With the Chairman Out Look for this Stock to Rise

Marshall is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Shareholders in Occidental Petroleum (NYSE: OXY) can finally breathe a sigh of relief now that former Chairman Ray Irani is gone. Over the last four years he has taken over $200 million in compensation from the company and has made nearly $1.1 billion in his 20 years as CEO. Ray Irani decided on Friday to withdraw his name as a nominee to the company's board. This now clears the way for current CEO Steve Chazen to focus on improving costs at the company and unlocking value for shareholders.

The Irani Era

Ray Irani took over as CEO of Occidental Petroleum in 1990 after the death of company founder Armand Hammer. Irani's lavish compensation has been criticized for many years as being excessive and not truly performance based. Over the years he earned substantially more than the CEOs earned at ExxonMobil (NYSE: XOM), which has a market cap five times greater than Occidental's.

In 1990 Irani inherited a conglomerate that included oil, movies, and meatpacking. In his 23 years in charge, he transformed the company into the fourth largest oil producer in the United States and sold off unrelated assets. He expanded the company's international reach with his connections in the Middle East, beating out rivals and won drilling contracts in the Middle East and North Africa. He famously said that he gave oil ministers his home number to call him any time.

Peer Picture

Occidental Petroleum has a current market cap of $71.99 billion. This puts Occidental as one of the largest operators in the industry, but still well below some major peers. ExxonMobil trades with a $410 billion market cap, and Chevron (NYSE: CVX) trades at $239 billion. Exxon has a robust investment program, with plans to spend about $185 billion over the next five years, up 29% from the last five-year period. This CapEx plan will cover as many as 21 oil and gas projects, and is estimated to accumulate over 1 million net oil-equivalent barrels per day by 2016. 

Exxon also remains in superb financial health and has an AAA credit profile. The company has a solid share buyback program in place, having repurchased $5 billion in shares during the fourth quarter and targeting a similar buyback level going forward. 

Chevron also has a very strong oil and gas development project pipeline, where the company plans to target volume growth of 20% by 2017, more than twice the rate of growth from 2003 to 2010. The company has also been re-focusing its asset portfolio, having sold it marketing businesses in Kenya, Nigeria, Uganda, Western Africa and Brazil. 

Much like Exxon, Chevron has solid financial flexibility and strong balance sheet. The oil and gas company has $21 billion in cash on hand and a debt-to-capital ratio of just over 8%. Chevron's buyback program includes a target of up to $1 billion of its common stock quarterly. 

Valuation

Occidental trades at 12 times forward earnings, which is above Exxon (11.1 times) and Chevron (11.5 times); yet, Occidental has grow its dividend by an annualized 20% over the last five years, compared to Exxon's 12.5% and Chevron's 11.5%. 

The other side of the story is earnings growth, where, yet again, Occidental reigns supreme. Analysts expect Occidental to grow EPS at an annualized 5.9% over the next five years, and Exxon at 1.8% and Chevron at 1.6%. 

Over the past year, Occidental is up only 2.80%. Of the analysts that follow the stock, 6 have it rated as a Strong Buy, 10 a Buy, and 8 a Hold. Price targets on the stock range from $82 to $120 with 99.50 being the median target.

Hedge fund trade

At the end of the fourth quarter, a total of 54 hedge funds were long Exxon. Billionaire Bill Gates' Foundation was the top fund owner at the time, owning some $662 million worth of stock, comprising 3.9% of its 13F portfolio (check out Bill Gates' big moves).

Meanwhile, going into 2013, there were a total of 42 hedge funds long Chevron. This includes billionaire Ken Fisher's Fisher Asset Management as having the largest position, worth close to $397 million, accounting for 1.1% of its total 13F portfolio (see Fisher's cheap stock picks).

Occidental had a number of billionaire hedge fund managers upping their stakes at the end of 2012. Billionaire D.E. Shaw (the top hedge fund owner by shares) increased his stake 86%, as did Jim Simons' Renaissance Technologies. Billionaire Steve Cohen's SAC Capital upped its stake by 241% (check out Cohen's top consumer picks). 

What's Next?

The company's shares have fallen 25% since it reached a high of $115 in 2011. During this time Chazen and Irani clashed over the direction of the company. Chazen wanted the focus to be on North America, whereas Irani advocated international expansion. Now Chazen is free to re-focus the company, and a breakup is likely.

Occidental could be broken up into four separate companies. Those companies could be a (1) U.S. crude producer, (2) international oil and gas company, (3) chemicals manufacturer, and (4) a pipeline and logistics company. According to Fadel Gheit, an analyst at Oppenheimer & Co., “each separate and standalone entity would be very competitive and highly valued in its own sector.”

In CEO Steve Chazen, shareholders have the right man for the job. As a former investment banker, he understands mergers and acquisitions and how best to create shareholder value. He has seen how shareholder value has been created in the oil sector when ConocoPhillips spun off its Phillips 66 operations and Marathon Oil spun off Marathon Petroleum. I don't think Chazen or the board want to be the targets of activists (like with Hess Corporation) if they don't follow through on increasing shareholder value. 

For a steady, low-volatility investment, investors can look toward Exxon or Chevron; however, for a higher-growth play (that also happens to pay a 2.8% dividend yield), investors can find value in Occidental. I see Occidental Petroleum as an undervalued stock with plenty of upside potential, and my target is $125 on a breakup of the company.

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Marshall Hargrave has no position in any stocks mentioned. The Motley Fool recommends Chevron. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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