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Gurus Split Over Restructuring Policy: What Should You Do?
Posted by: Vanina Egea (IP Logged)
Date: April 4, 2014 05:06PM
Integrated oil and gas companies are not always structured equally. For example, Petrobras (PBR) has a greater focus on exploration and production than Exxon Mobil (XOM)’s downstream higher exposure. On the other hand, Occidental Petroleum (OXY) is an integrated oil and gas company with a heavy exposure to exploration and production of conventional and unconventional, onshore and offshore reserves. However, the firm is currently under a restructuring plan that will downsize the operation to onshore and unconventional activities. Reactions to the restructuring process among gurus have been varied; while some reduced their positions or opted out of the stock, others have greatly increased their holdings. So, what should a prospect investors do?
From the Ground on Up
Occidental Petroleum is undergoing a major surgery; however, overall performance has sustained growth. Throughout February, management announced, first, the sale of the Hugoton field assets. The transaction is valued on $1.4 billion before taxes, and will have an implied drop in production of approximately 110 million cubic feet equivalent per day, of which approximately 30 percent was oil.
The board of directors also authorized the separation of Occidental Petroleum’s California assets into an independent and separately traded company. The new company will have 8,000 employees and contractors, and will be California’s largest natural gas producer and the state’s largest oil and gas producer on a gross-operated barrels of oil equivalent basis. “Creating two separate energy companies will result in more focused businesses that will be competitive industry leaders,” said Stephen I. Chazen, president and chief executive officer.
When looking at overall performance year-over-year, Occidental Petroleum reported in 2013 improvements on net sales, income from continuing operations and diluted earnings per common share. Most importantly, debt levels declined after four years of continued growth, while at the same time cash flow volume experienced another increase. Last, dividends continue on the uptrend and increased by $0.40 to a total of $2.56.
Whether Occidental Petroleum will continue the uptrend in 2014 is under review. Not surprisingly, the first obstacle arises from the political arena. An important part of the restructuring plan is the drop of its Middle Eastern assets. Although the operation is underway, the agreement is threatened by political differences over the Muslim Brotherhood’s role in Egypt within the three-party consortium formed to purchase the assets. However, UAE and Oman have already made statements they may end the row by dropping Qatar from the $8 billion deal.
Attractive by Rewards
Of course the news of a possible delay on the drop of Occidental Petroleum’s Middle Eastern assets did not sit well in the market. And a new following financial institution went so far as to give an “Underperform” rating to the stock, against the unanimous “Buy” rating granted by analysts since the beginning of the year. Nonetheless, the stock recovered the ground lost the following day and continues on an overall positive trend.
Occidental Petroleum continues to create a portfolio with low-risk and long reserve-life properties that will provide a steady production growth and above peer group crude oil leverage. Through acquisitions and joint ventures, the company is set to expand reserves in the U.S. while selling minority interests in ventures abroad. The operations will secure the necessary cash flow to increase production and reserves, when other integrated energy companies are unable to do so.
Currently trading at 13.1 times its trailing earnings, Occidental Petroleum’s stock carries a 53% discount to the industry average. Most importantly, return on assets and equity is well above most competitors, while paying $0.72 quarterly dividends for an annual yield of 2.74%. While the gurus who opted out are cyclical buyers, those reducing their positions have been doing it for a while. Most interestingly, those selling stock did not purchase more when the price fell. Given the comparative low price and new gurus entering the business with clear intentions of long-term investments, it is recommendable to prospective investors to consider the stock.
Disclosure: Vanina Egea holds no position in any of the mentioned stocks.
Stocks Discussed: OXY,