Why Occidental Petroleum Corporation Is Poised to Outperform

Occidental Petroleum Corporation’s ongoing restructuring could be exactly the catalyst the company needs to unlock its true value and propel shares higher.

May 8, 2014 at 1:00PM

Often, all a company needs to unlock its true value is a catalyst. For Occidental Petroleum Corporation (NYSE:OXY), that catalyst could be its ongoing restructuring, which entails shedding assets to streamline its portfolio and focusing on growing oil production from its core asset in West Texas' Permian Basin.

Let me explain why Oxy's restructuring could be a catalyst to improve its financial performance and propel shares higher.

Linn Energy Granite Wash Drilling

Photo credit: Linn Energy, LLC

Oxy's new strategy
Occidental has had a rough past couple of years, as soaring expenses weighed heavily on its financial results. In an effort to boost its domestic oil and gas production, the company more than doubled its capital spending from $3.9 billion in 2010 to $10.2 billion in 2012. But the company's efforts to boost production were largely unsuccessful, which caused its share price to plunge.

But with a reconstituted board and a new strategy focused on slashing costs, improving capital efficiency, and growing oil production, Occidental is determined to turn things around. As part of this new strategy, it has already announced sales of various non-core assets and a spin-off of its California operations, which could be worth more than $20 billion according to analysts, into a separate publicly traded company.

So far, it has also sold a portion of its stake in the general partner of Plains All-American Pipeline (NYSE:PAA) and earlier this year announced the sale of gas-rich assets in Kansas' Hugoton field to for $1.4 billion. It is also marketing its assets in the Mid-Continent and in the Middle East and North Africa, or MENA, and is relocating its headquarters from Los Angeles to Houston.

Positive impact of restructuring
These various initiatives will generate substantial proceeds that can be used to pay down debt and buy back shares. For instance, the sale of a 40% share in Oxy's MENA assets, which are thought to be worth $22 billion, could bring in $8 billion to $10 billion for debt repayment and share buybacks, according to some analysts.

The sale of its MENA assets could also greatly boost the company's market value. According to Bank of America analyst Doug Leggate, Oxy's market value could be some $45 billion higher than its current value of $75 billion in the event of a split that separates its MENA assets.

Last but not least, asset sales will greatly streamline Occidental's portfolio and allow it to focus on its most profitable asset -- West Texas' Permian Basin, where it is one of the largest oil producers, accounting for nearly a fifth of basinwide production.

Permian will drive more profitable growth
Over the past year, Oxy has made commendable progress in cutting costs, improving capital efficiency, and boosting returns in the Permian through improvements in well design and other efficiency improvements. As of the fourth quarter, the company's capital efficiency in the Permian improved by 25% year over year, while operating expenses declined by 17%, or $3.22 per BOE.  

As a result, Oxy is now generating far better returns in the play. For instance, an average well at one of its core locations in the Permian is now generating a 48% internal rate of return, up from 24% before capital and operating cost reductions were achieved. As the company drills more horizontal Permian wells this year, it expects oil production to grow by 6%, which should generating $1.8 billion of cash flow after capital.  

Investor takeaway
By restructuring its portfolio, Oxy can now focus on its most profitable and most promising opportunities in the Permian basin, where it has decades of experience and advantages of scale. Meanwhile, asset sales will bring it plenty of cash that can be used to pay down debt and buy back shares.

If Oxy is able to bring in $8 billion to $10 billion from the sale of its 40% stake in its MENA assets, it could be a big catalyst to drive shares higher. Merrill Lynch has a price target of $130 per share, which represents more than 30% upside from Oxy's current price of $95 a share.

Will this stock be your next multibagger?
While Occidental Petroleum's restructuring looks likely to unlock a great deal of additional value for the company's shareholders, there's a huge difference between a good stock and a stock that can make you rich. The Motley Fool's chief investment officer has selected his No. 1 stock for 2014, and it's one of those stocks that could make you rich. You can find out which stock it is in the special free report "The Motley Fool's Top Stock for 2014." Just click here to access the report and find out the name of this under-the-radar company.

Arjun Sreekumar has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Bank of America. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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 fool.com.

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 www.fool.com/beginners, 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 www.fool.com/podcasts.

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