Occidental Petroleum - As Investors Applaud The Restructuring, How Much Is The Core Business Valued At?

| About: Occidental Petroleum (OXY)

Summary

Restructuring effort going well with regards to the US spin-off, while it still awaits buyer for assets in Middle-East.

US production keeps increasing, strong pricing boosts profits and reserves estimates.

Yet the true value of the core business remains to be seen during the restructuring process.

Occidental Petroleum (NYSE:OXY) managed to keep investors happy as the US oil major reported a jump in profits despite falling production.

Investors are pleased with the pace of restructuring and growing domestic oil production as it still remains to be seen how the value of Occidental will look like once the spin-off of its assets in California and the sale of Middle-Eastern assets is complete.

First Quarter Headlines

Occidental reported a solid performance over the past quarter. The company posted 3.7% revenue growth as revenues came in at $6.09 billion.

Reported GAAP earnings came in at $1.39 billion up from $1.35 billion last year. Earnings per diluted share were up by seven cents to $1.75, aided by share repurchases.

All About Oil & Gas

Occidental generates the vast majority of its revenues from oil and gas sales, the business segment which makes up nearly 90% of its operating earnings.

Oil and gas revenues were up by 5.3% to $4.68 billion with segment earnings increasing to $2.10 billion, for sky high profit margins. Production of barrel of oil-equivalents fell by 18,000 barrels to 745,000 barrels. While US oil production rose by 10,000 barrels to 274,000 barrels, natural gas production in the US was disappointing. The company furthermore produced less oil and gas in the Middle-East.

The chemical business posted a 3.8% increase in revenues to $1.22 billion with segment earnings falling to $136 million. Midstream and marketing revenues fell by 4.0% to $435 million as segment earnings contracted to $170 million.

Valuation, Shareholder Value And Capital Expenditures

Trading at $95 per share Occidental commands a valuation of its equity of $75 billion, while it holds a net debt position of about $7.0 billion.

This values equity in the business at roughly 3 times annual sales of $24.2 billion over the past year. Based on last year's earnings of $4.6 billion the business is valued at 16 times earnings.

While production is falling at the moment, US production is increasing and the company is making big investments to continue to grow domestic production.

It spent $2.3 billion on capital expenditures in the first quarter and the $10.3 billion being spent in 2013 resulted in a 169% replacement ratio against production that year. Note that this excludes the impact of divestments. As a result total reserves on an oil-equivalent basis rose to a record 3.5 billion barrels.

Despite these additional investments and the increase in the net debt position, Occidental continues to please investors. The company has paid dividends every year since 1975 with its current quarterly dividend of $0.72 per share yielding 3.0% for its investors.

Occidental was aggressive with buybacks in the first quarter by repurchasing 10.5 million shares at a rate of 5.3% per annum. This came after the board of the company authorized the purchase of another 30 million shares as restructuring efforts of the company continue.

Divestment of California assets

In February of this year, Occidental announced that its board authorized the separation of the Californian assets in a separately traded company.

The new company with 8,000 workers will own 2.3 million net acres in the state while the business reported $1.5 billion in operating earnings last year. The company will have a balance sheet including $4 to $5 billion in funded debt, targeting to make $2.1 billion in capital expenditures in 2014.

The separation which has been announced in October of last year is expected to go into effect later this year or early in 2015.

The operations in California have been struggling partially due to the tougher regulation and restrictions on drilling. Local governments are especially wary about cracking techniques.

Projects

For now Occidental remains committed to its Al Hosn gas project in Abu Dhabi which is expected to come online later this year. Once fully ramped up the facility is expected to deliver $2 billion in free cash flows in the future.

The BridgeTex pipeline is expected to come online during the summer as 450 miles of pipelines allow for the transportation of roughly 300,000 barrels of oil per day between the Permian production and the Gulf Coast refineries.

Implications For Investors

Like many oil companies, Occidental is focusing on its home roots in the US. As a matter of fact the fourth largest oil and gas company within the US is even splitting its domestic operations, focusing on the lucrative Permian based assets by splitting of the slightly problematic Californian assets. As such they try to squeeze out more shareholder value by increasing its focus. While the valuation of the spin-off is still unknown a deal could easily be worth over $15 billion with $1.5 billion in pre-tax earnings.

Besides splitting up the company, the company might be getting more aggressive in divesting some of its Middle-Eastern exposure. Occidental seeks a buyer for a minority stake in the Middle-Eastern and North African operations after renewed problems in Yemen and Libya took a toll on production. Bloomberg reported last year that a 40% stake in the business would have to bring in $8 billion, valuing those operations at $20 billion.

As such there are a lot of steps to take for the company before the true value of Occidental's core business is properly revealed including the spin-off and divestment of Middle-Eastern assets. In the meantime investors can count on a management team committed to create shareholder value, although I cannot accurately value the stand-alone valuation of the company following this restructuring yet.

I therefore remain a bit cautious, but do keep an eye on the restructuring process along the way. Given the huge reserve potential and high margins, the Permian assets might be very lucrative, it just all depends on the prices being realized during the restructuring process along the way.

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.