Pennzoil's Trip Down A Slippery Slope

Oil tycoon J. Hugh Liedtke isn't one to be trifled with. Back in 1965, Pennzoil Co.'s chairman deftly executed a hostile raid on United Gas Corp., a large gas pipeline operator, remaking his company into a major player in the oil patch. Consider, too, that when Texaco Inc. snatched Getty Petroleum Corp. from Pennzoil's clutches in 1984, Liedtke instinctively went for the jugular. He slapped Texaco with a $15 billion lawsuit, charging it with illegally usurping Pennzoil's pending merger deal with Getty. In the end, Texaco declared bankruptcy and forked over a $3 billion settlement to Pennzoil. Talk about sweet revenge.

Or was it? The windfall has proven something of a curse for Pennzoil. In late 1989, Liedtke invested nearly $2 billion of his booty to acquire an 8.8% stake in Chevron Corp.--and has since shown about a $400 million gain on paper. But fearing a takeover run from the acquisitive Liedtke, Chevron sued Pennzoil for allegedly violating securities laws by misrepresenting its stake as a passive investment, sparking a nasty legal row.

BUM LUCK. And how's this for a twist: While Texaco has rebounded, Pennzoil has sputtered along. Its energy earnings, after a two-year recovery, are falling again. And its market-leading motor-oil unit hasn't picked up the slack, nor have recent acquisitions helped. There's even talk Pennzoil may restructure. "No one expected it to be like this," says a former executive.Liedtke's bad luck started almost as soon as he cashed Texaco's check. In 1988, Pennzoil acquired Facet Enterprises, a maker of car and industrial filters--later renamed Purolator Products Co. after its best-known brand--for $350 million. However, the unit has been battered by a price-cutting campaign from foreign suppliers. After pumping in some $50 million to shore up operations, Pennzoil last year took an $82 million write-down to reflect the unit's lesser value. Now, Pennzoil would be lucky to fetch $200 million for it, figures Salomon Brothers Inc.

Pennzoil's core energy businesses have misfired, too. Since 1986, its worldwide replacement costs have averaged $7.70 a barrel, second-highest among the U. S. majors, according to industry research firm John S. Herold. Worse, half of Pennzoil's energy reserves are in natural gas, a market stung by a string of mild winters and plummeting prices. All this explains why Salomon Brothers figures Pennzoil's earnings will fall 12%, to $83 million, this year, on $2.1 billion in sales.

True, Pennzoil's motor-oil products business still boasts a market-leading 22% share. Yet it faces stiff competition from Quaker State Corp. and others that are flooding discount chains such as K mart Corp. with motor oil. Major oil companies are discounting, too. Especially--guess who? "Texaco," groans a former executive. "They're killing everybody."

Last March, Liedtke replaced his CEO of two years, Randal B. McDonald, with James L. Pate, Pennzoil's treasurer. The new chief has shaken up management, trimmed Pennzoil's work force by 7%, and squeezed out annual savings of $25 million from overhead.

TAX-FREE? That helps, but Pennzoil still faces a possible tax time bomb. Back in 1989, Liedtke hoped to shield Pennzoil from $800 million in potential taxes on the Texaco settlement. How? The company argued that the award represented an involuntary conversion of assets--Getty Oil--that it would not have made had it not been for Texaco's meddling. By investing the proceeds in another oil company, Pennzoil wanted to get off tax-free. The Internal Revenue Service has yet to decide how much, if anything, Pennzoil should pay. The company could face a tax bill of up to $675 million, plus $125 million in interest.

Things are coming to a head with Chevron's lawsuit, as well. The action was summarily tossed out of Federal District Court in San Francisco last year, and an appeal pending in the Ninth Circuit Court is a long shot. Once the dispute is resolved, speculation is sure to mount regarding a restructuring of Pennzoil, whose stock is trading around 74. That's well below the estimated $83-a-share breakup value, reckons Salomon Brothers.

What's in store? Liedtke isn't saying, but odds are he will sell Pennzoil's refining and marketing arms or its sulfur-mining operations. Or he could spin off the Chevron stake, now 9.4%, into a separate trust. Any way you shake it, some sort of makeover seems certain. If so, it will be an ironic turn for a company that once seemed so turbo-charged--and so ready to roll.

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