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In February of this year, Occidental Petroleum (NYSE: OXY ) , one of America's largest independent oil companies, announced that it would be spinning off its California assets and relocating to Houston in a strategic split of the company. In addition, Occidental announced that it was "reviewing options" for a continued peel off of various international assets.
This split, in my opinion, is very welcome news because the stock has been undervalued for a number of years. This proposed split follows in the footsteps of what ConocoPhillips (NYSE: COP ) did in 2012. Like Conoco, Occidental is doubtlessly looking to "unlock" the true value of its business units by splitting the company up.
Before and after
To understand how Occidental might split up, and thereby create value for shareholders, we have to understand the business as it is today. While Occidental has been slimmed down since the 90s, it does still have a wide range of somewhat disparate assets:
- Occidental's flagship acreage lies in the Permian Basin, and includes CO2-flooding operations, the most cash flow-positive piece of the company. Holding nearly 2 million acres, Occidental also has vast potential for horizontal drilling here;
- Occidental is the largest oil and gas acreage holder in California, owning various waterflood and steamflood properties;
- Significant operations in the Bakken;
- A chemicals business;
- A significant interest in midstream company Plains All American Pipeline (NYSE: PAA ) . This interest was recently sold;
- A wide range of international assets in the Middle East and Latin America. Concentrations include oil production in Colombia, oil and gas operations in Qatar, a large gas field in Oman, and a brand new gas plant under construction in the UAE.
Prior to Occidental's February announcement, many expected just the international assets to be sold and perhaps the chemicals business to be spun off. But instead, management went for something much more fundamental: a split of the California and Texas businesses.
The new Oxy
In splitting its company by its two single most valuable pieces, this breakup will result in at least two fundamentally different businesses. While the Middle East and Latin American assets will initially be part of the Texas-based business, it is conceivable that they will also be sold off at some time.
The more exciting part of this breakup story will be a split of the American operations into two camps:
- A growth-oriented business anchored by flagship waterflood and steamflood assets in California. This business, presumably, would also hold Occidental's higher-growth Bakken acreage. Growth will be driven by Bakken acreage, California steamflood operations, and also Elk Hills drilling. The more profitable but less prolific California waterfloods will serve as a provider of cash flow.
- A value-oriented business in the Permian Basin of West Texas. The Permian's vast CO2 flooding oil operations will provide significant free cash flow, which could lead to a nice dividend. In addition, as the Permian's largest acreage holder, Occidental has tremendous untapped potential for horizontal drilling in the Wolfcamp and Bone Spring shales.
Bank of America energy analyst Doug Legette, in a report published last summer, wrote that the sum of Occidental's parts, when accounted for separately, should be worth around $150 per share. He also confirmed that Occidental will "definitely split into multiple parts." Currently, Occidental trades at just about $93 per share, so this upside is comparable to that of ConocoPhillips in 2012. Not only that, Occidental will pay you a 3% dividend to wait for the spinoff. Occidental has some tremendous assets, and I believe that it is a compelling buy right here.
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