Texaco Shareholders Face Many Questions Following Settlement
When the proposed settlement of the bitter, multibillion-dollar Texaco-Pennzoil battle is submitted to a bankruptcy judge today, a big, dark cloud that has been hovering over Texaco for two years will begin to break up. But the skies haven’t exactly cleared.
The 85-year-old company wasn’t in such great shape to begin with, and now Texaco faces uncertainty on several levels. It isn’t yet known what Texaco will sell to raise the $3 billion it must pay Pennzoil, the future role of leading shareholder Carl C. Icahn is a mystery, and the very structure of the company is about to undergo fundamental, but unspecified, change.
Perhaps just as important, some say, is whether Texaco can shake off a deeply ingrained autocratic, inward-looking corporate culture that its critics claim was responsible for the very predicament that drove the company into the biggest corporate bankruptcy in U.S. history.
But at least the decks are being cleared for an attempt. Until now, the management team led by Chairman James W. Kinnear that was installed last January has spent almost as much time in Texas courtrooms as at company headquarters in White Plains, N.Y.
“There have been no major changes during this litigation. Kinnear never had an opportunity,” said longtime Texaco follower Rosario Ilacqua, analyst at Nikko Securities in New York. “I would suspect there will be a lot of change.”
Kinnear promised as much Saturday when he hinted at past frustrations and reportedly said, “I’ve had ideas about how to restructure this company for the last 10 years, and now I’ll be able to do that.” He said investment banker Morgan, Stanley has been hired to perform an “aggressive” review of every asset, and vowed that the uncompetitive ones will be discarded.
Kinnear and President Alfred DeCrane replaced the retiring John K. McKinley, whose effort to rebuild Texaco’s dwindling oil reserves led to the bold but ill-fated purchase of Getty Oil Co. in 1984. A Texas court later held that Getty had a binding deal to be bought by Pennzoil. Texaco was ordered to pay Pennzoil $10.3 billion, and hid behind the bankruptcy laws while it appealed.
$4 Billion on Hand
The out-of-court agreement reached late Friday calls for Texaco to pay Pennzoil $3 billion by April 14 and its creditors 100 cents on the dollar by April 24. Its appeal of the original verdict to the U.S. Supreme Court goes forward. Texaco could emerge from bankruptcy by March 30 if its settlement and reorganization plan get court approval, though a favorable ruling from the high court--due by the same date--could make the issue moot.
Though Texaco has more than $4 billion in cash, it is expected to sell off assets for most of the cash to pay Pennzoil. Speculation has centered on its 78%-owned Canadian subsidiary and its half-ownership of Caltex, an oil refining and marketing venture with Chevron in the Middle and Far East.
Each is appraised by research firm John S. Herold Inc. of Greenwich, Conn., in the neighborhood of the $3 billion needed to pay Pennzoil, and there are potential buyers. Husky Oil wants to buy Texaco Canada, and Chevron--which has right of first refusal--says it would be interested in becoming sole owner of Caltex.
On the other hand, they are “two of the finest assets Texaco owns,” says Ilacqua. He would rather see the company sell some of its oil and gas producing properties where output is in decline--perhaps even some of the Kern County, Calif., holdings that were the centerpiece of the Getty Oil transaction that caused all the trouble.
In its impact on the total company, John S. Herold says an asset sale of $3 billion compares with total assets, after debt, of about $18.3 billion. On a per-share basis, it would reduce the appraised value to about $62 per share from $72. Most oil company shares trade for about two-thirds of their appraised value, which means Texaco shares should sell for $40 after a settlement, said Thomas Tracey, analyst at John S. Herold. Texaco common shares spurted $2.50 Friday and closed at $38.50 a share.
If Texaco chooses to sell declining oil reserves, it has more than its share to choose from. Texaco’s poor performance in exploration was the impetus for its run at Getty. The company placed dead last in a Salomon Bros. ranking of 30 major companies by replacing only 13% of the oil and gas it produced from 1979 through 1986.
Lately, however, Texaco has shown signs of improvement. Although its overall spending on exploration has been modest in the past two years and it hasn’t found enough oil and gas to replace what it sold, Tracey said the company has done better with what money it has spent.
“They’ve sort of turned it around. In the last three years, their finding costs have been comparable to the rest of the industry,” said Tracey. But since 1984, when the Getty purchase boosted Texaco’s oil reserves to 3.2 billion barrels, they have dwindled to 1.9 billion barrels.
Handcuffed by the lawsuit and last April’s bankruptcy filing, Texaco has been unable to restructure along with the rest of the oil industry in the wake of the 1986 collapse in oil prices. As a result, analysts said, Texaco didn’t benefit as much as other firms from the 1987 oil-price recovery.
Icahn Role a Mystery
Though the oil-price volatility makes it difficult to predict, analysts see Texaco’s earnings climbing about 8% to $3.25 per share this year and spurting to about $5 a share next year. But such figures mask the bankruptcy-forced suspension of dividend payments and the general climate of crisis that has prevailed for so long.
Ilacqua says one of the biggest immediate questions is whether Icahn, Texaco’s largest stockholder with 30 million shares, seeks to continue to play a major role or whether he will sell the shares he acquired earlier this year. As a group, he said, the shareholders are restless.
“A $3 billion settlement can be handled without too much disruption,” said Ilacqua. “But you’ve got a new breed of shareholder at Texaco. There are not too many happy shareholders. Texaco’s performance over a long period of time has not been that good. They’re not in a class with the Chevrons. There’s going to be pressure on management.”
