Strategic Move Offers A Leaner, Meaner Occidental Petroleum

Feb.14.14 | About: Occidental Petroleum (OXY)

Executive summary:

  • The Occidental Petroleum split will serve investors in the long term.
  • Oxy's business lines to be headquartered in Houston offer the emergence of a leaner, more focused competitor in the oil and gas space.
  • Independent firms are re-tooling to do what it takes in shale oil plays.


Occidental Petroleum (NYSE:OXY), Texas' largest oil producer, just announced the spin-off of its California assets as a stand alone company. This move had been a possibility for a while. The other interesting news is that Oxy, consisting of its Middle East/North Africa assets, Permian Basin, midstream and chemical business, will become a Houston-based firm. The larger Oxy is relocating to Texas, where the oil and gas "cluster" of knowledge and activity exists. This is a good move -- leaner, potentially more potent Oxys in California and Texas.

The split is thought to be final by the end of 2014 or early part of 2015. The new California company will be the largest oil and gas mineral acreage holder in the state with ~2.3M net acres, in the high-potential oil and gas basins, including Los Angeles, San Joaquin, Ventura and Sacramento. It will be California's largest natural gas producer and the states largest oil and gas producer on a gross-operated barrels of oil equivalent basis.

The company states:

The company believes that it will be better positioned to continue its strategy of generating growth with strong returns on capital and consistently increasing its dividend. Consistent with Occidentals strategic review to focus in core businesses, it also plans to reduce its exposure to proprietary trading activities related to crude oil and other commodities.

Other independents have been redefining themselves and re-focusing their energies in the last couple of years. Some moved fairly quickly such as Pioneer (NYSE:PXD), who ditched its international assets to focus on U.S. onshore assets. It is targeting the Permian Basin, wherein 900,000 acres will provide 9.6 billion boe of net recoverable resource potential in 2014, up 2.3 billion from 2013. This resource potential all derives from the Midland Basin's Spraberry/Wolfcamp play from horizontal drilling in 20,500 locations. Apache (NYSE:APA) has also been re-configuring its portfolio, ramping up capital for efforts toward its U.S. onshore assets in the Permian Basin and Central Basin.

For $76 billion Oxy, the move to Texas indicates a commitment to a business model that will ultimately serve shareholders. For investors, this geography-based play may be a source of added return. In new research by Finance Professor Johan Sulaeman of Cox School of Business, Southern Methodist University, and co-authors, their findings suggest that local information advantages do matter, and institutional investors that play the local advantage angle realize higher returns on their stock portfolio holdings.

There can be an information advantage gained from soft information from local sources as opposed to hard data alone. The researchers findings make important contributions to the emerging literature in finance that recognizes the importance of geography. A concentration of local stocks may have higher risk, but the rewards may also be higher. Investors may believe the local information is good enough to bet this way. Think of hedge funds and investment boutiques in Houston concentrating in oil and gas stocks, given the proximity to energy firms, distribution networks, and sources of oil supply.

This geography-based information advantage is also true for younger and smaller firms and more volatile or less liquid stocks, and the institutional ownership of these stocks in their economically-relevant locations or states was important. "The performance of institutional investors' local (ER) portfolios depends directly on the potential availability of local information, both at the level of the individual holding and of the local portfolio as a whole," the authors write. Technology stocks and other types of growth stocks are likely to fall into the hard-to-value category, where specialized knowledge is needed to evaluate the firm's prospects.

From Oxy's move, the management efficiencies gained and their implications may also contribute to shareholder and investor value. A social network effect alluded to in other research suggests that management guidance will be benefited. Oxy was up 3.5% as of this writing. Just when observers thought the shale oil impact could not offer many more surprises, it just did.

See article on Oxy's Permian focus.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.