Pennzoil Company - Company Profile, Information, Business Description, History, Background Information on Pennzoil Company

Pennzoil Place
Post Office Box 2967
Houston, Texas 77252-8200

History of Pennzoil Company

Pennzoil Company is a major energy company consisting of three main operating units: Pennzoil Exploration and Production Company, which has about 100 oil and gas fields in the Gulf of Mexico and the gulf coast, Texas, Arkansas, Louisiana, Canada, Azerbaijan, Egypt, Qatar, Australia, and Venezuela; Pennzoil Products Company, which operates two refineries in Shreveport, Louisiana, and Rouseville, Pennsylvania, and markets the bestselling motor oil in the United States; and Jiffy Lube International, Inc., the world's largest franchiser and operator of fast oil change service centers, with about 1,400 outlets. Pennzoil's history is one of mergers and takeovers. Though one of its earliest ancestors was a part of the vast Standard Oil interests until 1911, Pennzoil was not a major factor in the oil and gas industry until its 1965 takeover of United Gas Corporation, a company many times its size. In a high-profile corporate war, in 1988 Pennzoil accepted a settlement of $3 billion from Texaco after the latter was found guilty of interference in Pennzoil's failed merger with Getty Oil. The cash payment, larger than Pennzoil's total assets at the time, was a climax to Pennzoil's long and complex history of corporate gamesmanship, much of it engineered by the company's longtime chairman, J. Hugh Liedtke. Ironically, the Texaco settlement actually weakened Pennzoil, and the company was subsequently in danger of being taken over itself.

Early History Was Centered in Pennsylvania

The companies that originally came together to form Pennzoil were all involved in the oil industry's early history in Pennsylvania and the neighboring states. One of them, the South Penn Oil Company, was formed on May 27, 1889, by a unit of Standard Oil Company, John D. Rockefeller's enormous oil concern. Standard already controlled approximately 90 percent of the oil refining in the United States, but it had been slow to move into oil producing until the late 1880s, at which time it bought up a large number of ground leases in the Pennsylvania oil region and created South Penn to work them. Under first president Noah Clark, South Penn made rapid progress with its initial wells and was soon pushing across the border into the rich West Virginia fields. South Penn enjoyed all the benefits of membership in the Standard family of companies, including guaranteed sale of its crude to Standard distributors and refineries, ample provision of capital for expansion, and an absence of threatening competition. When Standard reorganized itself in 1892 into a closely interlocked trust of 20 operating companies, South Penn was capitalized at $2.5 million, a significant figure for the time, but among the smaller of Standard's holdings.

The reorganized South Penn received a new president as well. John D. Archbold had been a Pennsylvania oil man since the 1860s, and after joining Standard had rapidly risen to become one of the company's top five policy-makers and its director of all producing activity. As such, he became the president of South Penn upon its reorganization in 1892, when the Standard companies were responsible for over a quarter of all U.S. oil production. In the 1890s South Penn increased tenfold its annual production of crude, and by 1898 it was the leader among the Standard interests with 7.6 million barrels per year, most of it pumped from its West Virginia fields. The year before, it had bought the drilling rights to some 20,000 acres of land in the Pennsylvania oil region, paying $1.4 million in what was described as the largest deal in the history of U.S. oil production.

In 1899 Standard Oil was again reshuffled, all of the affiliated companies becoming subsidiaries of the newly enlarged Standard Oil Company (New Jersey). John Archbold remained head of South Penn and was now effective head of New Jersey Standard as well, John D. Rockefeller having largely retired from the scene. South Penn was thus well-positioned to grow into one of the giants of the American petroleum business, with unlimited financial backing, top management skills, and a healthy share of the existing crude market. It soon became apparent, however, that South Penn lacked the one indispensable ingredient of the oil industry: oil. By 1900 the Appalachian oil region had reached its all-time peak of production and its many thousands of wells began to run dry. South Penn production dropped by about 50 percent during the following decade and would never again provide more than small amounts of high-grade crude, in addition to useful quantities of the recently harnessed natural gas.

In 1911 the Supreme Court ordered the dissolution of Standard Oil Company (New Jersey). South Penn began life on its own as one of the leading drillers of crude oil in a region that was largely played out. About the time South Penn had been formed, two independent refineries were built in nearby Rouseville, Pennsylvania. The Pennsylvania Refining Company and Nonpareil Refining Company were both founded in 1886 to process the great stream of oil then produced by the region and bound for the eastern seaboard. The founders of Pennsylvania Refining (PRC), Henry Suhr, Samuel Justus, and Louis Walz, invested $40,000 in their new company and commenced production of kerosene, at that time the most valuable end product of petroleum. Nonpareil Refining, on the other hand, designed its facilities to make lubricating oil and enjoyed only mixed success from the beginning.

The early oil industry was volatile, in more ways than one. By 1893 Nonpareil had already changed hands once and was then bought out by PRC for $50,000 at auction. Nonpareil's name was changed to Germania Refining Company and its offices consolidated with those of PRC. In the meantime, PRC had suffered a catastrophic fire in 1892, which destroyed its barrel factory and much of the adjoining refinery, killing 50 workers and causing an estimated $1 million in damage. Fires were common in the early years of the petroleum industry, as safety regulations were almost nonexistent and the product naturally flammable. PRC rebuilt its facilities and within a few months had restored production to full capacity.

Pennzoil Name First Used in the 1910s

The growing use of the automobile and other internal-combustion engines gradually changed the relative value of oil's refined products. Use of kerosene began a slow decline, its illumination replaced by the cleaner and more-efficient electricity; while gasoline, previously an unwanted oil byproduct, was increasingly required by the new machines. Internal-combustion engines also depended on efficient lubricants, which PRC recognized in 1904 when it expanded its lube facilities and five years later formed a new company to market its lubricants, Oil City Oil and Grease Company. Prevented by Pennsylvania's limited crude supplies from becoming a major refiner of gasoline, PRC shifted more of its production to lubricants and quickly developed a reputation for manufacturing high quality products. PRC's president and part owner was Charles Suhr, son of one of the company's founders, and in 1913 Suhr agreed to invest in a California company that wished to distribute Germania lubricants on the West Coast. A few years later, Suhr and his associates came up with the brand name Pennzoil, which would henceforth become the company's trademark and one of the country's more widely recognized logos. To capitalize on Pennzoil's growing popularity, Suhr changed the name of his two marketing companies in 1921 to the Pennzoil Company (California) and the Pennzoil Company (Pennsylvania).

In the meantime, Suhr had merged his refining outfits in 1914 into a single company called Germania Refining Company, soon changed for patriotic reasons to Penn-American Refining Company. In 1924 Penn-American and its marketing companies, now three in number with the addition a few years before of Pennzoil Company (New York), were merged into an umbrella corporation called Pennzoil Company. Pennzoil was not only refining and marketing about 3,000 barrels per day of crude oil; it also had bought gas stations in Detroit, Cleveland, and Pittsburgh. Having organized the refining and marketing aspects of the oil business, Pennzoil was still lacking crude-production capacity, and in the mid-1920s it began talks with South Penn Oil about a possible merger. South Penn, the former Standard Oil producer, had limited refining and marketing capacities, and in 1925 the two companies came together when South Penn bought 51 percent of Pennzoil's stock. Though not a merger, South Penn's purchase effectively united the two medium-sized Pennsylvania oil concerns. South Penn completed its purchase of Pennzoil in 1955.

While Pennzoil motor oils were racking up an impressive series of Indianapolis 500 automobile racing and transcontinental flight records, South Penn continued consolidating its holdings in the Appalachian oil and gas region, which though limited in scope remained a source of high-grade petroleum. The focus of U.S. oil production had shifted to the South, however, where the vast east Texas fields had begun pumping in the early 1930s, and initial efforts were underway to tap the offshore riches of the Gulf of Mexico. The immediate effect of this surge in production was to depress the price of Pennsylvania crude to an all-time low in 1933, but its long-term effect on Pennzoil's future history was to be much more profound.

Zapata Petroleum Founded in 1953

After World War II, as America developed its love of the automobile, investors continued to pour into the Texas oil regions in search of more spectacular finds. One such wildcatting firm, Zapata Petroleum Corporation, was founded in 1953 by two brothers, J. Hugh and William Liedtke, John Overbey, and a young man named George Bush, later to abandon oil for the richer field of politics. The Liedtkes had already formed a useful friendship with another future U.S. president, Lyndon Baines Johnson, at whose Austin, Texas, home they rented rooms while attending law school at the University of Texas. The four men all had some experience in oil, and in raising the $1 million to form Zapata planned to have a go at big-time oil gambling themselves. As it turned out, they were both lucky and talented: Zapata leased several thousand acres in Texas's West Jameson field and proceeded to drill 127 wells without once coming up dry.

Zapata soon moved offshore, creating Zapata Offshore Company and Zapata Drilling Company to pursue the oil fields then being uncovered in the gulf. In 1959 these two companies were spun off as independent concerns, with Bush remaining as Zapata offshore's head until his election to the House of Representatives in 1966. The so-called spinoff would become a favorite tactic of the resourceful Liedtke brothers, who were able time and again to realize substantial gains by relying on the willingness of shareholders to pay more for equity in a smaller, easily comprehended asset than they would for the same asset hidden in a large corporation. The Zapata partners were already wealthy men by the late 1950s, but the Liedtke brothers were eager to expand, and became interested in the fortunes of Pennzoil, whose corporate name had become South Penn Oil Company after the final merger of its partner companies in 1955. South Penn was well known as a producer of premium motor oil but its profits had never reached their potential. The company's largest shareholder was J. Paul Getty's Tidewater Oil, and the Liedtkes, who knew Getty through previous dealings, began buying large amounts of South Penn stock with Getty's approval. Convinced that South Penn's assets were not being fully exploited, the Liedtkes soon bought out Getty's position and in effect gained control of South Penn in the early 1960s. J. Hugh Liedtke became president of South Penn in 1962, and in the following year South Penn was merged with the Zapata companies in a new entity called Pennzoil Company. Pennzoil was still a relatively small player among the oil giants, with sales in 1963 of only $77 million and a net profit of about $7 million. The corporation was headquartered in Houston, with regional offices in Los Angeles and Oil City, Pennsylvania.

Acquired United Gas Corporation in 1965

The Liedtkes next set their sights on a much richer prize, United Gas Corporation. United was formed in 1930 as a holding company for some 40 gas and oil concerns in the Gulf of Mexico region and by the mid-1960s had become one of the largest distributors of natural gas in the country, its United Gas Pipe Line Company carrying approximately 8 percent of the nation's supply. United also produced and processed natural gas and owned an important mining company, Duval Corporation. As with his friendly takeover of South Penn, Hugh Liedtke saw in United a company unable to exploit its large resources and hence undervalued in the market. He offered to buy one million shares of United at $41 per share; five million shares were promptly tendered, and Pennzoil bought all of them in 1965 for a total purchase of 42 percent of United's stock, borrowing $215 million of the $225 million required. The move was an early example of corporate raiding, in which a much smaller company--in this case, one-eighth the size of its target--gained control of a vast but underperforming competitor. As he did with Zapata, Liedtke proceeded to sell off much of United's assets, first spinning off its retail business and then, in 1974, the huge United Gas Pipe Line Company. According to Pennzoil, the latter divestment was made necessary by government regulations which inhibited Pennzoil's operation of both producing and distributing concerns, but the Liedtkes's handling of the affair resulted in a barrage of lawsuits and an investigation by the Federal Power Commission. In addition, the brothers agreed to pay $100,000 to former Pennzoil stockholders in settlement of insider trading charges brought at the time of the spinoff.

In any event, the absorption of the United companies turned Pennzoil into a large and diversified natural-resources company. Its 1970 sales hit $700 million, up tenfold from 1963, and its Duval Corporation mining subsidiary went on to make a series of quick strikes in sulfur, potash, copper, gold, and silver. To keep its natural gas production up, Pennzoil created two new companies in the early 1970s, Pennzoil Offshore Gas Operators (POGO) and Pennzoil Louisiana and Texas Off-shore, Inc. (PLATO), selling shares to the public in order to raise capital needed for further offshore drilling while also enjoying a sizable appreciation in the value of the stock it retained. By 1980 Pennzoil sales had passed $2 billion, the bulk of it generated by the company's traditional strength in the refining and sale of motor oil. Pennzoil had become the second-leading seller of motor oil, bolstered by its reputation for quality and by an increasing use of mass marketers instead of gas stations for its retail trade. Its assorted mining ventures brought in about 20 percent of corporate sales, while sulfur added another 10 percent. It was not surprising that Hugh Liedtke began pushing hard for more oil and gas production--though representing but one-fourth of sales, production accounted for fully 50 percent of net income, crude oil and gas always commanding a higher margin than refined products.

Legal Struggle with Texaco over Getty Oil Dominated 1980s

With that in mind, in the early 1980s Liedtke became interested in the squabbling heirs of J. Paul Getty. Liedtke calculated that Getty Oil Company stock was severely undervalued and began buying it up, and in January 1984 he reached an agreement with Gordon Getty to buy three-sevenths of the company's shares at $112.50 per share, well over their current trading price. The $3.9 billion purchase would vastly increase Pennzoil's reserves of oil and gas, and probably precipitate the dissolution of Getty Oil at prices even higher than Liedtke had paid. The agreement was duly approved by Getty's board of directors and announced at a press conference, but Getty's investment bankers and lawyers continued to solicit higher offers for Getty stock. They got one from Texaco, which several days later announced that it had agreed to buy all of Getty's stock at $128 per share, or about $10 billion. At that point, Hugh Liedtke sued Texaco for tortuous interference with Pennzoil's prior contract with Getty, and shortly afterward a Texas jury agreed with him, deciding that Texaco owed Pennzoil about $10.5 billion in real and punitive damages--the highest such award to date.

With the exception of Hugh Liedtke, the award seemed to stun everyone. Texaco had not taken the suit seriously, assuming that at worst it would be forced to pay off Pennzoil with a nominal settlement fee. Not only did the Texas jury express the general public's growing dislike for big-money takeovers; its verdict was upheld upon appeal though the award was lowered to $8.5 billion. Texaco threatened to declare bankruptcy if Liedtke did not accept a "reasonable" settlement, but the Pennzoil chairman refused. In April 1987 Liedtke turned down an offer of $2 billion cash from Texaco, which promptly followed through on its promise and filed under Chapter 11 of the bankruptcy code. Upon that news the stock value of Pennzoil dropped $631 million overnight. Liedtke was aware, however, that Texaco was a wealthy company even for the oil business, able to sustain a huge cash loss, and by the end of 1987 Texaco agreed to pay Pennzoil $3 billion to have done with the case.

While this legal struggle was being waged, Pennzoil had decided to sell its various mining interests, with the exception of sulfur. Liedtke spun off the gold-mining subsidiary into an independent company, Battle Mountain Gold Company, whose stock tripled in a short time. The mining disposal left Pennzoil with a mix of motor oil refining and marketing, oil and gas production, and sulfur production, the last two far more profitable than the former; and about $3 billion in cash.

Based on a court ruling, Pennzoil management was led to believe that it could avoid paying taxes on the Texaco settlement if it invested the money in an asset similar to that of Getty. Liedtke, therefore, in 1989 spent the bulk of the money, $2.1 billion, for a big chunk of a larger oil concern, in this case 8.8 percent of Chevron. Anticipating the worst, Chevron immediately filed suit to prevent the purchase and readied itself for a hostile takeover bid. Nevertheless, Pennzoil, which was essentially making a tax-sheltered investment, did not follow through with a takeover bid. Meantime, money from the Texaco settlement also went into Pennzoil's purchase of Purolator, a maker of oil filters.

Restructurings and Threat of Takeover in the 1990s

Unfortunately, over the next several years, company management had to pay considerable attention to the Chevron investment and to haggling with the Internal Revenue Service over whether it owed taxes on the Texaco settlement, all of which led management to be somewhat neglectful of its core operations. A subsequently weakened Pennzoil was forced to restructure its operations throughout the 1990s and operated with the threat of a hostile takeover hanging over it.

Nevertheless, Pennzoil began the decade with a promising acquisition. In January 1990 Pennzoil bought more than 80 percent of Jiffy Lube International, Inc., a franchiser, owner, and operator of automotive lubrication and fluid-maintenance centers. Jiffy Lube had successfully found a niche as a speedy-service center, but was deeply in debt. Pennzoil's $43.5 million purchase price bought a company with assets of $237.3 million and liabilities of $239.5 million. Two months later, James L. Pate, who had been company treasurer, was named president and CEO, with Liedtke remaining chairman. In September 1991 Pennzoil paid $9.3 million for the remainder of Jiffy Lube, which then became a wholly owned subsidiary of Pennzoil.

Pennzoil began to reduce its Chevron holding in October 1992, when it exchanged 48 percent of its shares (worth about $1.2 billion) for Chevron PBC, which owned 240 million barrels of oil and gas reserves in and around the Gulf of Mexico. As part of the agreement, Pennzoil and Chevron also said they

would not buy each other's stock for the next five years. In November 1993 Pennzoil sold 8.2 million shares of its remaining stake at $89 per share, gaining $171 million over what it paid for the stock. These deals left Pennzoil with just over 9 million shares of Chevron.

Continuing its 1980s sales of noncore assets, Pennzoil in December 1992 spun off Purolator in a public offering that generated $206 million. The following month, the company sold its Mt. Muro gold mine located near Kalimantan, Indonesia. In October 1994, after Pate had in May of that year succeeded the retiring Liedtke as chairman, Pennzoil sold the remaining U.S. assets of its sulphur division to Freeport-McMoRan Resource Partners LP.

Wanting to concentrate on rebuilding the company's long-neglected exploration operations, Pate moved quickly to close the chapter on the Texaco settlement by reaching an agreement with the IRS whereby in October 1994 Pennzoil made a $556 million payment in cash for back taxes, including $294.3 million in interest charges. That same month the company incurred a $500 million charge for the back taxes, a loss on its sale of its sulphur division, and bad real estate investments. Pennzoil was sufficiently weakened by this point that Pate feared the company was in danger of a hostile takeover. The company board therefore in early November adopted a "poison pill" defense to guard against any unwanted suitors.

For the year, Pennzoil posted a $288.7 million loss in 1994, which was followed by a 1995 loss of $305.1 million. The company was particularly hurt by a decline in the price of natural gas, which accounted for about two-thirds of the company's production, and continuing high debt. Pate subsequently restructured Pennzoil's operations, achieving savings in operating costs of more than $75 million a year, and reduced the company dividend in 1995 and 1996 to save cash. He was also able in 1996 to cut company debt by $300 million. With natural gas prices on the rise, 1996 showed a huge improvement--net income of $133.9 million.

By mid-1997 Pennzoil was looking forward to a bright future based on its improved financial picture and on long-awaited payoffs for its investments in exploration in Azerbaijan and the Gulf of Mexico. In June 1997, however, Union Pacific Resources Group Inc.--an energy exploration and production company based in Fort Worth, Texas--launched a $4 billion hostile takeover bid of Pennzoil (ironically, Pennzoil had been rebuffed in 1995 when it had approached Union Pacific's then parent about a Pennzoil takeover of Union Pacific). The company board soon announced their opposition to the bid, and their desire to have Pennzoil continue on its own, letting Pate's restructuring play itself out. Whether the company would have that opportunity was uncertain, although Pennzoil had some formidable defenses in place and seemed determined to stay independent.

Principal Subsidiaries: Jiffy Lube International, Inc.; Pennzoil Exploration and Production Company; Pennzoil Products Company.

Additional Details

Further Reference

Baldo, Anthony, "The Pennzoil Pickle: How Hugh Liedtke's Windfall from Texaco Could Be Torpedoed by the IRS," Financial World, November 26, 1991, pp. 30--31.Barrett, William P., "Another Rabbit, Please," Forbes, December 10, 1990, p. 92.Burrows, Peter, "Pennzoil Switches on Its Searchlight," Business Week, February 13, 1995, pp. 74--75.Byrne, Harlan S., "Revving Up," Barron's, November 11, 1996, p. 20.Chubb, Courtney, "Pennzoil Emerges Dry from Sea of Red Ink, Prepares for Growth," Oil Daily, May 15, 1997, p. 1.Gentry, Mickey, and Kimberly Patrick, Pennzoil Company: The First 100 Years, Houston: Pennzoil Company, 1989.Ivey Mark, "Pennzoil's Trip Down a Slippery Slope," Business Week, July 22, 1991, p. 53.Ivey, Mark, and Maria Shao, "What Does Liedtke Want?," Business Week, December 25, 1989, p. 42.Lipin, Steven; Allanna Sullivan; and Terzah Ewing, "In Fight for Pennzoil, Old Suitor Becomes the Pursued: Union Pacific Resources' $4 Billion Offer Faces an Arsenal of Defenses," Wall Street Journal, June 24, 1997, p. B4."Love Her and Leave Her," Forbes, September 15, 1974.Nulty, Peter, "How a Foxy Deal Became a Dog," Fortune, November 2, 1992, pp. 82, 86.Petzinger, Thomas, Oil and Honor: The Texaco-Pennzoil Wars, New York: Putnam, 1987.Shannon, James, Texaco and the $10 Billion Jury, Englewood Cliffs, N.J.: Prentice Hall, 1988.Sherman, Stratford P., "The Gambler Who Refused $2 Billion," Fortune, May 11, 1987, p. 50.

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