Occidental Looks to Profit From Spin Off

OccidentalOccidental Petroleum Corporation, the largest oil producer in the continental U.S., will spin off its California operations from the rest of the company. This is a final step of a breakup plan for Occidental. Chief Executive Officer Stephen Chazen stated that by creating a second similar company, Occidental looks to remain focused and profitable.

The company stated that the new subsidiary will own about 2.3 million net acres of land in California. It will have 8,000 employees and contractors, and its headquarters will remain in the state. It will also be California’s largest natural gas producer. The final spin off is set for the end of 2014 or early 2015.

Chazen states that he will look for investors to buy a stake in the new subsidiary. He hinted that his targets are located in North Dakota and the Persian Gulf. Meanwhile, analysts announced that the new company could be worth as much as $22 billion next fall. It can also carry as much as $5 billion of debt. The firm generated revenue of $4.3 billion last year. The assets being spun off represent about 20 percent of Occidental’s total production.

The energy industry itself has taken some hits in recent years. An overproduction from shale fields has driven prices down. Though a cold 2014 winter has increased purchase of natural gas for heating, this has not provided a full recovery to Occidental or its competitors .

The spin off includes an agreement to sell over a million acres of its Hugoton Field for $1.4 billion to an unnamed party on Thursday. According to The Wall Street Journal, the oil fields averaged a net production 110 million cubic feet in 2013. The sale will be completed by the end of April, and Occidental expects to earn a profit from the agreement. The company looks to use the proceeds to fund further exploration and to continue its stock repurchase program.

One analyst, Fadel Gheit of New York-based Oppenheimer & Co., suggested that Occidental use the spinoff for its overseas operations, instead of selling a stake in the business.

Once completely spun off, the new company will seek to be a leader in the Monterey Shale harvest. Monterey Shale is a vast rock formation that spans much of the state. Energy officials believe it contains up to 15 billion barrels of oil, most of the nation’s shale-oil resources. Occidental currently produces the equivalent of 154,000 barrels of oil and natural gas a day in California.

Other oil and gas producers such as Hess Corp and Chesapeake Energy Corp are also streamlining their operations. Like Occidental, they look to the more profitable shale fields in North America, hoping to increase shareholder returns.

While Occidental suffered lackluster performance in 2011 and 2012, its stock advanced by nine percent in the past year. It also climbed by three percent on Friday morning, though it is unclear if this was a direct response to Occidental’s decision.

Analysts’ applauding of the spin off has been virtually unanimous. Details about whether it will continue selling to outside investors or not, remains unclear. Nonetheless, recent stock performance by Occidental shows that experts believe the company looks to be moving from frustration toward profitability.

By Ian Erickson

Bloomberg News
Wall Street Journal

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