A battle over oil was at the center of the legal war between Texaco Inc. and Pennzoil Co., whose $10.53 billion judgment against Texaco was upheld by a trial judge Tuesday.
And oil -- not cash -- may provide the means of settling the dispute, if a settlement is possible, investment bankers and market analysts said this week.
As Texaco prepares to appeal the ruling by Judge Solomon Casseb Jr., it will also be looking for a settlement, a senior company official said. "I'm not saying that a settlement is under way . . . I see no reason why we can't work together as rational people," the official said. The Texaco official would not discuss any terms of a possible settlement.
A "standstill order" imposed Tuesday by Casseb provides a breathing period of several months before Texaco will face the necessity of posting an $11 billion-plus bond to cover the judgment in order to launch an appeal. As long as the order stands, Texaco cannot sell any of its major assets, nor can Pennzoil file claims against them. The standstill period, which gives Texaco time to prepare its appeals, will also provide time for negotiations.
The basis of a possible settlement may be the billion barrels of oil and natural gas reserves that the companies have battled over for two years. Pennzoil thought it had acquired the reserves from Getty Oil Co., but lost them when Getty's directors accepted Texaco's later, but higher, bid.
Texaco could sell the billion barrels of Getty oil back to Pennzoil, some observers propose. "Let them have what they want," said Alan Edgar, an investment banker with Schneider, Bernet and Hickman Inc. in Dallas. "Give them back the Getty reserves."
The issue, of course, would be price, an issue over which Pennzoil and Texaco were far apart during two days of hearings before Casseb last week. Texaco said that, at most, the billion barrnuld be left so weakened that it would have to liquidate.
That isn't Pennzoil's goal, Liedtke has said. "It's not my objective to destroy anybody," Pennzoil's lead attorney, Joseph D. Jamail Jr., said last week. Texaco's assets total $26 billion, he said, more than enough to pay what it owes. "They've still got the Getty assets they took away from Pennzoil," he said.
But Texaco continues to dispute that analysis. It paid about $3.5 billion for the 1 billion barrels of Getty oil, which are now worth somewhat less because of the decline in oil prices. With the revenue from the sale of gasoline and other products from that oil, Texaco makes about 8 percent after taxes on its investment, a Texaco official said. It used borrowed funds to buy Getty, and after paying the interest charges, it would just break even on its investment, the official said.
Selling Pennzoil the Getty oil would cost Texaco between one-fifth and one-quarter of current revenue, but would also reduce its debt significantly, if the price were right.
"I think we're playing a game of chicken," said George Friesen, an analyst with Dean Witter Reynolds. "I wouldn't be surprised to see a court settlement within a few months."
Liedtke gave no clue of Pennzoil's interest in a settlement after Casseb's ruling, saying the company would need time to sort through its options.
Edgar, the Dallas investment banker, noted that Pennzoil has a line of credit of $2.5 billion that it could use to buy the Getty oil from Texaco, as part of a settlement.
Politically, a settlement is in Pennzoil's interests, too, Edgar said. "Remember, it's their hometown too," he said -- both Texaco and Pennzoil have deep roots here, though Texaco now has its headquarters in New York. "A lot of Texaco people are employed here," he said. If Liedtke forced Texaco into bankruptcy or liquidation, "he'd be a villain, not a hero." But a settlement would make Liedtke not only the man who slew the giant, but also the man who saved its life, Edgar said.