USX Puts Reserves of Texas Oil & Gas Unit On the Block

As part of an ongoing restructuring to lower debt and bolster its stock price, steel and energy giant USX Corp. said Monday that it will sell off the oil and gas reserves of its unprofitable Texas Oil & Gas Corp. subsidiary, which USX bought in 1986 for $3 billion.

The company declined to put a value on the reserves--”we wouldn’t want to limit the imagination of potential buyers,” said USX spokesman Don H. Herring. But analysts estimated their worth at between $1.5 billion and $2 billion.

At the end of 1988, the reserves included 1.2 trillion cubic feet of natural gas and 28 million barrels of oil in six states: Texas, Oklahoma, Arkansas, Louisiana, Colorado and Kansas.

Consistent With Strategy

Proceeds from a sale would provide the company with cash to buy back stock and to help pay down long-term debt, which stood at $5.85 billion at the end of the second quarter, Herring said.

The sale would also be consistent with the company’s recent strategy of selling off assets to streamline operations and guard against possible takeovers.

“The mandate is to bring shareholder value, and one way is to take major assets that are not contributing to the bottom line and convert them into something that will,” said George Gaspar, an oil industry analyst with Robert W. Baird & Co. in Milwaukee.

Former USX Chairman and Chief Executive David M. Roderick drew criticism when he engineered the deal valued at $3 billion to buy Texas Oil in exchange for 133 million newly issued shares of stock. Charles Corry assumed Roderick’s job June 1.

USX based its hopes of profitability on the eventual bursting of the natural gas “bubble,” or oversupply, analysts said.

Now, the company admits that the unit’s performance has disappointed its corporate parent.

Texas Oil reported an operating loss of $31 million in 1988, compared to operating income of $2 million in 1987, Herring said.

“Obviously, the situation in the natural gas marketplace has had a depressing impact on TXO’s profitability,” Herring said.

Stock Undervalued

Texas Oil’s inconsistent profitability has hurt USX’s per-share earnings at a time when USX’s steel operations are rebounding and demand has been strong for refined petroleum products, analysts said.

At the end of the second quarter, USX reported net income of $250 million, up 17% over a year ago. Sales totaled $5 billion, up 16%.

But the company’s stock price remains undervalued, with some analysts saying it is worth as much as $50 to $55 per share.

Following Monday’s announcement, USX stock closed up $1.75 at $34.875 on trading of 2.8 million shares, the second highest volume on the New York Stock Exchange.

USX hopes to strike a deal by the end of the year. Herring would not discuss potential buyers, except to say, “There seems to be a lot of interest now in obtaining oil and gas reserves--particularly gas reserves--so it looks like it’s an improving market at this point.”

Demand for natural gas is also expected to increase in the wake of impending clean air rules.

Analysts mentioned Pennzoil Co. as a logical buyer, especially since it still has about half of its $3-billion settlement from its damage suit against Texaco. A Pennzoil spokesman declined to comment.

Other potential buyers include Exxon Corp., Chevron Corp. and Phillips Petroleum Co., analysts said.