Should Investors Buy the Occidental Spinoff?

With Occidental sending its California operations off on its own, is this new standalone business worth a look?

Feb 25, 2014 at 9:30AM

It looks as though Occidental Petroleum (NYSE:OXY) wants to follow in the footsteps of Conocophillips (NYSE:COP) and Devon Energy (NYSE:DVN). These two companies have basically reshaped themselves into new companies through billions of dollars in sell-offs, mergers, and acquisitions. In the past couple weeks, Occidental has announced that it too will make some fundamental changes to its business model. The most notable move is to spin off its entire California business into its own publicly traded entity. Images

Photo Credit: Loco Steve via Flickr

So should investors take a hard look at this new investment opportunity? Let's take a look at this move by Occidental and see if it is worth our investment dollars.

New company, new opportunities
Unlike spin offs we have seen from others such as Conocophillips or Marathon Oil (NYSE:MRO) which split each company based on specific business segments, this move from Occidental is purely a geographical split. All operations that take place in California, regardless of whether they are upstream operations or processing facilities, will be spun off. The remaining aspects of Occidental, including its midstream pipelines and chemical divisions, will remain part of the existing company. The reason that Occidental has gone this way is because management believes that the California part of the business can do best as a stand-alone business. 

What will make this spin off so unique is that California's assets are a very wide range of exploration and production activities. The new company will hold about 2.1 million net acres in the state and will be the state's largest oil and gas producer on a barrel of oil equivalent basis, but those millions of acres range from very mature oil fields to what could turn out to be the nation's largest shale oil play

While the 15 billion barrels in the Monterey shale seems like an extremely attractive asset, it's still a very prospective play that may take several years to get a handle on. Thankfully, there are plenty of more certain production centers to generate cash in this new California business while it explores this new field. In 2013, unconventional exploration was only 25% of Occidental's $1.5 billion California budget.

Oxy Budget

Source: Occidental Petroleum Investor Relations

While this business may sound attractive because of its potential in the Monterey shale and the cash generation from its mature oil fields, there are some particularly challenging aspects that could hold this company back from realizing its potential. California has some of the strictest regulations for new wells, and the permitting process is extremely long. Also, there is the issue with California's struggle with extreme drought, which would make sourcing water for hydraulic fracturing of shale much more difficult than in more water-rich parts of the nation. 

When the entire spin off is complete, the California business for Occidental will probably be valued somewhere in the $20 billion range, making it one of the larger independent oil and gas operators in the U.S. What is also encouraging is that initial estimates from Occidental suggest that the company will generate EBITA of $2.6 billion, which is more than enough to cover its 2014 capital expenditures. These numbers suggest that a dividend would be possible.

What a Fool believes
Occidental's spin off plans go against the grain of its competitors like Conocophillips and Marathon Oil, but it doesn't mean that it is a bad decision for the company. Occidental's California business has actually been a source of funds for the company to spend on other projects, like its capital-intensive projects in the Middle East and the Permian Basin, so letting it stand alone as its own company may give it a chance to grow at a slightly faster clip than in recent years. For the parent company, spinning off $20 billion on top of its $1.4 billion sale of natural gas assets in the Hugoton Basin will give the company a very large reserve of cash, which will more than likely be used to bolster its position in its core holdings in the Permian Basin. 

This new business has the potential to be an attractive investment, but environmental regulations could make it difficult, and we are not completely certain what the capital structure of this new business will look like. It's probably best to wait and see until more detailed plans for the spin off are complete before considering it a buy.

What will be 2014's version of Core Labs?
The Motley Fool's chief investment officer really nailed his 2013 top stock pick with oil services company Core Labs, which shot up a spectacular 75% this year alone! Now, he has selected his No. 1 stock for 2014, and it's one of those stocks that has the potential for a great year ahead. You can find out which stock it is in the special report: "The Motley Fool's Top Stock for 2014." Simply click here and we'll give you free access to the name of this 

Tyler Crowe has no position in any stocks mentioned. You can follow him at under the handle TMFDirtyBird, on Google +, or on Twitter, @TylerCroweFool.

The Motley Fool owns shares of Devon Energy. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.

Compare Brokers