Chevron to Pay $775 Million to Oxy to Settle Old Lawsuit

Chevron Corp. said Thursday that it has agreed to pay Occidental Petroleum Corp. $775 million to settle a 17-year-old lawsuit resulting from a scuttled merger involving two oil companies that no longer exist.

The payout ends a 1982 lawsuit brought by Cities Service Co., now a part of Occidental, against Gulf Oil Corp., now a part of Chevron. The settlement represents a windfall for Occidental but will also boost the fourth-quarter income of Chevron, which had set aside more than it needed to cover its potential liability in the case.

The agreement eliminates a nagging headache for San Francisco-based Chevron and saves the nation’s fifth-largest oil company from a bill that could have reached more than $1 billion with steadily mounting interest.

At the same time, the settlement gives Los Angeles-based Occidental a hefty chunk of cash to help pay down its large debt load.

“We are pleased to conclude this lengthy litigation with an agreement which resolves all issues and gives Occidental the benefit of immediate use of the proceeds,” said Ray R. Irani, chairman and chief executive of Occidental, No. 11 among U.S. oil companies. “This very substantial payment will be of great benefit to our shareholders.”

Chevron had petitioned the U.S. Supreme Court to hear the case after the Oklahoma Supreme Court refused to reconsider its March decision upholding a trial court’s damage award of $742 million in the breach-of-contract action.

Chevron still believes that the case is worthy of review by the high court but decided to settle because “we had to evaluate what was in the long-term interests of our shareholders,” said Chevron spokeswoman Dawn Soper. “We have been dealing with this since 1984, when we acquired Gulf.”

“Chevron did the right thing,” said James L. Van Alen, an oil industry analyst with investment firm Janney Montgomery Scott in Philadelphia. “They were a little bit with their back against the wall.”

For Occidental’s part, Van Alen said, “supposedly they would have won, but what if they didn’t?”

Back in 1982, Cities Service Co. of Tulsa, Okla., was trying to escape a hostile takeover by Mesa Petroleum, the Amarillo, Texas, oil company run by legendary raider T. Boone Pickens Jr.

Cities Service turned to Gulf Oil of Pittsburgh as its “white knight” and bought back its stock from Mesa for $225.5 million. But Gulf pulled out of the merger amid opposition from the Federal Trade Commission. Cities was acquired by Occidental that same year.

Cities sued Gulf to recover what it had paid Mesa, and a trial judge in 1996 awarded Cities that amount in damages plus interest. By mid-1999, with compounding, that original $225.5 million had grown to nearly $1 billion.

Pickens wasn’t finished--he went after Gulf in 1984, but ultimately the company hooked up with Chevron instead.

The settlement will boost Chevron’s fourth-quarter earnings by about $145 million after taxes because the company had reserved nearly $1 billion to pay the judgment in case it lost on appeal. In the fourth quarter of 1998, the reserve reduced net income from $431 million to a loss of $206 million.

Occidental said it will use the settlement to pay down its long-term debt, which totaled $5.3 billion on June 30.

On the New York Stock Exchange, Occidental’s stock rose 25 cents to close at $24 a share Thursday and Chevron fell $1.31 to close at $95.25.