(FORTUNE Magazine) – In 1984, Oscar S. Wyatt Jr., the legendary oilman and corporate raider, made a $1.3 billion hostile bid for Houston Natural Gas Corp. Wyatt was building a network of natural-gas pipelines that would snake around the country. At the time Houston Natural was one of the biggest and most profitable pipeline operators anywhere, and Wyatt wanted it.

Houston Natural had other ideas. To rebuff the raider's play, it offered to buy all the stock in Wyatt's own company, Coastal Corp. Wyatt was furious. A legal battle ensued, and Wyatt eventually walked away--but only after he had forced Houston Natural to buy back his stake at a $14.6 million after-tax profit. Later Houston Natural's CEO, Kenneth Lay (yes, that Kenneth Lay--the company changed its name to Enron in 1985), described Wyatt as "incredibly tenacious." As Lay put it, "Once Wyatt decides he wants to accomplish something, he continues to pursue it until he gets what he wants or runs into a brick wall."

Twenty years, several hundred million dollars, and a few brick walls later, Oscar Wyatt is back, and he wants something--this time, El Paso. In one of the biggest proxy battles in a decade, Wyatt, 78, has teamed up with another major El Paso shareholder, Selim Zilkha, 76, to try to wrest control of the nation's largest natural-gas pipeline company from its management and board of directors. The shootout will occur in mid-June in Houston at El Paso's annual meeting, where shareholders will vote to either keep El Paso's board or replace it with a new slate of directors and CEO, all handpicked by Wyatt and Zilkha. Wyatt isn't seeking a seat on the board, but Zilkha is; their chances of winning, as we'll see later, seem to be improving by the day.

Why would Wyatt and Zilkha, at this point in their lives, mount an exhausting, expensive, and time-consuming proxy battle? Because they're really mad. Each had tied up a huge chunk of his personal wealth in El Paso stock, and together they have lost nearly $900 million on paper since early 2001. Still, neither is hurting for money. Zilkha sold about $70 million in stock and Wyatt another $27 million during that time. They each also own lavish homes and make generous charitable donations. No, the battle may have started over money, but now it's about pride and, of course, Texas-sized egos. In their eyes El Paso's board had its chance and blew it. Now they want their team calling the shots.

On the surface one might wonder what the fuss is all about. El Paso barely has a pulse. Its stock is down 87% from its February 2001 high of $75 a share. The company has already acknowledged that it owes some $25 billion in debt, and analysts fear there's more where that came from. In addition, El Paso has been sued by shareholders and investigated by state and federal regulators. It has taken more than $5 billion in charges since 2000 and more write-offs are expected.

But buried beneath all that smoking rubble lie some very desirable gas pipeline, exploration, and production assets. "Neither side would be fighting this hard for a company with $25 billion debt and $2.5 billion cash flow unless there was something there," says John Olson, an energy analyst at the Houston brokerage Sanders Morris Harris. "With some work, it could emerge as the best-integrated gas company in the industry."

The question for El Paso shareholders is, Who is best suited to ride in and save the business? Unfortunately, this spaghetti Western doesn't have a clear-cut hero. El Paso's current management certainly doesn't sport white hats. With the apparent approval of the board, El Paso's brass adopted many of Enron's questionable strategies in order to drive profits sky-high. And the board okayed lavish pay packages even as El Paso's stock collapsed. From 2001 to early 2003, CEO Bill Wise received more than $30 million in compensation and benefits. Under the same board, top executives invested personally in a telecom venture that netted them a roughly 25% return in eight months. Finally, under this board El Paso agreed to pay one of the biggest fines in the industry's history--$1.7 billion--to settle charges that it withheld natural gas from California during the state's energy crisis in the late 1990s.

But Wyatt isn't anybody's idea of Gary Cooper either. The combative CEO cobbled together Coastal through a series of hostile takeovers and greenmail maneuvers in the 1980s. He did business with Libya's Muammar Qaddafi and Iraq's Saddam Hussein. He is litigious to an extreme. He sued the Houston Chronicle for quoting an unattributed source who compared him to J.R. Ewing, and he sued the U.S. Treasury Department to recover $700 worth of French booze he said customs agents had improperly confiscated from his plane. He couldn't be interviewed for this article because--you guessed it--he's filed a class-action lawsuit against El Paso, and a judge has a gag order in place. In 1981, Wyatt--in his corporate capacity as CEO--also pled guilty to a criminal misdemeanor charge that he willfully violated federal oil-price regulations. (His camp notes those regulations were later revoked.)

The dubious backgrounds on both sides of this battle leave some investors cold. "The choice is between a board that oversaw a management that ran the company poorly and was not particularly forthright with investors, and a guy who also has a history of playing pretty fast and loose with his own company," sighs an analyst at a money-management firm who asked that his name not be used. "Is that a trade up? I'm not sure."

"WHO IN THE HELL IS OSCAR?" blared a front-page headline in an Austin newspaper in the 1960s when Wyatt was starting to catch folks' attention. Texans would find out soon enough, but for those of you who don't live in the Lone Star State, here are the basics: Wyatt grew up poor in South Texas and flew a crop-duster before becoming a pilot during World War II. After the war he worked as a rice farmer to help finance the mechanical engineering degree he earned at Texas A&M. In the 1950s he was selling drill bits from the back of his Ford coupe.

But Wyatt had bigger dreams. Using the car as collateral, he borrowed $800 and invested it in Coastal, a tiny Corpus Christi, Texas, pipeline operator with scattered oil and gas leases. Within a decade he had turned Coastal into one of the gas industry's most valuable and fastest-growing companies.

By the 1970s, though, Wyatt was no longer a favorite son in many Texas cities. The global energy crisis had sent gas prices soaring. Even though it had long-term contracts in place, Lo-Vaca, a subsidiary of Coastal's, sharply reduced gas deliveries to San Antonio, Austin, and elsewhere. Texas consumers were stuck with billions in higher utility bills. In 1977 the Texas Railroad Commission ordered Coastal to refund more than $1.2 billion to customers. "A more corrupt, nor least trustworthy person could hardly be imagined," sneered Representative Henry Gonzalez on the floor of the U.S. House of Representatives at the time. Wyatt responded in his typical conciliatory way, telling a newspaper, "Gonzalez is a mental incompetent and has been for years. You can quote me on that."

Wyatt's woes didn't end there. In 1979 the Justice Department alleged that Coastal and another firm, Coral Petroleum, had engaged in a complex scheme to evade federal oil-price regulations. At that time federal regulations limited the price that companies could charge for oil taken from wells in production in 1973 or earlier. Prosecutors claimed that Coastal used a Bermuda subsidiary to boost the price of domestic crude oil sold to Coral. In 1981, Wyatt and Coral executives pled guilty to misdemeanor charges of violating energy regulations.

Despite its legal tussles, Coastal continued to grow through a string of hostile takeovers. Meanwhile, Wyatt and his fourth wife, Lynn Sakowitz, part of Houston's famed retailing family, had become fixtures in the society pages. They threw parties at their Houston River Oaks Boulevard mansion and at their villa in the South of France that would do Tyco's Dennis Kozlowski proud. In July 1982 a New York Daily News gossip column reported on one of Wyatt's parties in the South of France--the guest list included Princess Grace and Prince Rainier, Liza Minnelli, West German Chancellor Helmut Schmidt, Johnny Carson, Farrah Fawcett, and Ryan O'Neal. Placido Domingo led a six-piece orchestra in a round of "Happy Birthday" to Wyatt's wife.

But Wyatt's most famous exploit took place in December 1990 when the U.S. was on the brink of its first war with Iraq. Before Saddam Hussein invaded Kuwait that August, Coastal had been one of the world's biggest buyers of Iraqi crude. Wyatt had also been negotiating to sell Iraq a half-interest in Coastal's refining and marketing operations. Wyatt and former Secretary of the Treasury--and Coastal board member--John Connally flew to Iraq on Coastal's corporate jet. After meetings with Tariq Aziz, then Iraq's deputy foreign minister, and Hussein himself, Wyatt brought back two dozen U.S. hostages who were being held as human shields against an expected U.S. attack.

By the late 1990s, after nearly half a century in the business, Wyatt was ready to slow down. He retired from Coastal in 1997 and started buying, of all things, produce farms. The Wyatts ceded the social stage to Houston's newer new rich, selling their River Oaks mansion in 1999. And in January 2000, as a member of the board, Wyatt okayed the sale of his beloved Coastal to El Paso for a whopping $24 billion. The combined company boasted more than 58,000 miles of pipeline and was the third-largest U.S. natural-gas producer. But a few months after the acquisition closed in 2001, Wyatt started to wonder if he had made a huge mistake.

Over on the west coast, another El Paso shareholder was experiencing similar qualms. Following El Paso's 1999 merger with Sonat, Los Angeles businessman Selim Zilkha had become the largest individual shareholder in the company, with a 1.5% stake. (Sonat had acquired Zilkha Energy Co. a year earlier.) He now had a seat on El Paso's board.

In many ways Zilkha is the anti-Wyatt. He is charming and refined, has a booming voice, and is prone to infectious cackles of laughter. Zilkha was born in Baghdad, the son of a successful banker. When he and his brothers came of age, Zilkha's father sent them abroad to expand the family's business to Paris and London. In 1960, Zilkha left banking and launched Mothercare, a chain of British retail stores that catered to mothers-to-be and babies. The chain flourished and expanded rapidly. In 1982 he sold the company and again changed course. This time he invested in Towner Petroleum, an Ohio exploration and production firm that he moved to Houston and renamed Zilkha Energy. He bought oil leases in the Gulf of Mexico and made Zilkha one of the first companies to use 3-D seismic data for exploration. The business grew quickly, and in 1998, Sonat offered $1 billion for it. Zilkha accepted. Like Wyatt, he came to regret the decision once his company ended up in El Paso's hands.

In 1999, El Paso was reinventing itself. It had little choice. After two major acquisitions in previous years--Tenneco and Sonat--its balance sheet was tilting dangerously. It found the solution to its problems at its hugely successful Houston neighbor--Enron. "El Paso pretty much trained a pair of binoculars on Enron," says a former Enron executive. "Whatever it was doing, El Paso did." That same year El Paso created a merchant energy division and hired Ralph Eads, who had been the company's investment banker at Donaldson Lufkin & Jenrette (later acquired by Credit Suisse First Boston), to run it.

In the late 1990s the energy industry was rapidly deregulating. That created tremendous opportunities for Enron, El Paso, Reliant Resources, and others. They borrowed huge sums of money to acquire and build power-generating plants, and created vast trading operations to buy and sell energy contracts. The strategy involved restructuring long-term fixed-price energy contracts with utilities and customers. Rather than selling electricity from power plants they owned and booking the profits over several years, Enron, El Paso, and others purchased the power on wholesale markets. That made the sale a financial transaction that the companies could then account for using mark-to-market accounting, allowing them to book the entire value of a contract up-front, even though they might not receive the cash for ten or 15 years. Meanwhile, the money needed to finance power plant construction was borrowed by off-balance-sheet entities. Eads helped structure El Paso's first partnership, called Chaparral. More than $1 billion was initially raised for it, with El Paso holding a 20% stake, and CSFB and others the remaining 80%.

The energy-trading strategy completely revitalized El Paso's fortunes. Its revenues doubled in 2000, to $22 billion, and shot up another 160% the following year, to $57 billion. (El Paso was No. 17 on the FORTUNE 500 that year.) Intoxicated by the revenue surge, the company created even more off-balance-sheet vehicles. One, called Gemstone, purchased power plants in Brazil. Still, in hindsight El Paso wasn't among the worst offenders in those off-balance-sheet deals, say some analysts. "If Enron was a ten in its egregious attempts to hide debt, then Williams [Energy] and Reliant were eights, Dynegy was a seven, and El Paso was probably a six or a seven," observes one energy analyst.

It doesn't appear that El Paso executives made huge personal gains from the partnerships, a la Enron. That's not to say it didn't profit from other deals. El Paso--again, following Enron's lead--soon embarked on a telecom strategy. In February 2001, 16 El Paso executives, including CEO Wise, CFO H. Brent Austin, and energy division president Eads, were given loans to invest in a broadband undertaking called El Paso Global Networks. The venture was short-lived. By October, with the telecom industry collapsing, El Paso again shifted its plans and bought out the executives--at a 25% return after the loans were repaid with interest. When investors got wind of the deal last year, the executives quickly donated the $900,000 in proceeds to charity.

By then, however, El Paso's past was catching up to it. Once Enron collapsed and filed for bankruptcy late in 2001, many of the industry's dirty secrets were revealed. Wyatt was among the first investors to cast a wary eye toward El Paso's own off-balance-sheet deals and mark-to-market accounting schemes. In late 2002 he started to fire off several blistering letters to the company's board as well as to the Securities and Exchange Commission and members of Congress, blasting the accounting practices. At the same time he began preparing for a proxy fight.

Wyatt also started hunting for an ally. Last May he invited Zilkha, whom he had never met, to his Houston home for lunch. There Wyatt tried to convince the El Paso board member that the company's numbers didn't add up. Zilkha admits he didn't get it at first. "Oscar tried to explain it to me, but it took me a while to come to the realization we hadn't been given all the information," he says. He also says he didn't understand many of the company's complex accounting strategies and wishes he had asked more questions. In June 2002, fearing that a margin call on his holdings could crush him or make him unable to meet his charitable obligations, Zilkha resigned from the board and started selling stock.

El Paso's problems were mounting. Last June its treasurer committed suicide. (The cause was apparently health-related, but it still cast a shadow over the company.) Five days later El Paso received an informal inquiry from the SEC into "wash," or "roundtrip," trades. The telecom sector was rife with such transactions, which artificially inflated trading volumes or revenues. But the biggest shock came in September, when the Federal Energy Regulatory Commission ruled that El Paso had illegally withheld natural gas from California. Under the law, pipeline companies are required to make all their capacity available to the market, but a FERC judge charged that El Paso delivered only 79% of the gas its pipeline could carry. (El Paso still denies withholding any gas.) Fed up completely with El Paso's management and board, Wyatt filed a class-action lawsuit against the firm in November. He was named the lead plaintiff.

The ranks of investors who wanted CEO Wise's head was growing by late 2002. Zilkha hurled numerous letters and e-mails at El Paso's board, demanding Wise's removal and suggesting candidates he felt were up to the job. (At one point he even proposed that he and his son take over the company for no compensation.) Behind the scenes Wyatt and Zilkha spoke frequently, plotting their next move. In January of this year Wise and two directors--Ronald Kuehn Jr. and John Bissell--flew to Los Angeles to have lunch with Zilkha at his home. They hoped to broker a truce between the warring factions. "We offered over lunch to give Selim the opportunity to, in effect, have an influence in selecting two or three members of the board," says Kuehn, who adds that he and Zilkha have been friends for several years. But in front of Wise, Selim angrily demanded that Wise be terminated. The CEO, recalls Kuehn, "was very quiet. He took it like a man. But the board at that point was just not ready to terminate him."

About a month later Wise finally stepped down as El Paso's CEO. But Zilkha was furious to discover Wise would still hold his chairmanship through the end of 2003 and help select the new CEO. A few days later, when El Paso's stock price sank to an all-time low of $3, Zilkha announced his plans for a proxy fight. "This company needed to have its credibility restored," says Zilkha. "That's what this proxy battle is about." Adds Wyatt's and Zilkha's CEO candidate, Stephen Chesebro', who was CEO of PennzEnergy until 1999: "We're trying to improve this company's transparency on debt and off-balance sheet issues. The last quarterly report was over 400 pages long. It's too confusing for shareholders."

Even if Zilkha and Wyatt lose, they've achieved much of what they were looking for. El Paso's board is selling assets to shore up the balance sheet; there's a renewed focus on the core pipeline and production businesses; the company has named more independent directors to the board; and it worked out refinancing with its banks to avoid a liquidity crunch. In fact, some investors are struggling to define the differences between the two sides. "Six months ago Oscar and Selim were simply very upset about losing money. But since then, they've put together an alternative slate of directors and managers with a collection of very good resumes," notes money manager James Gipson, who holds one of the largest stakes in El Paso's stock in his Pacific Financial Research Investment Management. "But the current management and board have also done a credible job of resolving a lot of the issues at the company. If you can get past the blame game, what you find are pluses on both sides."

Still, Zilkha and Wyatt are gaining momentum. In early June, union officials at the AFL-CIO and Institutional Shareholder Services, a Maryland proxy advisory firm, endorsed the challengers. (However, ISS declined to support Zilkha's quest for a board seat because it felt that, as a former board member, he was "equally culpable" for El Paso's past decisions.)

Even after the final vote is tallied, El Paso will still have plenty of drama. For one thing, Wyatt's class-action lawsuit isn't going away. People familiar with the matter say that even if Wyatt wins, he'll continue to push forward with the lawsuit. Which means, in yet another bizarre twist, that Zilkha and Wyatt could end up on opposing sides. "The nicest thing that has happened to me in the last year is to have met and gotten to know Oscar Wyatt," says Zilkha, smiling. Then the smile fades. "But even if Oscar is on the opposite side of the table, I only have one single interest--El Paso shareholders," he adds, punctuating his point by banging his fist repeatedly on the table. So yet another battle looms--and we all know how much Wyatt likes a good fight.

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