Occidental Petroleum Corp., transformed by longtime leader Ray Irani into a global oil powerhouse from a hodgepodge of businesses that included movies and meatpacking, is set to undergo another makeover after the chairman’s ouster by shareholders.
Investors rebelled against the board’s surprise decision in February to replace Chief Executive Officer Stephen I. Chazen. Concern that Irani had been a driving force behind the plan and years of discontent over his outsized pay packages led investors to vote him out May 3 by a margin of more than three to one.
Irani’s decision to stay on as chairman after turning over the top job to Chazen two years ago wasn’t working for the company, said Tim Beranek, a money manager at Cambiar Investors LLC, which oversees about $8 billion including about 1.5 million Occidental shares.
“I’m excited to see the changes that can happen now,” Beranek said. “It’s a fresh start for Chazen and it’s a fresh start for Occidental and its shareholders.”
Irani’s departure will allow Chazen to pursue a breakup of the company that may unlock more than $30 billion of additional value by selling or spinning off Occidential’s international assets, chemical and pipeline businesses into separate companies, said David Neuhauser, a managing director at Northbrook, Illinois-based Livermore Partners Inc.
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, he said.
“It’s ripe for splitting up,” said Neuhauser, who helps oversee $100 million in assets, including Occidental shares. “If you sold them, you’d get a pretty penny for those assets. That could be used for buybacks and dividends to reward shareholders.”
Occidental has the potential to transform into four separate companies: a U.S. crude producer, an international oil and natural gas explorer, a chemicals maker and a pipeline and logistics concern, said Fadel Gheit, an analyst at Oppenheimer & Co. in New York who rates the stock the equivalent of a buy and doesn’t own shares.
“Each separate and standalone entity would be very competitive and highly valued in its own sector,” he said.
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.
“CEO Chazen’s plan will likely be successful, in our view, and holds broad support in the investment community,” Doug Terreson, an analyst with ISI Group Inc., said in a report today.
The breakup prospects would allow Chazen to end his career next year 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.
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.
In the vote at Occidental’s annual meeting for shareholders May 3 in Los Angeles, 478 million investors sided against Irani, while 150 million voted for his re-election, according to a company filing. Occidental rose 3 percent the day of the vote, and shares fell 1.5 percent to $89.36 at the close in New York today.
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. Investors, including First Pacific Advisors LLC, Cambiar Investors 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 is leaving 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.
Irani may be 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 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 was an unwieldy conglomerate at the time with interests as far-flung as filmmaking, horse breeding and meatpacking and a share price of about $13, Chazen said May 3.
Irani sold off the unrelated businesses and turned the company’s focus to oil. He 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. Irani made a point to ensure that oil ministers had his home telephone number to reach him with any questions, he said in a 2009 interview.
During his time leading the company since 1990, Occidental saw a sixfold increase in its share price and provided returns more than double the gains of the Standard & Poor’s 500 Index, 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.
At the May 3 annual 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.”