Occidental Petroleum Corporation (NYSE:OXY), the Los Angeles-based oil and gas company, recently reported its Q1 FY 2014 earnings that beat analysts' estimates due to higher oil and gas prices and improved production. On the other hand, the company's revenue during Q1 FY 2014 fell short of analysts' views. Therefore, in this article, I will take a look at the company's performance in the recently reported quarter. Additionally, I will also discuss some of the initiatives undertaken by the company in order to improve its performance and position in the coming periods.
A Glance at Current Results
Occidental Petroleum earned revenues of $6.09 billion in Q1 FY 2014, reflecting a 3.7% rise in comparison to the $5.9 billion revenue earned by the company in Q1 FY 2013. Despite the growth, the $6.09 billion figure missed analysts' expectations of $6.21 billion.
In terms of segments, the company's oil and gas segment was the primary driver of the company's revenue growth in Q1 FY 2014. The company's oil and gas segment recorded a 5.3% growth in its sales revenue in comparison to Q1 FY 2013. Additionally, the company's chemical segment was also up 3.8% in Q1 FY 2014 in comparison to Q1 FY 2013. However, the revenue growth logged by the company's oil and gas and chemical segments was partially offset by lower revenues from the midstream and marketing segment. The revenue from the company's midstream and marketing segment decreased by 4% in Q1 FY 2014 compared to Q1 FY 2013 (see table below).
Source: OXY Q1 FY 2014 10Q
As far as the company's bottom line is concerned, Occidental Petroleum's Q1 FY 2014 earnings rose to $1.39 billion, or $1.75 per share, from $1.36 billion, or $1.68 per share, earned in Q1 FY 2013. Moreover, the company's $1.75 earnings per share for Q1 FY 2014 also beat analysts' estimates of $1.70. The improvement in the company's bottom line was supported by the rise in oil and gas prices and production during the quarter. The company's realized price for worldwide oil was up around 1% to $99 per barrel, in comparison to the previous year's figure of $98.07 per barrel. The company's domestic average realized oil price recorded an increase of 4.8% during Q1 FY 2014 in comparison to Q1 FY 2013. Conversely, the company's average realized oil price in the Middle East/North Africa recorded a decline of 2.7% in comparison to the price in Q1 FY 2013 (see table below). Therefore, the company is restructuring its operations and assets to focus more on growth areas.
Source: OXY Q1 FY 2014 10Q
Preparing to Focus on More Productive Operations
Like other U.S. oil companies, Occidental Petroleum has also opted to sell assets as an approach to concentrate on more profitable projects. The company announced a deal in Q1 FY 2013 to sell assets in the Hugoton Field for $1.4 billion to an undisclosed buyer. Occidental's average net production from the Hugoton Field properties was about 110 million cubic feet equivalent per day in FY 2013, and around 30% was oil.
Occidental expected the transaction to be closed by April 30, 2014 after acquiring regulatory approval. The company anticipates it will record a gain on the sale. Occidental has disclosed that it will use the proceeds from this transaction to partially fund the declared increase in the company's share repurchase program.
Additionally, the company is planning to spin off its California and Bakken assets and sell its foreign operations in the Middle East and North Africa. In Q1 FY 2013, Occidental Petroleum's net oil gas and liquids production per day was 745 thousand barrels of oil equivalents (MBOE), as shown in the following table. This production volume was down 2.4% in comparison to Q1 FY 2013, primarily as a result of lower overall domestic production due to a reduction in domestic gas drilling and lower production from the Middle East/North African operations. Therefore, the company is eliminating low-production operations in the Middle East and North Africa in order to focus on more productive facilities.
With increased focus on the Permian Basin in western Texas, the company is anticipating a 13%-16% growth in the production of this region in FY 2014. Furthermore, the company's New Johnsonville chlor-alkali plant has started production in March 2014. The company's BridgeTex Pipeline is expected to start operations in Q3 FY 2014, and the Al Hosn Gas Project is anticipated to start production by the end of FY 2014.
The company is also looking to divest some of its assets in midstream operations. These include reducing its stake in Plains All American Pipeline LP (NYSE:PAA) in an effort to rationalize the company's operations and focus on more favorable operations. As stated earlier, the company's midstream and marketing segment recorded a 4% decline in its revenue in Q1 FY 2014 in comparison to Q1 FY 2013.
Occidental has also announced during Q1 FY 2014 that it would move its headquarters to Houston and its California operations will be converted into a distinct and publicly traded company. The split is likely to be accomplished by the end of FY 2014 or early FY 2015. This change is also a part of the company's plan to revamp and increase its share price and profitability.
According to Occidental, the newly spun-off California company will have 8,000 employees, and will be the state's prevalent natural gas producer. Occidental has not yet declared where the new company will be headquartered, but the management of the new company will be named in Q3 FY 2014.
The company will distribute at least 80% of the new shares in California Resources to Occidental shareholders. The California business will generate $2.6 billion in cash from operations, and is looking forward to boost output by 5%-8%.
The uncertainty regarding drilling in California is diminishing the potential value of the new company. Analysts are currently placing a $19 billion price tag on the company, as the detached producer will generate cash similar to Continental Resources Inc. (NYSE:CLR). Continental Resources mainly drills in North Dakota's Bakken shale, and is worth approximately $25 billion.
The company recorded an approximate 7% decline in the natural gas (MMCF) production from California in Q1 FY 2014 in comparison to Q1 FY 2013, as shown in the following table.
Source: OXY Announces 1st Quarter of 2014 Net Income
Concluding Remarks: More Returns For Shareholders
TheStreet Ratings team rates Occidental Petroleum as a buy, with a ratings score of B+. Occidental Petroleum's concurrent strategic asset divestment will enable the company to improve its future performance. The company is putting efforts into streamlining its business operations by eliminating its low-production operations. The company is restructuring and disposing its assets in the Middle East and North Africa, as well as its assets in midstream operations to focus on enhancing its production from the Permian Basin. The company has planned to serve the proceeds from these asset disposals to return cash to its investors. The company has increased its annual dividend from $2.56 per share to $2.88 in February 2014, and increased its share repurchase authorization to an additional 30 million shares. These returns to shareholders are supported by the rationalization of the company's operations, and I offer the stock a buy rating.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: The article has been written by a Gemstone Equity Research research analyst. Gemstone Equity Research is not receiving compensation for it (other than from Seeking Alpha). Gemstone Equity Research has no business relationship with any company whose stock is mentioned in this article.