Pennzoil May Be Drilling For A Swap With Chevron

After declining for about two years, Pennzoil shares are suddenly on the rise. In part, the stock is being buoyed by rising oil and gas prices and concern over the short-term disruption of supplies triggered by Hurricane Andrew. But there's more to the Pennzoil story than that.

Whispers are that a deal is in the making between Pennzoil and Chevron over Pennzoil's 9.7% stake in Chevron, the major international petroleum company. One money manager who is close to some insiders in both companies is convinced that Pennzoil, a diversified oil-and-gas-exploration company, will swap the 32,944,100 shares of Chevron that it owns for certain oil-and-gas-producing Chevron properties.

This pro says informal talks have taken place between key executives at Chevron and Pennzoil and that some Pennzoil people have had a couple of meetings with the Internal Revenue Service to discuss the tax implications of such a stock-for-property trade. It couldn't be determined which properties will be involved should there be a trade. Pennzoil declined comment and a Chevron spokesman didn't return calls.

TAX LOOPHOLE. The reason Pennzoil needs to swap its Chevron shares is to avoid paying a huge tax bill that could hit at least $1 billion.

Here's why: Pennzoil bought the Chevron shares in 1988 for $2.2 billion, after it had won a $3 billion settlement from Texaco in the Pennzoil-Texaco legal battle over Getty Oil. Those shares now have a market value of more than $2.4 billion, and Pennzoil might well have to pay taxes on the entire sum. Pennzoil already had to pay taxes on $800 million, the difference between the $3 billion it won and the $2.2 billion it invested in Chevron. "Normally, monies received as a result of successful litigation are fully taxable," notes tax analyst Robert Willens of Shearson Lehman Brothers. But in this case, a Texas court had ruled that Pennzoil was the victim of a property "theft," and as such Pennzoil could avoid paying a tax if it invested the money in property "substantially similar or related in service or use," explains Willens.

By buying into Chevron, Pennzoil claims it has fulfilled the "substantially similar" requirement. But the IRS may disagree, by contending that the Chevron shares aren't "substantially similar or related in service or use" to what was taken--and Pennzoil could end up paying through the nose. So the swap with Chevron for actual properties may be the easy way out for Pennzoil.

One New York investment manager estimates that such a swap could boost Pennzoil's cash flow from $6 to $10 a share and send the stock back to its old high of 75 from the current 53. For Chevron, he adds, it's a golden opportunity to get rid of Pennzoil--and the $80 million in dividends that it pays on Pennzoil's stake.

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