As 2013 draws to a close and 2014 stands on the horizon, it's a new era for Occidental Petroleum (OXY +0.83%). The company is in the process of a major restructuring, which will include considerable asset sales and a refocusing of its core operations. Other oil and gas majors, including ExxonMobil (XOM +1.00%) and BP (BP +2.21%), have acted similarly in recent months, shedding billions of dollars worth of assets deemed non-critical.
What makes Occidental's strategy different is how it plans to use any proceeds from these asset sales. Its rivals focus on returning cash to shareholders and shoring up their balance sheets, but Occidental has bigger plans in store. It's doubling down on the United States and reinvesting confidently in domestic fields, which is why investors stand to win big next year and beyond.
A 'more manageable' Occidental Petroleum in 2014
This is management's overall sentiment of what it wants the Occidental Petroleum of the future to look like. The company notified investors earlier this year that it intended to pursue actions, including selling assets, that would create a 'smaller company with more manageable exposure to political risk', in the words of Chief Executive Stephen Chazen. The first step to realizing this goal is selling off assets that are located in areas of the world with pronounced political risk.
Front and center are Occidental's Middle East and North Africa assets. These operations are fairly considerable, so the fetching price figures to be significant. Occidental's Middle East and North Africa assets generated $1.7 billion in after-foreign tax cash flow through the first six months of 2013. According to analysts with Citi, Occidental's Middle East and North Africa business is worth about $22 billion. Should Occidental Petroleum decide to sell these interests, it would follow a recent trend of oil and gas majors shedding assets in risky geographies.
Asset sales are a major theme in energy
ExxonMobil recently announced it would sell its stake in a Hong Kong power-generation company for more than $3 billion. It will likely use the proceeds to buy back its own stock, which is the primary way the company returns cash to shareholders. ExxonMobil bought back $3 billion worth of its own shares in the most recent quarter.
BP, meanwhile, has a particular set of issues to deal with. BP primarily uses cash to fund its hefty 5% dividend and buy back stock, but the company is also shoring up its books to deal with the ongoing penalties resulting from the 2010 Gulf of Mexico oil spill. In all, BP has spent more than $42 billion in penalties and damages resulting from the 2010 Gulf of Mexico oil spill. Going forward, BP likely has billions in additional penalties coming once the ongoing civil trial concludes. That's why BP has already divested $38 billion in non-critical assets, and announced its intention to divest another $10 billion by the end of 2015 to protect itself against further damages.
How Occidenta Petroleum l investors stand to benefit
Occidental, like its rivals, plans to buy back stock with the proceeds from any asset sales. The company is also committed to providing a competitive dividend, which it increases regularly. Therefore, for investors who are concerned with getting their fair share of cash, Occidental isn't falling behind in that regard.
But in addition to buybacks and dividends, Occidental is plowing resources back into the United States, which contains several promising fields without the risk of operating in unstable areas of the world. Occidental is expanding on its Permian Basin operations, where the company already derives the bulk of its oil and natural gas liquids production. One specific initiative to grow its Permian business is the building of the BridgeTex Pipeline, which should improve realized oil prices from the Permian region.
Growth will be further achieved by focusing investment on longer-term projects. Proof of this can be found in Occidental's plans to devote a higher-than-normal portion -- approximately 25% -- of its 2013 capital budget on long-term oil, gas, and chemicals projects. These are designed to come on-line in 2014 and 2015, and should substantially boost future earnings and cash flow. These projects include the BridgeTex Pipeline, as well as a new chemical plant in Tennessee and enhancements to their existing gas and carbon dioxide processing plants to expand their capacity.
The bottom line is that while its major rivals make share buybacks and dividends their primary focus, Occidental Petroleum still has its eyes on growth in a big way. Because of this, Occidental is likely to reward its shareholders handsomely in 2014.
