Occidental Petroleum Corp., headquartered in Los Angeles since 1920, is relocating to Houston and spinning off its California exploration and production (E&P) unit to create a new independent.
The move likely would accelerate operations in the United States. Last year the E&P produced 291,000 boe in the United States alone, lifted by growing volumes in the Permian Basin of West Texas.
The announcement came one day after the explorer agreed to sell its gassy Hugoton leasehold in the Midcontinent for $1.4 billion.
The California-based standalone would remain the state's largest natural gas producer and, on a gross-operated boe basis, the biggest oil and gas producer. The business carries with it about 8,000 employees and contractors.
"Creating two separate energy companies will result in more focused businesses that will be competitive industry leaders," said CEO Stephen Chazen, who took the helm last year.
Known to most simply as "Oxy," its New York Stock Exchange ticker, the explorer was founded by Armand Hammer. Oxy has since then become one of the world's largest and best-known producers and is the fourth-largest domestic E&P based on 2011 year-end equity market capitalization. It has an estimated 40,000 employees and contractors worldwide.
The West Coast independent's portfolio includes close to 2.3 million net acres with prospects in the Los Angeles, San Joaquin, Ventura and Sacramento basins. In 2013, the California unit earned $1.5 billion on a pre-tax basis, with gross earnings of $2.6 billion and capital expenditures of $1.7 billion.
Oxy already had planned to increase spending this year for the California business to $2.1 billion. The spun-off company would carry between $4 billion and $5 billion of funded debt on the balance sheet.
The relocated worldwide operator is to hold E&P assets in the Permian Basin and other parts of Texas, as well as the Middle East region and Colombia. It also would have the midstream and marketing segment, and OxyChem, a chemical subsidiary.
"The company believes that it will be better positioned to continue its strategy of generating growth with strong returns on capital and consistently increasing its dividend," management said. Consistent with its strategic review to focus in core businesses, it plans to reduce its exposure to proprietary trading activities related to crude oil and other commodities.
Chazen would remain as president and CEO of the Houston company through the 2015 annual meeting. Chairman Edward P. Djerejian agreed to remain for another year.
The California management team should be announced by the second half of the year, with separation expected to be completed by early 2015. The separation would be based on market conditions, the board said. Occidental expects to incur one-time charges related to the spinoff, to be quantified later this year.
The news followed an announcement Thursday to sell Hugoton for $1.4 billion to an undisclosed buyer. The field extends from southwestern Kansas into parts of Oklahoma and Colorado. Average net production in 2013 was about 110 MMcfe/d, 70% weighted to gas.
"This was approved...as part of Occidental's strategic review to streamline and focus operations where it has depth and scale in order to better execute" the long-term strategy, the company said. The sale should be completed in April.
The United States is the heart of Occidental's operations. Including California, domestic developed and undeveloped leaseholds encompass nearly 8.1 million net acres. It has leaseholds in the Permian Basin in West Texas, Eagle Ford Shale in South Texas, Piceance Basin in Colorado and the Williston in North Dakota. It also has various associated gas assets in the Permian.
Oxy’s move to more domestic oil-weighted production was clear in the fourth quarter from a year ago. U.S. oil and liquids output climbed to 270,000 b/d from 265,000 b/d.
California oil and liquids contributed 94,000 b/d in the final period, 2,000 b/d more than in 4Q2012, while Permian output was flat and Midcontinent volumes rose by 3,000 to 30,000 b/d.
In January senior executive Vicki Hollub said 2014 would be a "pivotal year" for the Permian operations (see Shale Daily, Jan. 31). The producer has about 2.5 million net acres in the West Texas play.
Meanwhile, natural gas production in the period declined to 762 MMcf/d from 800 MMcf/d. California output rose to 260 MMcf/d from 242 MMcf/d, but in the Permian, it declined to 147 MMcf/d from 162 MMcf/d. Midcontinent gas output dropped to 355 MMcf/d from 396 MMcf/d.
The spin-off news appeared to cheer investors. Ahead of market close on Friday, Oxy shares had gained close to 4% on the day, with more than double the average number of trades at around 6.87 million.
Goldman Sachs reiterated a "buy" rating with a price target of $109.00.
"We believe the separation of California E&P in particular will help investors better understand the growth/returns characteristics of this unique E&P business," said Goldman analyst Arjun N. Murti. "We have long viewed [the] California asset base as holding significant oil and gas resources that can be developed at competitive costs.
"In our view, the assets are likely to be better appreciated by investors when run under a more typical 'E&P' business model that focuses on volume growth," and earnings generation, "rather than as part of a major oil company."
Murti also favorably viewed Chazen's extension as CEO, "given his track record of focusing on total shareholder returns."
TheStreet.com also rated the company a "buy."
"This is driven by some important positives, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover," said the analysts. "The company's strengths can be seen in multiple areas, such as its revenue growth, compelling growth in net income and impressive record of earnings per share growth. We feel these strengths outweigh the fact that the company has had lackluster performance in the stock itself."
Sterne Agee's Tim Rezvan said the California business could generate 6-7% oil-focused growth production this year, accelerating in 2015 and beyond.
"2013 production from California averaged 154,000 boe/d (58% oil)," Rezvan said. "We estimate 2014 production will average 163,000 boe/d (61% oil)."
In related news, Elisse B. Walter, former chair of the U.S. Securities and Exchange Commission (SEC), was elected to the board. Walter was appointed to the SEC in 2008; President Obama named her chair in December 2012. She previously served as general counsel of the Commodity Futures Trading Commission and as senior executive vice president of regulatory policy and programs for the Financial Industry Regulatory Authority.