Occidental: The Sum of the Pieces
07/24/2013 8:00 am EST
Occidental Petroleum, a major oil producer with a chemical subsidiary, doesn't get nearly enough credit for its ability to add to production—a critical test for any energy company today—or for its newfound zeal in creating shareholder value, suggests Stephen Leeb of The Complete Investor.
And with its positive free cash flow, Occidental Petroleum (OXY), passes the other critical test for energy companies today.
Slightly more than 75% of revenues come from oil and gas production, about 18% from chemicals, and the rest from energy marketing and transport.
Around one-third of revenues come from abroad, mostly the Middle East. Occidental's strategy has always been to go for growth, both organic and through acquisitions.
In the past, the market has rewarded growth in a big way. But today, with growth in the energy patch increasingly uncertain, precarious investors also look for transparency and efforts to increase shareholder value directly.
So while Occidental isn't abandoning growth, it won't be growth at any cost. Production growth should be in the high single digits over the next several years in both the US and internationally, while growth in chemicals and other energy businesses should remain strongly positive.
But the company also has announced it will forego new acquisitions to focus on unlocking shareholder value—including splitting the company into pieces.
How many pieces? We would guess from two to five. The biggest bang would probably come from a fivefold split: international production, domestic production centered in California, domestic production centered on Permian Basin shale assets, chemical assets, and marketing/midstream assets.
These various parts are candidates for sale to other companies, spinoffs, or IPOs. Our best guess would value the sum of the parts somewhere around $120 a share.
Occidental's biggest segment is its leading share in the Permian Basin, a productive shale oil and gas field. Applauding its shale stake might seem at odds with our view that shale isn't a long-term growth area.
But there are exceptions, and some 60% of Occidental's Permian Basin production comes from enhanced oil recovery, a much less capital-intensive and very profitable business.
With its ample free cash flow, we wouldn't be surprised if Occidental buys back its own shares and opts for sharper dividend increases.
Dividend growth has been about 15% a year in recent years and should remain close to that level. With its current yield of 2.8%, Occidental is a superb total return holding.