Occidental Petroleum Corporation (ticker: OXY) is an international oil and gas exploration and production company with operations in the United States, Middle East/North Africa and Latin America regions. Oxy is one of the largest U.S. oil and gas companies, based on equity market capitalization.
On October 18, 2013, Occidental Petroleum announced initial actions, per its strategic review, to streamline and focus operations. The actions are expected to generate significant proceeds which will be used to reduce OXY’s capitalization. The Board of Directors has authorized the following:
- The sale of a minority interest in its Middle East/North Africa properties. OXY currently operates in seven different countries, with 929 MMBOE proved reserves in 2012.
- Alternatives for select Midcontinent assets in North America, including the sale and/or trade of acreage. Its assets include oil and gas interests in the Williston Basin, Hugoton Field and Piceance Basin. OXY held more than 4.5 million gross acres with 211 MMBOE of proved reserves in 2012, and an increase in reserves is expected for 2013.
- Sale of 35% of its investment in the general partner of Plains All-American Pipeline, L.P. (ticker: PAALP). The tax proceeds will result in $1.3 billion, and OXY’s remaining interest in PAALP, based on the IPO price, is worth approximately $3.4 billion.
OXY expects to complete the strategic review in the coming months and will disclose any new developments as they occur.
Stephen I. Chazen, President and Chief Executive Officer of Occidental Petroleum, said: “These are the first formal steps in our effort to streamline the business, concentrate in areas where we have depth and scale and improve overall profitability. Our goal is to become a somewhat smaller company with more manageable exposure to political risk. We will continue to consider additional strategic alternatives for the Company to maximize total returns to our shareholders.”
According to OXY’s Q2’13 release, the company has 805,763,948 shares outstanding, with a market cap of approximately 78 billion as of market’s close on October 18, 2013. OXY has $3.1 billion cash on hand, and estimates to use$9.6 billion in capital spending in 2013.
Despite the announcement, OXY did not disclose plans for its California assets. The company is currently the majority owner in the Monterrey Shale, with 2.1 million net acres, and has invested 25% of its $1.5 billion budget on unconventional opportunities in the region. The shale is believed to hold more than 400 billion BOE, but the recent passing of a bill regarding fracing regulation may complicate operations. Rock Zierman, chief executive of the California Independent Petroleum Association, said the bill contains the most comprehensive set of fracing regulations of any state. OAG 360 went in depth on the issue in a feature article on September 13, 2013.
OXY’s 2013 Third Quarter conference call is scheduled for October 29, 2013, at 10:00am ET.
Roger Read, Senior Analyst for Wells Fargo Securities said OXY’s release confirms what was generally known in his October 18, 2013 note. “We would expect the stock to likely be flat or weaker based on the fact that several important questions (California and future drilling spending plans in the Permian Basin) remain unanswered … In our view, the main goals are to ‘free up’ capital from non-core, low growth and/or low return and high risk assets and reposition the company for faster growth in the near and long-terms. As an additional benefit, we expect a significant portion of realized proceeds from asset sales will be directed towards share repurchases.”
William Featherston, managing director at UBS, values OXY’s Middle East/North Africa operations at $27 billion and the Midcontinent assets at $3.5 to $4.5 billion in his note on October 18, 2013. “Our estimated divestiture proceeds imply valuations near OXY’s current EV/DACF multiples and thus we do not expect the transactions will be materially accretive to valuation; however, a sizeable buyback program should support its share price in the near-term. Beyond the restructuring, we believe OXY needs to improve its U.S. capital efficiency and boost its organic growth rate in order to maintain its 0.5x turn premium to peers on EV/DACF.
Doug Leggate, Senior Analyst for Bank of America Merrill Lynch, said OXY’s share buyback could be 10% to 15% of its outstanding shares. “This marks the first major step of a two phase process that ultimately shrinks OXY from a production level of 772 Mboepd in 2Q to around 500,000 boepd. We maintain our view that a standalone California entity positioned as a resource play is a likely phase two… Given the disconnect with oil prices, a defensive balance sheet, significant buy back and prospect of more competitive growth per share we maintain OXY amongst our top sector picks.”
Pavel Molchanov, analyst for Raymond James Energy Group, said a share buyback is expected, and believes company spin-offs are possible in his note on October 18, 2013. “The obvious answer is a full-fledged corporate breakup, e.g., the creation of a separate public entity containing Occidental’s international operations. This option has been mooted by management earlier this year, and while no such decision has been made thus far, we still think it’s a viable option for what might be called “phase two” of the restructuring plan. Also, any spinoff or sale of OxyChem (OXY’s wholly owned subsidy which manufactures and markets chlor-alkali products and vinyls) remains hypothetical for now.”
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