Pennzoil Co.

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Pennzoil Co.

founded: 1889 as south penn oil company

Contact Information:

headquarters: 700 milam

houston, tx 77002 phone: (713)546-4000 fax: (713)546-6639 url: http://www.pzl.com

OVERVIEW

Pennzoil has three major businesses in the energy field. First, it drills and explores for oil and gas throughout the world. Second, it is the leading manufacturer of motor oil in the United States. Third, it owns Jiffy Lube International, the world's largest franchiser of fast oil change operations, with over 1,500 outlets, two-thirds of which are franchised.

In April 1998, Pennzoil and Quaker State announced a joint plan to restructure and combine their operations. Under the plan, Pennzoil would spin off its motor oil business, Jiffy Lube chain, and related operations into a new company. That company would then merge with Quaker State. Pennzoil's shareholders would own 62 percent of the new firm; Quaker State's, 38 percent. The new company is as yet unnamed. Pennzoil's remaining businesses would be solely in the oil and gas exploration field.

COMPANY FINANCES

Pennzoil reported a net income of $175 million in 1997 compared with $134 million in 1996. Revenues were approximately $2.7 billion in 1997, versus $2.5 billion for 1996. The company's debt-to-capital ratio declined from 60 to 56 percent. Between April 1997 and April 1998, the stock traded in a range of $48 to $83. As of May 1, 1998, the annual dividend was $1, for a yield of 1.5 percent on a stock price of $66 (the dividend yield is the dividend divided by the stock price).

ANALYSTS' OPINIONS

In late 1997 Pennzoil successfully defended a takeover attempt by Union Pacific Resources Group. After beating back the attractive offer, Pennzoil had to answer to investors and analysts. One analyst, who thought Pennzoil did the right thing by fighting, said the company would have to address shareholders concerns, mostly by putting in place strategies to drive the stock price up. The analysts felt Pennzoil will do a better job creating value for the company than Union pacific would have.

Not everyone was satisfied with the outcome or Pennzoil's immediate response. While some shareholders sued and tried to change takeover policies, other analysts pointed out Pennzoil had done very well since CEO James Pate took over in 1990. Before that time, shareholder return was at 0.3 percent, leading one analyst to characterize the company's performance as "really atrocious."

Once Pate took over, he cut dividends, cut costs, streamlined operations, and paid down debt. Pennzoil's stock began to rise and earnings improved for eight straight quarters. Some analysts caution that while Pennzoil has come a long way, it isn't quite there yet. The fact that top management boasted of a 10-year strategic plan, but then refused to reveal details, didn't endear them to investors or analysts.

After the announced merger with Quaker State, the first big move since the takeover attempt, analysts jumped in. Some felt it was an excellent move to buoy the stock, by saving an estimated $95 to $125 million per year. Others conceded the savings, but feel Pennzoil's stock will not reach the $84 per share Union Pacific was offering any time in the near future.

HISTORY

Pennzoil traces its corporate history to the founding of the South Penn Oil Company in 1889. It was part of John D. Rockefeller's Standard Oil Co., which controlled 90 percent of the oil refining business in the United States. When the U.S. Supreme Court dissolved the Standard Oil Trust in 1911, South Penn became an independent company. In 1925 South Penn purchased 51 percent of Pennzoil Co.; it bought the rest of the company in 1955. Pennzoil originally sold its lubricants under the brand name "Pennsoil," which was an abbreviation for William Penn's Oil. It was discovered, however, that customers pronounced the brand "Penn-soil," so the name was changed to Pennzoil.

In 1953, the Zapata Petroleum Company was founded by J. Hugh and William Liedtke, John Overbey, and a young man named George Bush, who would later become the forty-first President of the United States. In 1963, Zapata merged with South Penn and the new company took the world famous Pennzoil name. In 1965 Pennzoil began its takeover of United Gas Pipeline, a much larger company. By 1970, the company's sales had grown to $700 million and by 1980, $2 billion.

In 1984 Pennzoil sued Texaco for "interfering" with its attempt to take over Getty Oil. After winning a jury verdict of $10.5 billion in 1985, Pennzoil eventually settled for a $3-billion payment from Texaco. In 1990, Pennzoil bought more than 80 percent of Jiffy Lube International, Inc. for $44 million.

STRATEGY

Pennzoil's strategy for the mid- to late 1990s was to sell off noncore business and invest more in its core businesses. In the mid-1990s, Pennzoil's overall corporate strategy was to focus on its three main businesses: oil and gas production, motor oil, and fast oil changes. The company also sought to restructure its operations and reduce its costs. It sold off its Purolator oil-filter business in 1993 for $250 million and its domestic sulfur assets in 1994. It dumped other noncore assets, including an ownership interest in Chevron, some older oil and gas properties, and a ranch in New Mexico. It cut its annual overhead by some $75 million in 1996 and reduced the cost of finding, developing, and producing oil. And to conserve cash, it cut shareholder dividends. At the same time, the company spent $500 million on its remaining refining and specialty oil products businesses for upgrades and expansion.

In mid-1997, Union Pacific Resources tried to buy Pennzoil with an all-cash offer of $84 per share. The company fought off the challenge, but some shareholders were disappointed, since after UPR withdrew its bid the stock price fell back to $65 in late November. In April 1998, Pennzoil announced a plan to combine its motor oil and Jiffy Lube operations with Quaker State in a separate company; the oil and gas exploration business would remain with Pennzoil.

INFLUENCES

When Zapata merged with South Penn to become Pennzoil, the company had only $77 million in sales. Just two years later, in 1965, the company launched its attack on United Gas Pipe Line—one of the largest distributors of natural gas in the United States. United Gas also owned a big mining company called the Duval Corporation. The Liedtke brothers, who ran Pennzoil, believed that United Gas was undervalued; in other words, they thought the company was worth more than its stock price indicated. They invited United's shareholders to sell their shares to them at a higher price than the listed stock market price. The shareholders were happy to sell and tendered 5 million shares. That was five times the number of shares the Liedtkes wanted to buy—they didn't have the money for the additional shares. So they borrowed $215 of the $225 million needed and wound up buying 42 percent of the company, enough to give them control.

This was one of the first examples of a "hostile tender offer," a technique that would become famous (or infamous) in the 1980s. The maneuver transformed Pennzoil and turned it into a large and diversified natural-resources company, having 10 times the sales in 1970 that it had in 1963. In 1980, when sales had risen to $2 billion, the bulk of Pennzoil's revenues still came from the refining and sale of motor oil. Pennzoil was the second-leading seller of motor oil and had a good reputation in the market. Meanwhile, oil and gas production represented only one-fourth of sales, but accounted for 50 percent of profits.

In the attempt to expand its oil and gas production business, Pennzoil would once again make corporate history. In the early 1980s, Pennzoil began to buy up the stock of Getty Oil, which J. Hugh Liedtke thought was severely undervalued. Getty management eventually agreed to the sale of three-sevenths of the company's shares and announced it at a press conference. However, Getty's investment bankers and lawyers kept working for a higher price from another firm. It eventually got one from Texaco, which agreed to buy the entire firm for $10 billion. J. Hugh Liedtke sued Texaco for "tortuous interference," and in a decision that shocked the nation, a Texas jury decided that Texaco owed Pennzoil $10.5 billion. This business melodrama played out for several months, with Texaco eventually agreeing to pay Pennzoil $3 billion.

Things didn't exactly turn out the way Pennzoil expected, though. The legal combat distracted management from running its business. The money was put into investments in the energy field—a big block of Chevron stock and the purchase of Purolator—which didn't turn out particularly well. Further, the settlement led to a bitter dispute with the U.S. Internal Revenue Service, and Pennzoil wound up paying the government a huge sum for back taxes.

CURRENT TRENDS

In the 1990s, Pennzoil worked to restructure its oil and gas operations. Between 1993 and 1996, it sold off about 700 oil and gas fields, retaining only those with significant potential. In 1996, the company agreed to sell some of its Canadian oil and gas properties to Gulf Canada for $185 million. Pennzoil also agreed to sell about half of its interest in the huge Azeri-ChiragGuneshli unit in the Caspian Sea to Itochu Oil Exploration of Japan. Under the deal, Pennzoil would remain an important player in this area, off Azerbaijan in the former Soviet Union. Some analysts thought this region would be the next major oil-producing area, with potential oil reserves of several billion barrels. As of May 1996, Pennzoil was the only U.S. company with two government-ratified contracts for oil and gas concessions in the Caspian Sea.

Pennzoil also held a 75-percent interest in a discovery in the Gulf of Mexico off Louisiana, a site expected to yield 80 million cubic feet of gas a day. Overall, higher oil and gas prices in 1996 were improving the outlook for Pennzoil's oil and gas operations. The company was particularly sensitive to swings in gas prices. According to one analysis, each move of $.10 per thousand cubic feet in gas prices translated into $.38 of per share earnings.

FAST FACTS: About Pennzoil Co.

Ownership: Pennzoil is a publicly owned company traded on the New York Stock Exchange.

Ticker symbol: PZL

Officers: James L. Pate, Chmn., Pres., & CEO, 62, 1997 base salary $761,000, bonus $757,000, total compensation $2,436,000; David P. Alderson, II, Group VP, Finance & Accounting, 1997 base salary $284,600, bonus $315,600; Stephen D. Chesbro, Pres. & COO, 1997 base salary $434,600, bonus $424,200; Donald A. Frederick, Group VP, Oil & Gas, 1997 base salary $252,700, bonus $245,400

Employees: 10,214

Principal Subsidiary Companies: Pennzoil's subsidiaries include: Pennzoil Exploration and Production Co., Pennzoil Products Co., and Jiffy Lube International.

Chief Competitors: Pennzoil's traditional rivals in motor oil include: Quaker State, now merged with-Pennzoil and Valvoline. In the oil exploration sector it competes with: British Petroleum; Chevron; Exxon; Mobil; Phillips Petroleum; Shell Oil; Texaco; and Unocal.

CHRONOLOGY: Key Dates for Pennzoil Co.

1916:: The Pennsylvania Refining Company trademarks the Pennzoil brand name
1925:: South Penn, a former division of Standard Oil, purchases 51 percent of Pennsylvania Refining
1955:: South Penn purchases the remaining portion of Pennsylvania Refining
1963:: South Penn, STETCO Petroleum, and Zapata Petroleum Company merge to form Pennzoil Company
1965:: Pennzoil acquires United Gas Pipeline, a company about eight times the size of Pennzoil
1978:: Pennzoil is one of the first U.S. companies invited to China to discuss off-shore oil exploration
1984:: The company sues Texaco for interfering with its attempted takeover of Getty Oil
1990:: Pennzoil purchases Jiffy Lube
1993:: Acquires U.S. oil and gas properties from Chevron
1997:: The company fights off an attempt to purchase it

While not as exciting as oil and gas exploration, Pennzoil's other activities continued to do well. Pennzoil was the number one selling motor oil for more than 10 years. In 1996, it had a 21-percent share of the market. After the announcement of the merger with Quaker State in 1998, the market share of the company jumped to 36 percent. In addition, in 1996 it had 17 percent of the do-it-yourself market and 29 percent of the installed market. Its Jiffy Lube centers captured 25 percent of the oil change market, and 85 percent of the oil sold was Pennzoil. As of December 31, 1997, 1,516 Jiffy Lube service centers were open in the United States. Franchisees operated 935 of the service centers, and Jiffy Lube owned and operated the remaining 581.

PRODUCTS

In the mid-1990s, Pennzoil introduced a new Z-line of lubricants, which had a variety of end-uses. Each product has a specific application. For example, the Z-M lubricant targeted marine applications to protect metal from salty moisture. In 1996, Pennzoil also repositioned some products: it changed the name of its line of synthetic oils to Performax 100, and it broadened its Wolf Head line from a regional product to a national one.

CORPORATE CITIZENSHIP

Pennzoil successfully promotes its products through its support of sporting events. Pennzoil was a sponsor of NCAA basketball and the Olympic Games. But, as one might guess, most of its energies have been directed toward auto racing. Beginning with its sponsorship of Russell Snowberger in the 1930s, Pennzoil has an important presence at the Indianapolis 500. This tradition was reaf-firmed in 1995 when Gil de Ferran, driver of the Pennzoil Special, was named the 1995 IndyCar Rookie of the Year. Pennzoil motor oil is the "Official Motor Oil" of the Indy, as well as the Brickyard 400. Pennzoil is also the sponsor of The Auto Channel, a web site at http://www.theautochannel.com, devoted to motor vehicles and sports.

GLOBAL PRESENCE

In 1996 Pennzoil marketed its products in 62 countries. It had two joint ventures in China—one in lubricants and one in fuel additives. In Peru, Pennzoil owned 45 percent of Isopetrol SA, a lubricants company. Pennzoil also had a 50-50 joint venture to market lubricants with ATGE of Argentina. Pennzoil's international sales rose about 8 percent in 1996.

Pennzoil's search for oil and gas gives it a major global presence. Besides its role in exploring the Caspian Sea region, its drilling activities extend to South America (Venezuela), the Middle East (Egypt and Qatar), and Oceania (Australia). In December 1995, the company announced the site of its new European headquarters in Frankfurt, Germany. Pennzoil's production facilities in Europe were being consolidated at its plant in Barcelona, Spain.

FUN FACTS ABOUT OIL

Using the wrong kind of oil can void the warranty on your vehicle's engine;
Dirty oil is a good sign. It means your oil is picking up engine contaminants and keeping them suspended so they can't collect on engine parts;
Additives will not increase your oil's useful life;
Some motor oils can give you better gas mileage than others;
Most late model engines are designed to use lighter viscosity oils compared to older engines;
According to the theme song from The Beverly Hillbillies, oil can also be referred to as "Texas tea," or "black gold."

EMPLOYMENT

According to Pennzoil, they "believe that success is a combination of hard work and the ability to make the most of opportunity when it arises." The company claims to be strong in technology and training, providing onthe-job technological and management training. In addition, they have an educational assistance program that funds graduate and undergraduate classes.