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Big Holders' Risks Cut : Analysts Support Unocal Partnership

April 23, 1985|DEBRA WHITEFIELD and NANCY RIVERA | Times Staff Writers

Troubled by the depressed price of its stock, Lear Petroleum started casting around in 1983 for ways to prop it up.

Borrowing a device that Transco had used effectively that year, Lear transformed its exploration and production division into a limited partnership and announced that it would distribute units in the partnership to the public. On that news, the stock bounced to $22 from $17.

Their effectiveness in propping up a company's stock value, combined with their success as a takeover defense strategy, accounts for the growing popularity of limited partnerships at oil and gas companies.

Latest to embrace the partnership arrangement is Unocal, which is embroiled in a takeover fight with an investor group put together by Mesa Petroleum Chairman T. Boone Pickens Jr.

Unocal announced Friday that it has approved a plan to put 45% of its domestic oil reserves into a publicly traded partnership. The move is intended to boost the value of Unocal's shares by infusing cash into the company and generating renewed interest in Unocal's reserves and to make Unocal less attractive as a takeover target by transferring to the partnership some of the cheap reserves sought by the Pickens group.

Could Soothe Holders

It also could be effective in soothing some big Unocal shareholders who are upset over Unocal's defense strategy of loading up the company with debt in the event that the Mesa group succeeds in getting a near-51% stake in Unocal. Their concern is that Unocal had backed Mesa into a corner--because, as Mesa Chief Financial Officer David Batchelder said Monday, Mesa won't buy the 64 million shares it is seeking as long as the "poison pill" defense strategy is a threat--and that if Mesa were to retreat, the price of Unocal stock would fall to its pre-fight level of about $35 a share from the current $48 level.

The limited partnership "would eliminate a risk, particularly for an institutional shareholder thinking that he has to tender (to the Pickens group) or else be stuck with a $35 stock," said Herbert Hart, an analyst with S. G. Warburg, Rowe & Pitman, Akroyd in San Francisco.

Although details of Unocal's partnership plan, devised with the help of the Los Angeles law firm, Gibson Dunn & Crutcher, are still sketchy, securities analysts are characterizing the move as brilliant.

"The best strategy for Unocal to follow," said David Ullom, energy analyst with the brokerage Bateman Eichler, Hill Richards. "A very smart move," said H. B. Juengling, a specialist in limited partnerships and royalty trusts with the firm Schneider, Bernet & Hickman in Dallas.

But some tax experts say Congress threw a cloud over the value of partnership plans with mid-1984 changes in the tax code. Even companies that have used such plans successfully caution against their use by companies that didn't have heavy losses in earlier years that can be applied against their tax liability in coming years. (Unocal is not one of those companies.)

The reason: Such arrangements used to be free from taxation to the company. They no longer are.

"Congress ruined a really neat deal," Juengling said. "They saw companies whose stock was depressed suddenly having fully valued stock after these things were spun off with no tax liability to the corporation, and they thought something fishy was going on."

That is why Mesa--which has championed the use of limited partnerships and their cousins, royalty trusts, as an effective device for distributing assets to shareholders--doesn't think much of Unocal's partnership plans.

Before the tax-law change, such plans eliminated taxation of direct company distributions to shareholders. "Now, if anything, the law accelerates double taxation," Mesa's Batchelder said.

Double taxation results because, on top of taxes paid by the company, investors in the limited partnerships are taxed on any dividends received.

Under current law, a company will be taxed on the difference between the value of the partnership units when they're distributed to shareholders and the property's value as carried on the company's books, and the shareholders would be taxed on the value of their units as dividend income.

Could Owe $1 Billion

Batchelder says Unocal could owe taxes in excess of $1 billion if the partnership proposal survives in its current form. Tax experts agree with that assessment but note that the tax liability would be $1 billion only if Unocal were to make a single, lump-sum distribution to shareholders, a move that seems unlikely.

Unocal says the tax impact of the plan is under consideration.

The Los Angeles oil and gas company hasn't said yet whether it intends to sell partnership units to the public or spin off the units to existing shareholders, or some combination of the two. But tax experts say that either way, the distribution will trigger "a taxable event."

A royalty trust usually passes along to its holders the income from specific, fully developed properties. A limited partnership is a more active investment in a company since it usually contains a company's ongoing exploration and production operations and the cash flow is reinvested into more exploration.

Monroe Helm, a vice president at Lear Petroleum, said a limited partnership is attractive for Lear despite the tax changes because "we have net operating loss carry-forwards to offset the taxes." But the extra tax burden "is a fairly major consideration of any company considering a limited partnership," he said. "It's not a really clear-cut decision whether companies should do these."

By selling units to the public, Helm said, companies are able to demonstrate the true market value of their assets. That may end up boosting a firm's stock price as investors recognize the true value of the rest of the company.

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