Texaco’s Star Is Suddenly on the Rise
What’s going on with Texaco? Robert Holmes a Court, the Australian financier with the Norman name, has now purchased 9.6% of the big oil company’s 242.2 million shares outstanding and told the U.S. government on Tuesday that he intends to buy more.
Texaco stock has risen to nearly $44 a share from lows of under $30 in April, when it filed for protection from creditors to keep Pennzoil from seizing its assets as security for a $10-billion damage claim it won against Texaco two years ago.
Those are the bare facts. Otherwise all seems confusion. On the one hand, there is talk of Holmes a Court mounting a takeover of Texaco or forcing the $31-billion (revenue) oil giant to settle with Pennzoil--the much smaller, Houston-based company that reportedly spurned a $2-billion settlement offer before Texaco filed for bankruptcy.
Yet there is also talk that Texaco now has no interest in settling and that it intends to stay in bankruptcy for as long as it takes to reduce or rid itself of the obligation to Pennzoil, which grew out of Texaco’s elbowing Pennzoil aside to acquire Getty Oil in 1984.
So what can you say for sure? That chances of a takeover are slim and chances of a settlement are diminishing because momentum in the legal battle has shifted to Texaco.
The momentum-shifting play came two weeks ago when the Securities and Exchange Commission announced that it would ask the Texas Supreme Court to hear a Texaco appeal because Pennzoil may have infringed a federal statute in its own pursuit of Getty.
The SEC’s action made it more likely that Texaco can get the case up to the U.S. Supreme Court and ultimately win either a new trial or a reduction of the damage award.
Price Has Rebounded
The smart money was quick to respond to the SEC’s action. Holmes a Court added 7.7 million shares to his Texaco stake. Other investors chose to make a relatively risk-free dollar by purchasing Texaco capital notes, which are traded and listed in the bond section of the New York Stock Exchange.
The capital notes, which vary in interest and maturity, fell as low $80 for each $100 of face value around the time of Texaco’s bankruptcy filing on April 12. But since the SEC announcement, the notes have come roaring back--a 9% note maturing in November, 1988, for example, rising from $87 to $95.50.
Why are the debt notes of a bankrupt company relatively risk-free? Because Texaco, unlike normal bankrupts, is a highly solvent company, with almost $14 billion of stockholders equity and $2 billion of working capital.
It’s almost certain to have the money to pay the notes at maturity. And it may even resume paying interest on them before long, as lawyers for its bond and note holders intend to ask the bankruptcy trustee to allow Texaco to resume interest payments.
The company, according to bankruptcy lawyers, can pay interest and still remain protected by Chapter 11 bankruptcy while the legal battle with Pennzoil proceeds.
Takeover Unlikely
The bankruptcy, in which any change in asset ownership must go through a judge, also would make a takeover extremely difficult. Add the fact that it would take a prohibitive $20 billion to acquire Texaco, and takeover becomes a real long shot.
Then why is the stock up, and what’s Holmes a Court up to? To take the simpler question first, the stock price is up because Texaco is a very rich company, and a lot of investors think its value will be realized if it can come out from under the Pennzoil cloud.
Analysts such as John Ryan of Rauscher Pierce Refsnes of Dallas calculate a stock price, based on Texaco’s asset values, of $68 to $72 a share. Other analysts such as William Randol of First Boston and Bruce Lazier of Prescott Ball & Turben, acknowledging that Texaco is not going to break up, estimate its value as a going concern at $50 to $55 a share.
So is Holmes a Court in Texaco to make a fast $10 or $20 a share? Not likely. Now that he’s declared officially that he intends to purchase more than 10% ownership, it seems clear that Holmes a Court wants to participate with Texaco down the road, when it can put the Pennzoil matter behind it and come out of bankruptcy.
No. 1 in Size
He may envision ventures in Asia between Texaco and his Australian holdings, which include 30% ownership of Broken Hill Proprietary, a $6-billion (revenue) oil, minerals and steelmaking giant that is Australia’s largest company.
Or perhaps Holmes a Court recognizes that Texaco’s value will grow through whatever restructuring it takes on after bankruptcy. These are times, says Albert Anton, a partner in the brokerage firm Carl H. Pforzheimer, when oil companies have more cash than they can invest easily and so repurchase their own shares. Exxon has done that, so might Texaco.
Talk about a shift in momentum: Investors and analysts these days are contemplating Texaco’s future, where two months ago they questioned whether it had one.
