If you really want a brain teaser for the day, try wrapping your head around the Occidental Pertoleum (NYSE:OXY) story. For two straight quarters, all the buzz surrounding the company has been focused on breaking up the company into several parts to unlock shareholder value. Yet, the steps the company has made in improving operations, and the balance sheet, don't seem to garner any attention at all. Let's take a look at this puzzling situation and see why investors are set on the band splitting up.
Raise your hand if OXY has held back your portfolio
If you have been a shareholder in Occidental for the past three years, it's possible that you have some pent-up frustration to see the company wildly under perform the market. The total return price on Occidental -- share appreciation plus dividends -- has legged the total return price on the S&P 500 by 43%
Granted, Occidental hasn't exactly made it easy on themselves during this period, either. The company's shareholders gave its former CEO, Dr. Ray Irani, the boot back in 2011, only to keep him on as Chairman of the Board, while current CEO Steve Chazen took the reigns. (Oh to be a fly on the wall during those board meetings.) Since then, Occidental has tried a big boost to dividends, bought back 7 million shares, and even showed Dr. Irani and several other Board members the door -- even though it took $55 million this quarter to do so.
Not Seeing the Forest for the Trees
What must be most discouraging for Occidental's management is that the company has made some major steps toward improving the company. Over that time period, the company has brought down production costs per barrel across the entire company by 11%, and anticipates those costs to decline another 5% by the end of 2013. Also, the company has kept a very clean balance sheet, with a debt to capital ratio of 15.7%, well below its peer average of 29.82%. Furthermore, the company has also delivered a higher return on equity and dividend yield than several of its peers.
|Company||Debt-to-Capital||Return on Common Equity (LTM)||Dividend Yield|
Yet, despite all of these promising statistics, only Apache's shares have performed worse than Occidental, largely because the company has a ballooning debt problem.
Are you not entertained?!?
If these kinds of improvements can't seem to move the needle, then it is very possible that investors are dead set on the company spinning off some of its assets. Based on the assets on the company's books, there are a lot of directions the company can go with it.
The quickest way to shed some assets would be to wrap up its 35% general partner stake in Plains All-American, and create a Master Limited Partnership, since Plains itself has plans to do an IPO anyway. It would also allow Occidental to focus on becoming more of a pure E&P play rather than having some modest refining and pipeline assets in the books.
It may be very possible that the company will look to bundle its California assets into something, as well. During Occidental's most recent conference call, management went to great lengths to let everyone know exactly what was going on in the company's California operations, but balked when asked outright if California was on the auction block. Fellow Fool Matt DiLallo believes that these Cali assets would fit well as an upstream MLP in the mold of a Linn Energy because of the low decline rates and longer shelf life of the projects. But one hitch with any oil exploration in California is the long permit times and strict environmental regulations. In the word's of Mr Chazen: "This is not North Dakota".
What a Fool Believes
In some ways, the most recent operational performance of Occidental would suggest that chopping the company into bits isn't necessary, and that the company could be a turnaround candidate. But, ultimately, it appears that it is exactly what shareholders want, and the company's management is going to bow to their wishes one way or another.
If there was something to take away from this story, it's that the fundamentals of a company can change, and anchoring to your previous investment theory could be detrimental to your portfolio. It may be too soon to tell if Occidental will burn those hoping to profit from a breakup, but it is certainly something to keep in mind.
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