Settlement allows Texaco and Pennzoil to get back to business. But Texaco is still under intense shareholder scrutiny

The end is in sight. By agreeing to pay $3 billion to Pennzoil Company, Texaco Inc. hopes it can put almost four years of battling and litigation behind it and get on with restructuring. And Pennzoil will have the opportunity to find ways to spend that $3 billion, its recompense for being Getty Oil Company's jilted suitor. Yesterday the two companies filed settlement papers in bankruptcy court in White Plains, N.Y. This clears the way for Pennzoil to drop its $10.3 billion judgment against Texaco if Texaco pays $3 billion in cash and another $2.5 billion to square up creditor debts. The two companies reached this arrangement Saturday.

``It was like a shotgun marriage,'' says Ronald Londe, an oil analyst with A.G. Edwards & Sons Inc. in St. Louis.

``Texaco was dragged into the settlement kicking and screaming, because there was a lot of shareholder pressure, even to change management,'' Mr. Londe said.

The settlement is good for both companies, says John Sawhill, head of the energy group at McKinsey & Co., Washington, D.C. ``This arrangement gets two companies that have been fighting in the courtroom back into the oil fields,'' he observes.

The deal may be better for Pennzoil, however. ``Pennzoil walked away with $3 billion, so they won,'' observes Rosario Ilacqua, oil analyst for Nikko Securities, New York.

``But the question is: Is it worth $3 billion? In reality, Pennzoil should have paid Texaco, because Pennzoil was saved from a bad deal,'' based on Getty's original purchase price, he says.

The Houston-based Pennzoil originally won the $10.3 billion award in 1985 when a jury agreed that Texaco had interfered with Pennzoil's contract to purchase Getty and ended up acquiring Getty itself. Last April, in an attempt to avoid posting a bond equal to the $10.3 billion judgment, Texaco fled to federal bankruptcy laws for protection from creditors while appealing the decision.

The acquisition of Getty may have been worth Texaco's struggle, however, Londe says. ``Getty greatly helps skew Texaco's oil production more to the United States. Even though it's high-cost production, it's a low-risk, long-life type of oil,'' he notes.

The settlement will lead to corporate restructuring, certainly for Texaco and perhaps for Pennzoil. Texaco, the country's third-largest oil company, has said it will restructure once its reorganization under the bankruptcy laws is finished. Pennzoil may restructure as it spends some of its award.

``Texaco has spent three years in court, while most of the rest of the industry has already restructured,'' says Frank Knuettel, an oil analyst with Prudential-Bache Securities, New York.

In the case of Pennzoil, Londe says, management is following a tax strategy that leads toward breaking the company up into three or four pieces and paying down debt, which has been as high as 60 percent of total capitalization. ``They may also distribute some cash to shareholders and acquire oil and gas properties,'' he says.

The bankruptcy court and Texaco's shareholders need to approve this arrangement before Texaco can get out from under bankruptcy, planned for this spring. Texaco, based in White Plains, will pay the settlement by selling assets.

Mr. Ilacqua says he thinks Texaco might sell off oil fields that have already peaked and use the cash to invest in more attractive areas. Or it might sell some refining and marketing activities in Europe.

``There's no doubt the Saudis and the Kuwaitis and foreign companies would be interested,'' he says. ``Texaco is a low profit earner, one of the lowest in the industry, and should restructure somehow to enhance its earnings potential.''

Two of Texaco's biggest plums - and therefore likely candidates for sales - are its 78 percent stake in Texaco Canada Inc., which could be worth $2 billion, and its 50 percent stake in Caltex Petroleum Corporation, also worth about $2 billion. But Mr. Knuettel does not think Texaco will sell these. ``They are easy to segregate because they're big, but they are two of the best assets.''

Texaco's management also is not free and clear of shareholder scrutiny. Yesterday, corporate raider Carl Icahn, Texaco's largest stockholder, raised his ownership stake to 30 million shares after he bought 12 million shares from financier Robert Holmes `a Court. Mr. Icahn controls 12.3 percent of Texaco stock. His purchases must be approved under antitrust laws.

Icahn played a role last week in the settlement proceedings. He worked with two committees representing Texaco shareholders and creditors to settle with Pennzoil to get Texaco out of bankruptcy.

Ilacqua says Icahn's 30 million-share block may be a force to be reckoned with, particularly now that Texaco stock is trading in the $40 to $45 a share range, while the company is probably worth $65 a share after the settlement.

``If Icahn wanted to dispose of his shares, would he just sell them back? They would be difficult to dispose of,'' Ilacqua says. ``I'd rather Icahn be aligned with the other shareholders to the benefit of the company rather than just cash in.''

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