Occidental Petroleum Poised to Unlock Shareholder Value
Matt is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
For some time, Occidental Petroleum (NYSE: OXY) has been a rudderless ship, with little to no strategic direction or clear strategy for the future. This has depressed its share price, causing its value to to lag behind industry peers such as Anadarko Petroleum (NYSE: APC) and Apache (NYSE: APA). However, recent announcements from Occidental make the company appear poised to unlock value for shareholders, and driven its share price 15% higher since March of this year.
A key to re-establishing investors’ confidence in the company has been a shake-up of senior management on the back of a shareholder revolt. This saw the chairman Ray Irani, step down in May this year, while CEO Stephen Chazen will remain in place through 2014 in order to find a successor. As a result, this has ended the protracted boardroom conflict between Irani and Chazen, allowing management to focus on building a focused strategic direction for the company.
In early June 2013, Chazen publically discussed the company's restructuring options as a means of unlocking shareholder value. These options include monetizing its international operations, which include extensive exploration and production operations in the Middle East, North Africa and Latin America.
At this time it is speculated that the most likely path would be a partial sale of its Middle East and North African operations, which at the end of the first quarter 2013 accounted for production of 31,000 barrels of oil per day and 929 million barrels of proved oil reserves. It is speculated that the most likely means of monetizing those assets would be partial sale of around 40%, either outright or through an IPO realizing $10 billion.
Another option being considered is spinning out Occidental’s troublesome Californian operations, which are valued at around $20 billion, leaving a core company consisting of its Permian basin operations, oil trading, pipeline and chemical assets.
The execution of either or both of these options would then provide Occidental with substantial funds that could be used to pay down its debt of around $7 billion at the end of the first quarter 2013 or return capital to shareholders by way of a share buyback, boosting Occidental’s share price.
The company is also increasingly focused on building its domestic U.S. production, which will see a significant reduction in the geo-political and economic risk that the company is exposed too, particularly in the Middle East. Over the long term, this should also assist in boosting Occidental’s share price by ensuring increased production stability.
Occidental is undervalued
It is clear that Occidental is undervalued by the market, particularly when its key valuation metrics are compared to its primary U.S. peers Anadarko and Apache, both of which have significant operations in the U.S. Both of these companies like Occidental are major operators in the independent oil and gas industry and have also increased their focus on their U.S. operations.
Like Occidental, both of these companies have considerable operations in the Permian basin, as well as international operations in Africa and Latin America. Both have also been struggling to provide value for shareholders and are facing issues including political and economic risk, along with production outages in Africa, which has also seen them increasingly focus on their domestic U.S. operations as a means of reducing risk.
Based on the valuation ratios presented in the chart below, it is clear that Occidental is undervalued.
A key metric used in the oil exploration and production industry to measure a company's value in comparison to its peers is its price per flowing barrel. Occidental's price per flowing barrel, while not cheap, does indicate that it is unfairly valued, despite being higher than either Apache's or Anadarko's. But it’s Occidental's enterprise value-to-EBITDA ratio and price to cash flow ratio that indicates that the company is cheap, especially in comparison to either Apache or Anadarko.
Occidental’s risk metrics show the strength of the company’s financial position, particularly when its low debt-to-equity ratio and debt-to-EBITDA ratio setout in the table below are considered.
These ratios are also clearly superior to either Apache or Anadarko, and they indicate that any investment in Occidental is of particularly low risk in comparison to those peers. It also highlights the considerable value can be unlocked, because of it's low debt and high cash flow.
The bottom line
The announcements made by Occidental to date have given investors a clear indication that the company is poised to unlock shareholder value through a divestment strategy. Furthermore, the company's low level of debt and strong cash flows make it clear that considerable value can be unlocked for shareholders if the right divestment strategy is implemented. This, I believe, makes now the time to invest before any further announcements are made.