Texaco buys time in filing for bankruptcy protection

Texaco, the eighth largest company in the United States and the biggest to file for bankruptcy, has made a drastic move that could buy it precious time. Few people expected Texaco to choose bankruptcy as a result of the whopping judgment a Texas court said it owed to archrival Pennzoil.

Pennzoil, which won a $10.53 billion case in 1985 charging Texaco had wrongly snatched Getty Oil from its clutches, now must join the ranks of Texaco's many unsecured creditors. Large and small, creditors must wait in line for the giant refiner to make whatever payments it can negotiate.

Under bankruptcy law, Texaco has several months to develop a plan to pay debts. The portions of Texaco protected by Chapter 11 account for only 4 percent of the company's revenue. Thus Texaco has room to maneuver.

But Texaco's bold move is clearly not without risk. History generally has not shown that companies come out ahead by seeking bankruptcy protection. Still, Texaco decided Sunday that federal bankruptcy court was less risky than pursuing appeals through the Texas court system.

``This could be the quickest bankruptcy of all time,'' says Edward Altman, a bankruptcy expert at the New York University graduate school of business. ``It's a pretty sound business strategy... I don't think they'll be hurt as much as people think.''

In Chapter 11, a company asks a court to grant protection while it reorganizes assets and operations to pay off debts. Although a common procedure when a company is financially strapped, the Chapter 11 filing is precedent-setting for a company as healthy as Texaco - with $34 billion in assets. Still, the adverse court rulings were eating into Texaco's financial stability.

The major risk of bankruptcy for Texaco, in Professor Altman's view, is that sales and profits might decline because of uncertainty. Altman believes the company must reach some settlement with Pennzoil before it can emerge from bankruptcy.

Texaco was worried about the growing threat of a cutoff of crude oil by anxious suppliers - and credit by jittery banks - that might stifle operations. Suppliers like Sonatrach, the national petroleum company of Algeria, suspended crude oil deliveries recently. Other US companies, including Citgo and Occidental Petroleum, vowed to cut off supplies unless they were paid in advance.

But now, analysts say, the situation may change radically because Texaco is operating under federal bankruptcy laws. Banks and oil suppliers could soon resume business with Texaco, knowing a federal judge will see that they are paid.

``These companies [that deal with Texaco] are almost guaranteed payment, because they're operating what is basically a cash business,'' says Rosario Illacqua, oil analyst with L.F. Rothschild, Unterberg, Towbin, in New York.

Texaco also appears to be better off now because bankruptcy means it does not have to pay interest on debts, or dividends to shareholders. This relief gives Texaco about $1.6 billion in cash. In recent months, Texaco has built up a war chest of nearly $3 billion, Mr. Illacqua says, that will help fund operations.

It seems likely that at least some of the pressure weighing on Texaco has been transferred to Pennzoil, which may have overplayed its hand. Texaco stock dropped $3 a share in early hours of trading Monday; Pennzoil's dropped nearly $12.

Though the Texaco bankruptcy involves debts potentially three times as large as the next largest bankruptcy filing (LTV Corporation), the difference with Texaco is that it is still a very viable company. Why did Texaco take the plunge?

Since the beginning of the three-year battle between Texaco and Pennzoil, the contest has been described as a feud, high-stakes poker, and a deadly game of ``chicken.'' In many ways it was all of these.

Pennzoil chairman J. Hugh Liedtke challenged former-Texaco chairman John McKinley to a duel in court, and his company won a $10.53 billion judgment in front of a Texas state court jury. A Texas jury found that Texaco had interferred with a valid agreement by Pennzoil to purchase Getty Oil. Ever since then, Texaco has been wagering in the courts and losing.

``We were, quite simply, forced to make a Chapter 11 filing because Pennzoil has rejected any reasonable basis for settling the absurd $11.1 billion Texas judgment,'' James W. Kinnear, Texaco's chief executive officer, told a New York news conference Sunday.

While most analysts agree the original award was ``outrageously high,'' few remember that Texaco chose not to rebut in court the damage amount Pennzoil claimed.

``The jury didn't have an alternative,'' says George D. Reycraft, a senior partner with Cadwalader, Wickersham & Taft, a New York law firm. ``The only evidence the jury had on damages was what Pennzoil put in.''

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