OXY Down on Strategic Review Plans

Zacks

On Oct 21, 2013, Occidental Petroleum Corporation’s (OXY) share price edged down 1.3% to $97.05 per share from the closing price of Oct 18. We believe that the market reacted negatively to the company’s announcement of the preliminary phase of strategic review to streamline its existing operations.

Last Friday, Occidental Petroleum announced that it plans to sell a minority interest in its operations in the Middle East/North Africa (:MENA) region, follow strategic options at selected Midcontinent assets and sell a part of the company’s 35% investment to the general partner of Plains All American Pipeline, L.P. (PAA).

We believe the company intends to continue with the current strategy to efficiently execute its long-term growth plans, improve shareholders’ value and manage political risks.

Occidental Petroleum is an active player in the MENA region for more than decades and also has interests in several Midcontinent assets. The company is engaged in exploration and production activities in the United Arab Emirates, Oman, Qatar, Libya, Iraq, Yemen and Bahrain. In the Midcontinent area, the company has interests in the Hugoton Field, Piceance Basin, Williston Basin and several other Rocky Mountain assets.

In the Midcontinent and MENA regions, Occidental Petroleum had total proved reserves of 1,140 million barrels of oil equivalent (Mmboe) as of Dec 31, 2012. During the first six months of 2013, the company’s net production was 329 thousand barrels of oil equivalent per day (Mboepd).

As far as the third strategy is concerned, Occidental Petroleum intends to sell a part of the company’s 35% investment to the general partner of Plains All American Pipeline. In Dec 2010, the company purchased additional non-controlling interests from the general partner of Plains All American Pipeline. Last year, the company’s Midstream, Marketing and Other segment generated 20% of total earnings from the acquisition. The company’s future segment profit is expected to be affected due to the part sale of this property.

We have observed that many petroleum companies are currently streamlining their operations by way of divestment and/or spin-offs to focus more on profitable ventures. In Sep 2013, Occidental Petroleum’s peer Murphy Oil Corporation (MUR) completed the spin-off of its U.S. downstream subsidiary, Murphy Oil USA, Inc. (“Murphy USA”). Another competitor Marathon Oil Corporation (MRO) announced that it plans to sell its interest in an offshore block in Angola.

Though the market reacted negatively to the company’s preliminary strategic review, we believe there are a few positive takeaways from these restructuring plans. Although the divestment will likely impact the company’s future production volume, reduced exposure to the politically instable MENA region will bode well for Occidental Petroleum’s upstream activities in the region.

Further, Occidental Petroleum expects to generate pre-tax proceeds of $1.3 billion from the sale of a portion of interest in the Plains All American Pipeline asset. This will enable the company to reallocate the fund to a prospective venture, thereby realizing a stable stream of future cash flows. These initiatives will help the company to maximize shareholders’ wealth in terms of distributing dividends at regular intervals.

Los Angeles, Calif.-based Occidental Petroleum is an integrated oil and gas company. The company currently has a Zacks Rank #3 (Hold).

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