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Summary

  • Occidental Petroleum's shares break the $100 mark on the back of spiking oil prices and positive analysts comments.
  • Occidental is in a huge transformation process, aimed to deliver even more value to investors.
  • The modest valuation based on 2015's pro forma earnings and commitment to create shareholder value might drive further appeal and returns.

Shares of Occidental Petroleum (NYSE:OXY) have broken out of the $100 resistance level after higher oil prices driven by turmoil in Iraq and a positive research report from Jefferies fueled momentum in recent days.

The company is undergoing a big transformation process, driven by the divestiture of Californian assets in the short run, and the potential monetization of assets in the Middle East over the medium-to-long term.

Analysts At Jefferies Are Optimistic

Jefferies initiated Occidental with a buy rating while attaching a $114 price target.

Analysts note that the company is undergoing the most significant restructuring of any large-cap oil and gas business. Occidental is divesting non-core assets which could yield proceeds of $7 billion according to Jefferies.

The company is furthermore spinning out its California assets into a newly listed company, while using proceeds from these moves to repurchase up to 14% of their shares. The news is not very surprising, as the company recently gave some investor presentations, outlining the developments for the coming years.

Recent Investor Presentations

I like investor presentations, as the company often present their future ambitions in a detailed and easy to understand manner. Back in May, Occidental presented itself at the Sanford C. Bernstein conference.

The company positions itself between the large integrated international oil majors and pure exploration and production companies. Occidental hopes to offer stability, a solid financial position and growing dividends like Exxon (NYSE:XOM), Chevron (NYSE:CVX), Total (NYSE:TOT) and Royal Dutch Shell (RDS.A, RDS.B), among others.

On the other hand it hopes to show rapid production growth as well, focusing only on the higher returning assets like ConocoPhillips (NYSE:COP), EOG Resources (NYSE:EOG) or Apache (NYSE:APA) as well.

The company aims to grow production by 5 to 8% in the long term while deploying capital in projects returning yields far above the cost of capital, accompanied by a solid dividend yield.

The company has solid exposure to oil in stable markets. 63% of first quarter production was in oil, with 61% of total production being realized in the United States.

California Spin-Off Is Moving Along

Earlier this month, Occidental announced that its subsidiary California Resources Corporation has filed a Registration Statement related to the spin-off of the Californian oil and gas business.

CRC will become an independent oil and natural gas exploration company focused on high-growth and high-return assets in California. The assets are sizable making up 19% of Occidental's expected $10.2 billion capital expenditures budget in 2014.

The pure-play Californian assets will focus on conventional and unconventional production, growing at 6-9% per annum. CRC reported operational cash flows of $2.6 billion in 2013 and is expected to operate with a pro-forma debt position of $5 billion. These proceeds will be used to repurchase shares of Occidental.

The operations produced 154,000 barrels of oil-equivalent in 2013, expected to rise to 190,000 barrels by 2016 with expected production growth driven by liquids. The proceeds of the divestitures should allow Occidental to repurchase 40 to 50 million shares with the debt being incurred by the new company.

Valuing Occidental

Trading around $103 per share, Occidental is valued at $81 billion. Its enterprise value comes in around $88 billion given the company's net debt position of $7 billion.

This values the company at 3.3 times annual revenues of $24.2 billion for the year of 2013. Based on reported earnings of $4.6 billion, Occidental trades at 17-18 times annual earnings.

Note that Occidental is poised for growth with a $10.3 billion capital expenditures budget in 2013 resulting in a 169% replacement ratio. Occidental currently has reserves sufficient to support 12 to 13 years of current production.

Earnings, and cash flows from its operations are used to please investors with the current quarterly dividend of $0.72 per share providing its investors with a 2.8% dividend yield.

Takeaway For Investors

Back at the start of May, I checked out the prospects for Occidental after the company reported its first quarter results. The company is in the middle of a huge transformation phase which should be accretive to earnings and cash flows in the short term.

Capital expenditures of $10.2 billion in 2014 are set to decline markedly to $8.0-$8.5 billion by 2015 on the back of the spin-off of the businesses in California. The proceeds from these spin-off in the form of new debt financing and general share repurchases allow Occidental to reduce the share count significantly. Occidental had about 785 million shares outstanding in the first quarter, with the shareholder base seen down to 684 to 694 million shares next year.

Of course the spin-off will reduce the $5.6 billion core earnings in 2013 by about a billion. This will however be compensated by domestic growth and the Al Hosn operations which should offset this impact. However the reduction in the share count should allow Occidental to increase earnings per share of $6.95 in 2013 to $8.05 by next year.

The rapid growth in earnings, increased focus on the US operations, and aggressive focus on creating shareholder value continues to please investors. This has pushed shares above the $100 mark after shares have been trading in a $85-$100 trading range over the past year.

Besides the spin-off of the Californian assets, Occidental has many more assets in the Middle-East to monetize, creating further value for investors as similar assets within the US have a much lower cost of capital.

I really do applaud management's progress in transforming the business. I very much realize that it all depends on the prices being realized during the restructuring process how much value will be created. The visibility is good with shares trading at 13 times earnings based on 2015 projections.

Any meaningful upside or downside will depend heavily on the proceeds being realized from the restructuring process along the way. With management having demonstrated great results so far, I remain cautiously optimistic.

Source: Occidental Petroleum - Transformation Progress, Spiking Oil Prices Push Shares Above A $100