Why Occidental Petroleum Corporation Is Poised to Outperform

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.

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.


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