Why some market-watchers think Texaco stock may do well

Things are looking pretty grim for Texaco, right? For snatching Getty Oil away from Pennzoil two years ago, Texaco may have to pay an $11.1 billion award -- the biggest in history -- higher than the value of its stock and nearly as big as its net worth (assets minus liabilities). It's having trouble raising short-term credit to run its business. It's trying to wiggle its way out of the Texas district court system with arguments that at least one legal scholar says are ``ridiculous.'' And it has threatened to file for reorganization under Chapter 11 of

the bankruptcy code.

Why, then, is Rosario F. Ilacqua, oil analyst at L. F. Rothschild, Unterberg, Towbin, recommending that his clients consider buying Texaco stock? And why has Frank Knuettel at Prudential-Bache Securities put Texaco on his buy list for risk-oriented investors?

From a strictly financial point of view, Mr. Ilacqua contends that the price of the stock, around $29, is far below the value of the assets backing the stock, which he puts at $90 to $100 a share. Even if Texaco has to pay the full $11.1 billion -- which most people think is highly unlikely -- the stock would still be backed by $45 to $50 in assets.

But no matter how wide that spread, and the potential to make a killing if the stock price goes up, analysts would not be recommending Texaco if they weren't bullish on Texaco's management.

And Mr. Knuettel, for one, is pretty high on the company.

``John McKinley [Texaco's chairman] has done a remarkable job in the last couple of years turning around a company that had been a laggard in the industry,'' he says. ``We're only now starting to see the success'' of Texaco's changes in marketing and commitment to exploration.

While not as profitable as other big oil companies like Exxon, Chevron, and Mobil, Texaco has shaved costs and slowed the depletion of its oil reserves. It pared its worldwide work force from 76,000 after the Getty purchase to 56,000 today (mainly through spinoffs, not layoffs). It quickly disposed of businesses that didn't fit into its strategic plans, such as its reinsurance unit and its cable TV interests. These moves, as well as the sale of Getty's marketing operations in the Northeast and of some T exaco assets, brought in some $3.3 billion, which helped to pay its short-term debt.

There have been cosmetic changes, too. You know those new self-serve Texaco stations, complete with canopies and a red-white-and black motif? There are 500 of those little numbers, called ``System 2000,'' each selling more than 155,000 gallons a month, says Texaco spokesman Gordon Hamilton. That's three times what an average gas station sells. Texaco has added 100 of them in the last year, and it plans to build more as well as convert old stations.

The company is also selecting ``preferred geographical areas'' -- cities near Texaco's refineries on the East, West, and Gulf coasts -- where it has a 13 percent market share and can command higher profits. Texaco had investments in 5,000 stations five years ago; today it has half that many, but they each pump more than three times as much gas. Texaco has also closed a dozen money-losing, obsolescent refineries in the last few years and has poured about $3.5 billion into upgrading refineries to make the m more efficient.

Aside from streamlining costs, ``McKinley has put a spark back under the exploration,'' says Knuettel, by joint-venture exploration deals with smaller American companies. While the company still sells more oil than it finds, last year it replaced 50 to 60 percent of what it was able to produce, Knuettel says. ``That's not a huge improvement, but it's the best showing they've had in years.''

Which brings us back to Getty. By buying Getty, Texaco got oil reserves for $4 to $5 a barrel which might have cost it two or three times that amount to find itself. That's why Pennzoil wanted Getty so much, too, and sued for it.

Ironically, Pennzoil may be better off without Getty. Since oil prices have dropped, the value of Getty's reserves is less than what Texaco paid for them. Thus, any money Pennzoil gets from Texaco -- either the full award or a settlement -- will be icing on top of the money it already saved.

That has given Pennzoil incentive to settle with Texaco, rather than force Texaco into Chapter 11 or go through the appeals process -- risking having the damages eliminated or reduced to about $500 million, which Texaco contends is the fair damage assessment. ``If Pennzoil gets $2 or $21/2 billion [an amount bandied around in the press], you've just doubled the company's net worth overnight, with no work,'' says a professor at the University of Houston. ``That's a good deal.''

There is some debate on whether Texaco's Chapter 11 threat is a bluff. Though short-term credit is drying up, banks seem to be standing behind the company. Some 30 to 40 banks are expected to put together a $1.7 billion package today to cover its short-term needs.

``The banks are locked into a financial stake already,'' one lawyer says. ``They don't want to run Texaco.''

If it did file for protection from its creditors under Chapter 11, Texaco could appeal its case without posting the $12 billion bond. But such a move would pretty much cut Texaco out of the credit markets in the future, and it would not do much for its relationships with the banking community. Also, the bankruptcy court would have a say in everything Texaco did, from running its business to appealing its case.

On Friday Texaco tried to get the case out of the Texas district court -- and get out of posting the bond -- by arguing that it was being denied a fair trial because it couldn't afford to appeal the case with a $12 billion bond hanging over its head. If this tactic fails -- and the New York court judge has not specified when it will rule -- Texaco could find a settlement the best option -- and the fastest way to get back to running its day-to-day business.