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Oxy to Spin Off California Business, Relocate to Houston

Storied Los Angeles-based Occidental Petroleum Corp. on Friday announced it would spin its California assets into an independent, separately traded company and relocate the global outfit to Houston. The news follows an announcement Thursday that it would sell its gassy Hugoton field leasehold for $1.4 billion.

Known to most as simply "Oxy" because of its New York Stock Exchange ticker, the explorer was founded in 1920 by Armand Hammer. Oxy has since then become one of the world's largest and best-known producers.

Oxy is the fourth largest U.S. oil and gas company based on 2011 year-end equity market capitalization. At the end of 2011, more than 40,000 were employed worldwide.

The new 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 was tapped to head the operation last year (see Daily GPI, May 6, 2013).

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. Last year Oxy’s 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.

Occidental 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 exploration and production (E&P) assets in the the United States, as well as a marketing segment, and OxyChem, a chemical subsidiary. Although it is a global operator, the United States is the heart of Oxy operations.

Including California, domestic developed and undeveloped leaseholds encompass nearly 8.1 million net acres, with 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.

"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 Occidental's strategic review to focus in core businesses, it also 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 also 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. Oxy expects to incur one-time charges related to the spinoff, quantified later this year.

The day before the announcement, Oxy agreed to sell Hugoton, a huge Midcontinent gas field, 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. The sale is set to be completed by the end of April.

"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 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.

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