Institutional managers with large investments in Texaco stock said that they intended to keep their stock for the time being in the hope that the bankruptcy filing will enable the companies to return to negotiations and reach a quick settlement.
But several oil industry analysts said they expect big investors to begin selling off their holdings if the bankruptcy process drags on. The suspension of dividends is a major disincentive to holding the stock, which had been carrying a generous dividend yield of 9% before the filing. Furthermore, many institutional stock funds are not permitted to hold shares of companies operating under Chapter 11 or those not paying a dividend.
“We’ll start looking to see what we think the likely outcome (of the filing) will be,” said Greta Marshall, chief investment officer of the California Public Employees Retirement System and Teachers Retirement System, two of the largest pension investment funds in the country. The funds own nearly 1.3 million shares of Texaco and 305,000 shares of Pennzoil.
She said the dividend cut in itself will not provoke the California funds to sell off Texaco shares because, “with our positive cash inflow, we don’t depend on the dividend to meet our daily or current expenses.”
Positive Outlook
Some institutional money managers were even turning positive on Texaco stock. “I’m a little surprised the stock hasn’t behaved worse,” said David Dreman, head of Dreman Asset Management and the holder of about 2.3 million Texaco shares.
Dreman argued that, as a largely solvent company--with the exception of Pennzoil’s court judgment against it--Texaco’s cash flow and assets are more than adequate to cover its obligations to shareholders and debt holders, once it emerges from bankruptcy. Dreman said he was hoping to buy some Texaco bonds, which slid sharply in price in New York and Europe when they were declared in default as a result of the bankruptcy filing.
Texaco’s largest issue of Eurobonds, $500-million worth carrying interest of 11.75%, slid in price from $95 per $100 face value to $63 in overnight trading in London, but later recovered to $82.
Texaco’s bankruptcy filing has its roots in the $10.5-billion jury award Pennzoil won in 1985 in a Texas court on its contention that Texaco had improperly interfered with its 1984 acquisition of Getty Oil. Texaco outbid Pennzoil at the eleventh hour.
Since then, Texaco has been struggling to extricate itself from a Texas rule requiring that, to prevent Pennzoil from seizing its assets during the appeals process, it must post a bond equal to the amount of the judgment. The final crisis arose last week after the U.S. Supreme Court dissolved a federal judge’s order cutting the required bond to $1 billion.
Lists Assets, Liabilities
In its bankruptcy filing covering Texaco, the parent holding company, but not the operating companies that generate 96% of Texaco’s annual revenues, the company cited total assets of $18.3 billion and liabilities, including Pennzoil’s nearly $11-billion judgment, of $15.1 billion. The figures are as of Dec. 31. Two finance subsidiaries also covered by the filing cited assets totaling $7.2 billion and liabilities totaling $6.5 billion.
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