May 4 (Bloomberg) -- Ray Irani inherited an unwieldy conglomerate including oil, movies and meatpacking when he took over as Occidental Petroleum Corp.’s chief executive in 1990.
Over the next 23 years he transformed that hodgepodge of businesses into a global oil powerhouse, providing investors with returns more than double the gains of the Standard & Poor’s 500 Index. Now, Occidental is set to undergo another makeover after the 78-year-old Irani was thrown out of his chairman’s seat yesterday by shareholders who decided he’d overstayed his welcome.
“Occidental is ready for new blood and new thinking -- a wholesale change,” said Fadel Gheit, an analyst at Oppenheimer & Co. in New York.
Irani’s rejection came after investors rebelled against the board’s decision to replace chief executive officer Stephen I. Chazen, and after years of discontent over Irani’s outsized pay packages. Occidental’s board surprised shareholders in February by announcing it was seeking a replacement for Chazen as the company debated how it should be structured for the future.
Chazen, 66, has advocated a North-American focus for the $73 billion energy company, while Irani wanted to retain Occidental’s global reach with drilling assets in the Middle East, Africa and Latin America, said David Neuhauser, a managing director at Northbrook, Illinois-based Livermore Partners Inc.
The departure of Irani may free Chazen to pursue a breakup of the company that could unlock more than $30 billion of additional value, said Neuhauser, who helps oversee $100 million in assets including Occidental shares. The valuation surge would come from selling or spinning off the company’s international assets, chemical and pipeline businesses into separate companies, he said.
“It’s ripe for splitting up,” Neuhauser said. “If you sold them, you’d get a pretty penny for those assets. That could be used for buybacks and dividends to reward shareholders.”
In yesterday’s vote, 478 million shareholders went against Irani, while 150 million voted for his re-election according to a company filing. Occidental rose 3 percent to close at $90.76 yesterday.
The board announced a slate of new governance improvements April 29 after investors questioned the role Irani had played in the decision to replace Chazen as CEO. Shareholders including First Pacific Advisors LLC, Cambiar Investors LLC and Livermore Partners advocated that Irani should leave instead of Chazen.
The company reassured shareholders Chazen would stay as CEO through 2014. The governance changes included barring future CEOs from assuming the role of chairman, declaring that chairmen after Irani will be independent, cutting board and executive pay and adding two directors.
Irani’s departure is more than a year ahead of the retirement date he announced following previous shareholder criticism of his compensation as excessive. The best paid oil industry CEO in 2009, he’s received average annual compensation of almost $80 million since 2001, according to data compiled by Bloomberg. Irani earned more than $45.6 million last year after he gave up the CEO role.
Yesterday’s vote may make Irani eligible for a severance package of about $38 million, including a $5.7 million life insurance policy and annual payments of $2.2 million, according to the company’s proxy filing. Having to leave under such circumstances may entitle him to $21.6 million in retirement pay and, if it’s considered a termination, about $16.8 million more.
Born and raised in Beirut, Lebanon, Irani curried favor with rulers across the Middle East and North Africa to beat out bigger rivals for drilling contracts that helped fuel growth prospects in the U.S. and return cash to shareholders. During his time leading the company, Occidental saw a sixfold increase in its share price, according to data compiled by Bloomberg.
The company’s value has fallen 25 percent since shares touched a $115.74 high on May 2, 2011 -- just days before Irani handed the CEO reins to Chazen -- as a push to raise output in California was stymied by the state’s regulatory morass and high costs. Occidental has rallied 18 percent this year as Chazen executes a plan to cut drilling costs by as much as $400 million and boost U.S. crude production.
Occidental has the potential to transform into four separate companies: a U.S. crude producer, an international oil and gas explorer, a chemicals maker and a pipeline and logistics concern, Oppenheimer’s Gheit said.
Moving the Needle
“Each separate and stand-alone entity would be very competitive and highly valued in its own sector,” said Gheit, who rates the stock the equivalent of a buy and doesn’t own shares.
Chazen said in an April 25 conference call with investors that the company would weigh breakup options that “move the needle a lot,” such as selling assets in South Texas and Colombia and splitting the other international businesses into another company. Those prospects would allow the CEO to end his career with “a major cash return to shareholders,” Paul Sankey, an analyst with Deutsche Bank AG in New York, said April 30 in a note to investors.
Irani earned a doctorate in chemistry at the University of Southern California and became president of Occidental in 1984. He took over as CEO in February 1990, succeeding longtime CEO Armand Hammer, who died a few months later at the age of 92. Occidental’s share price was about $13 at the time, and the company had spread into film-making, horse breeding and meat packing.
Irani sold off the unrelated businesses and forged personal relationships with Middle Eastern rulers to help win drilling contracts, ensuring that oil ministers had his home telephone number to reach him with any questions, he said in a 2009 interview.
At yesterday’s board meeting, Chazen spoke for several minutes praising Irani and all he’d done for Occidental. He didn’t specify what role, if any, Irani may play at the company in the days ahead.
“I’m not going to tell you every day was a trip to Disneyland,” Chazen said. “But I’m glad I’m going to be able to talk to him in the future.”
Occidental director Edward Djerejian, a former U.S. ambassador to Israel and Syria, will become chairman and Spencer Abraham will be vice chairman, the company said. Director Aziz Syriani submitted his resignation as of May 2, the company said in a filing.
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