Texaco: From Takeover Bait To DynamoTodd Vogel
Depend on it, sir, when a man knows he is to be hanged in a fortnight, it concentrates his mind wonderfully.
When Texaco CEO James W. Kinnear gathered 2,000 executives inside a London Methodist church back in early 1987, he had plenty of reason to concentrate. After all, Texaco Inc. was on the hook for one of the largest damage awards in history--$11 billion--for elbowing its way into rival Pennzoil Co.'s deal to acquire Getty Oil Co. in 1984. Texas courts were dragging their feet on reviewing the decision. As Kinnear addressed the gathered worldwide staff, it looked as if Texaco might be heading up the gallows stairs.
Kinnear's message was quite simple: If employees would keep their minds riveted on Texaco, he promised to deliver them from the humiliating Getty affair. And he made another vow that sounded quixotic at the time: Texaco would ultimately emerge as one of the most admired companies in the world. That seemed unlikely, given Texaco's dim reputation and grimmer prospects. Even Kinnear later confided to fellow Texaco executives: "You must have been thinking: `What is he smoking?' "
CRASH MAKEOVER. Dramatic as Texaco's public agonies were, there were less visible systemic woes that were just as life-threatening. A legacy of underinvestment and outmoded technology had left Texaco with one of the industry's sorriest exploration records. It gleans more oil from the boardroom than in the ground--hence the Getty mess. And its ossified bureaucracy was in such disrepute that by 1987 Texaco's stock price reflected less than half of its $59.40 a share in net worth, prompting raider Carl C. Icahn to mount a takeover and proxy battle that year.
Four years, a bankruptcy, and a takeover fight later, Kinnear has pulled off one of the most startling comebacks in U. S. corporate history. The crisis atmosphere at Texaco gave him the opportunity to refashion the company in ways he might never have managed in more normal times. Kinnear has shed $7 billion in assets and 10,965 employees. And he has reshaped virtually all of the company's operations, from the way it manages its exploration in Sumatra to the way it sells high-test in Hartford.
In the process, Kinnear has transformed a rigid, oil-poor company into a focused, innovative, and growing force in the industry. Says onetime nemesis Icahn, who publicly skewered Kinnear and Texaco during his takeover challenge: "Since the proxy fight, they woke up. I wish to hell I'd kept the stock."
Icahn has reasons for regret. Texaco has cut its debt from 49% of equity in 1988 to 39% today. Its cost to find a barrel of oil has plunged from more than $9 in 1985 to $3.83 in 1990 (charts, page 52 42 ). And with the help of the oil price run-up prior to the Persian Gulf war, earnings have soared from $861 million, before asset sales, in 1989 to $1.4 billion on $41.9 billion in revenues in 1990. Even though oil prices have edged downward 37% from their wartime heights, the new Texaco is positioned for a nice earnings ride. Paul D. Mlotok, an analyst at Morgan Stanley & Co., figures Texaco's profit growth will cruise at an average of 14% a year through 1996, compared with 11% for other major integrated oil companies.
And the ultimate irony: The sweet victory enjoyed by Pennzoil and Chairman J. Hugh Liedtke hasn't been a panacea. Battered by fierce competition, sagging natural-gas prices, and a troubled diversification effort, Pennzoil's earnings have recently fallen off.
Texaco's stunning reversal of fortune has surprised even it's own directors. Says Thomas S. Murphy, Texaco director and chairman of Capital Cities/ABC Inc.: "If you had told me a few years ago that we would be in the shape we are now, I simply wouldn't have believed it." Texaco's brighter outlook still hasn't added much oomph to its stock, though. At about 60, it's up only some 4% since the start of the year.
OIL DRAIN. Investors have reason to be wary. While Texaco was struggling to survive, Exxon Corp. and Royal Dutch/Shell Group were plowing money into technologies such as computer-generated seismic imaging that could lead to the next big oil find. And Texaco needs a gusher. Despite its successes, Texaco has one of the shortest reserve lives--the number of years its current reserves would last--among the majors. Until recently, Texaco actually used up more of its oil reserves than it replaced through acquisitions and exploration. In short, it was liquidating itself at an alarming rate, while rivals were slogging around the planet finding new oil fields.
Kinnear has now made exploration a bigger priority at Texaco. Late last year, he announced a $21 billion capital spending plan for Texaco's exploration and refining operations. The program nearly doubles annual spending to $3.1 billion in 1991, from $1.8 billion back in 1988. Already, his efforts have placed Texaco on a more equal footing with global rivals. Texaco ranked No. 2, behind Atlantic Richfield Co., in a Wertheim Schroder & Co. analysis reviewing the production and exploration track records of the majors since 1986, based on such factors as production costs and reinvestment rates.
Texaco is still heavily reliant on foreign oil, though. Back in 1988, Saudi Arabia and Texaco set up Star Enterprise, a joint venture in which the Saudis acquired a half-interest in Texaco's refineries and gas stations in 23 states--a direct pipeline into the world's largest energy market. In return, Texaco got access to an ocean of oil. There's a big downside, however. About 60% of Texaco's refined product sales could be vulnerable if Saudi production is disrupted.
The man who has transformed Texaco's culture spent his entire working life steeped in it. He joined Texaco's marketing department in 1954, after the U. S. Naval Academy and duty in Korea. In those days, Texaco relished its reputation as an industry maverick. "The company had a kind of militaristic culture, and you had a series of CEOs who ran it that way," says one former Texaco executive. It was also notoriously arrogant. One big reason: Texaco was one of the few oil companies that grew up independently from the mighty Standard Oil trust, whose 1911 breakup spawned such rivals as Exxon, Mobil, and Amoco.
FEW SURPRISES. Kinnear, however, has rarely let Texaco's rigid ways cramp his style. At 31, he was sent to Hawaii to build Texaco's retail operations on the islands from scratch. There, he slashed gasoline prices to match those of competitors. In three years, he had grabbed 8% of the market--quite a feat in such a fragmented business. "I've been on the competitive kick since," he says.
Kinnear's star really started to rise, though, when he took over as president of Houston-based Texaco USA in 1982. Kinnear turned things around at the marketing and refining arm, closing or selling inefficient refineries and spending $2 billion to revamp more promising ones. He also cut Texaco's money-losing U. S. retail network in half, to 2,500. The result: While the Texaco USA unit lost an average of $200 million annually from 1981 to 1984, by 1985 the unit had turned a $10 million profit. The next year, it posted a $145 million gain.
Few were surprised, then, when Texaco's chairman at the time, John K. McKinley, elevated Kinnear to vice-chairman in 1983. Kinnear stayed in Houston, and that turned out to be a blessing. McKinley and Texaco President Alfred C. DeCrane Jr., Kinnear's chief rival for the top job, orchestrated the Getty deal from the company's White Plains (N. Y.) headquarters. They also took a real shellacking for the debacle. When Texaco's board gathered in late 1986 to name a new chief, Kinnear was the obvious choice. His vast operational experience gave him an edge. So did his popularity among employees--a sharp contrast to the old regime, for whom "the only difference between a person and a pump was that the pump is depreciable," says a union official. The board gave Kinnear the CEO job and day-to-day management responsibility, while DeCrane assumed the role of chairman.
SLUMPING STOCK. Then all hell broke loose. In April, 1987, the U. S. Supreme Court refused to shield Texaco froma lower-court ruling that required an $11 billion bond. Crude-oil suppliers soon suspended deliveries, and bankers began to demand more security. On Apr. 12, Texaco Inc. and its two subsidiaries--Texaco Capital N. V. and Texaco Capital Inc.--filed for Chapter 11 bankruptcy protection.
With Texaco's stock trading at depressed levels, Icahn soon acquired a 14% stake and eventually offered to buy the rest of the company for $12.4 billion. Kinnear refused, and Icahn launched a proxy fight to oust the CEO and seat himself, together with four others, on Texaco's board.
Kinnear struck back with the public-relations savvy that his predecessors had always lacked. He and DeCrane made a whirlwind cross-country tour, pressing the flesh with pension-fund and insurance executives. Kinnear also attacked Icahn as a quick-buck artist in newspaper ads. In the end, Kinnear prevailed, but not before Icahn garnered 41% of the vote. "I thought the assets would have been better off in someone else's hands," says one institutional holder who voted with Icahn. "I would have made a big mistake."
The scare forced Kinnear to rethink the whole company. He needed to restructure Texaco. And he had to raise $3 billion, the sum finally agreed upon by Texaco and Pennzoil to settle the Getty affair. What followed was one of the largest sell-offs in corporate history--and the emergence of a leaner and more profitable Texaco. In June, 1988, Kinnear sold Deutsche Texaco, a German subsidiary, for $1.2 billion. It still wasn't enough. So Kinnear also sold off one of the company's most cherished assets: Texaco Canada Inc. That turned out to be a shrewd move. The $2.04 billion unit was generating only $120 million in cash flow, thanks to tax complications involving the repatriation of earnings. Texaco sold the unit to Imperial Oil Ltd. of Canada for $4.15 billion, netting $3.24 billion for its 78% stake.
Kinnear also shook up Texaco's bureaucracy, putting his popularity to the test. He instituted a tough program that pegged salaries to performance at the divisions. He also broke with Texaco's insular tradition of promoting only from within. "We wanted some new blood," Kinnear says. So, he lured away Allen J. Krowe, a former executive vice-president at IBM, to serve as Texaco's CFO. In all, six top Texaco officials would come from outside the company.
Through all Texaco's travails, Kinnear refused to scrimp on research and development. Texaco pumped $15 million into one product, called System. The aim: to create an engine-cleaning, high-performance gasoline. System is now the brand name for virtually all of Texaco's gasoline offerings. Since its launch in 1989, Texaco's sales have picked up momentum: In 1990, the company's total market share--including sales by Star Enterprise--hit 6.5%, up roughly a quarter of a percentage point from 1989, while total volume rose 3.1%, according to Lundberg Survey Inc. Another edge: Texaco is a leading producer of methyl tertiary-butyl ether, a key ingredient used in the reformulated gasolines required by the Clean Air Act.
Kinnear's biggest coup though, has been to recast Texaco's exploration process. Before, each division came up with its own exploration plan. With each team hoping to strike a gusher, that often caused an imbalance of high- and low-risk wells. Texaco's replacement rate lurched up and down. Now, managers are schooled in a portfolio strategy balancing sure-fire projects and long-shot efforts.
A BIG PAYOFF. Kinnear has also given more freedom to his exploration staff, which once had to wait months for executives to sign off on new wells. One payoff: In December, 1989, Texaco learned of a discovery in a Malaysian field. A manager rushed through a process that used to take up to two weeks and quickly had a bid in hand for the property. Within a day, he was on a plane headed for Kuala Lumpur. Texaco now owns a partial interest in the site and plans to start drilling on Aug. 1.
Texaco has come a long way--but there's more to be done. Its reserve life of about 8.8 years lags behind Exxon's 11.3 years and Amoco Corp.'s 11.7. Texaco also needs more in-house technological savvy. Royal Dutch/Shell and Exxon have spent billions on computer-aided exploration that can deliver color-coded topological models and pinpoint remote oil and gas wells. Rivals say that Texaco has to hire out some of the reading of this data. Sniffs one competitor: "We'd never hire out interpretation."
Kinnear acknowledges that he still has work to do. But remember that Texaco once had a rather tight noose around its neck. For Kinnear and Texaco, it's been quite a reprieve.