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Occidental Up on Strategic Spin-Off Plan

Zacks Equity Research

Occidental Petroleum Corporation’s (OXY) share price moved up 3.8% to close at $95.76 on Feb 14. Investors reacted positively to management’s decision to separate the company’s Californian oil and natural gas assets and form an independent traded company.

Last Friday, before the market open, Occidental Petroleum made the announcement and the board of directors of the company has already provided their approval. The spin-off is expected to be completed by the end of 2014 or the beginning of 2015. The completion of the transaction is subject to several approvals.

Post-transaction, the new entity will set up its headquarter in the state of California, and employ 8,000 workers and contractors. The new company will be the largest oil and gas mineral acreage holder with roughly 2.3 million net acres, covering operations in mineral-rich basins like Los Angeles, San Joaquin, Sacramento and Ventura.

Post separation, Occidental Petroleum will be headquartered in Houston, Texas. The company will be engaged in exploration and production operations in the Permian Basin and other areas of Texas, the Middle East region and Colombia. In addition, Occidental Petroleum will manage its midstream and marketing segment along with a chemical unit, OxyChem.

We noticed gradual improvement in natural gas demand in the U.S. The proposed spin-off will enable Occidental Petroleum to manage its business more efficiently and control the scale of operations, thereby meeting increased customer demand.

Last year, Occidental Petroleum produced 90 thousand barrels of oils equivalent per day (“mboe/d”) of oil, 20 mboe/d of natural gas liquids and 260 million cubic feet per day (“mmcf/d”) of natural gas from California. In 2013, the company’s total annual production was 154 mboe/d.

At the end of 2013, Occidental Petroleum estimated liquids and natural gas reserves of 603 million barrels of oil equivalent (“mmboe”) and 843 billion cubic feet (“bcf”), respectively, in California. The company’s total reserves were 744 mmboe.

To develop its assets of this region, Occidental Petroleum invested $1.7 billion in 2013 and plans to invest $2.1 billion in 2014 for exploration and production activities.

We expect the spin-off will enable both companies to efficiently execute their long-term growth plans and focus more on their strategic goals, while improving shareholders’ value.

Occidental Petroleum currently has a Zacks Rank #3 (Hold). However, some better-ranked stocks in the same sector include Athlon Energy Inc. (ATHL), Clayton Williams Energy, Inc. (CWEI) and Matador Resources Co. (MTDR), each with a Zacks Rank #1 (Strong Buy).

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