Texaco to Take Charges of $4.9 Billion Against Profit in Fourth Quarter
Texaco, recording a staggering fallout from its legal battle with Pennzoil, said Friday that it will take charges totaling $4.9 billion against profit in the fourth quarter.
The charges include a $2.1-billion provision for writedowns and reserves and a $2.8-billion charge to reflect its recent out-of-court settlement with Pennzoil. The charges are expected to set the stage for Texaco’s emergence from the largest corporate bankruptcy case in U.S. history.
The oil giant also announced plans to sell at least $3 billion worth of assets to pay back the money it will borrow to pay off Pennzoil. It said the assets to be sold include part-interests in refineries and about 60 million barrels of oil in the ground.
Texaco’s fourth-quarter charge dwarfs the $3.7 billion taken by American Telephone & Telegraph in the final quarter of 1986 as part of a retrenchment.
“Big number, huh? Even for Texaco,” said Rosario Ilacqua, an analyst for Nikko Securities in New York.
However, it was no surprise that Texaco faced a big financial hit in the wake of the Pennzoil settlement. Ilacqua said the writedown was “in line with expectations. It’s a bookkeeping thing and it doesn’t disturb me.”
Other analysts said the oil giant will have to go even further to regain credibility in the investment community. Texaco indicated that additional unspecified actions will indeed be taken.
“This company needs to announce a more ambitious restructuring plan than that,” said Arthur L. Smith, president of John S. Herold Inc., a Greenwich, Conn., oil research and consulting firm.
The battle with Pennzoil began in 1984, withTexaco’s successful takeover of Los Angeles-based Getty Oil. A Texas jury found that Pennzoil had already reached a binding agreement to acquire Getty and ordered Texaco to pay $10.3 billion in damages. Texaco sought bankruptcy protection while pursuing its appeals before the two sides reached their $3-billion out-of-court settlement last month.
A Texaco spokeswoman said about $200 million of the $3 billion that Texaco agreed to pay Pennzoil is considered interest and is tax-deductible, thus reducing the amount being charged off to $2.8 billion.
$3-Billion Target
The $2.1 billion in writedowns reflects a lowering of the valuation of some assets that Texaco hopes to sell, plus a reserve to cover an expected increase in income taxes and the pending settlement of disputed government claims dating to the oil price controls of the 1970s, the company said.
In part, Texaco said it was making up for lost time with its restructuring plans. Analysts have said its long-running court feud with Pennzoil limited the company’s flexibility to cut costs and downgrade valuations of its properties since the 1985-86 collapse of oil prices. Virtually all other oil companies retrenched drastically during that period.
“The consequences of the Pennzoil litigation cost us valuable time in making the adjustments needed to keep pace with a rapidly changing energy industry,” said James W. Kinnear, Texaco president and chief executive. “We intend to make up that lost time quickly once our reorganization plan is confirmed.”
He was referring to the required approval of a reorganization plan by the U.S. Bankruptcy Court, creditors and shareholders. Those shareholders include financier Carl C. Icahn, who is challenging Texaco’s proposed reorganization with one of his own. He had no immediate comment on Texaco’s news Friday.
Kinnear said Texaco has set a target of raising “at least” $3 billion from the sale of assets, much of it through the sale of partial interests in refineries and related assets to joint-venture partners. Among the interested parties are thought to be the national oil companies of Venezuela and Saudi Arabia, both known to be looking for refinery outlets in the United States and Europe so they can refine and market their own crude oil.
Kinnear said “preliminary discussions have begun with several prospective partners.”
Last year was a bad one for refineries because of a resurgence in the price of their chief raw material, crude oil, and analysts said 1988 isn’t likely to bring top prices for refineries. Ilacqua said he was skeptical that Texaco could get $3 billion through the steps mentioned Friday.
Meanwhile, analyst Smith estimated that Texaco could realize $500 million from the sale of 60 million barrels of U.S. oil and gas reserves, which the oil company did not identify but which analysts said were probably scattered and marginally profitable.
Smith was critical of the restructuring as too little and too late, disputing Texaco’s contention that it was prevented by the bankruptcy courts from undergoing the same retrenchments as other energy firms implemented last year.
“They’ve really given us a skimpy amount of information. I’d like to know what things they’re writing down and why, and why they didn’t do it sooner,” he said. “They’re not ‘fessing up to all their problems . . . and it’s awfully late.”
But Kinnear said the steps “among a planned series of restructuring proposals being considered by the company,” implying that further actions are in the works.
Proceeds from the asset sales will retire debt and “thereby permit the company to achieve a debt-equity ratio that the company has been advised will support investment grade financial ratings,” Kinnear said.
