Occidental Losing Irani Portends Breakup: Real M&A

Occidental Petroleum Corp. will lose its two-decade leader Ray Irani next year, freeing the $66 billion energy company to sell its operations outside the U.S. and boost one of the industry’s worst valuations.

Irani, who devoted much of his 23-year tenure as chief executive officer and chairman to nurturing the foreign unit, leaves a company whose price-earnings ratio is lower than 84 percent of North American peers, according to data compiled by Bloomberg. By selling or spinning off the riskier international business -- including operations in Libya and Yemen -- for more than $35 billion, Occidental could be worth $120 a share, 46 percent more than yesterday, according to Oppenheimer & Co.

“The future outside the U.S. is very questionable,” Fadel Gheit, an analyst at Oppenheimer in New York, said in a telephone interview. “It was basically Dr. Irani’s forte,” and the company’s new leadership should “seriously take a look at becoming a domestic U.S. oil company.”

Occidental, which is also looking for a successor to replace CEO Stephen I. Chazen, may draw bidders for the Los Angeles-based company’s non-U.S. operations including Chevron Corp. and Royal Dutch Shell Plc, according to Brookshire Advisory & Research Inc. Total SA is also among potential buyers, Edward Jones & Co. said.

Melissa Schoeb, a spokeswoman for Occidental, declined to comment, as did Shell’s Kelly op de Weegh and Chevron’s Kurt Glaubitz. Total’s Tim Coffy didn’t respond to a request for comment.

Industry Renaissance

Shares of Occidental, down 29 percent from a May 2011 record of $115.74, just completed their first back-to-back annual losses since the early 1990s. The company is in retreat even amid an industry renaissance that boosted U.S. crude output last year by the most since 1859.

In the fourth quarter, 39 percent of Occidental’s production was outside the U.S. The rest was concentrated in California and Texas. Civil unrest has disrupted its operations in Libya and Yemen in the past two years, curbing output. Occidental also operates in Iraq, Bahrain and Colombia.

The so-called Arab Spring, or uprisings that toppled governments and generated protests in oil-producing nations in North Africa and the Middle East, has made investors wary of Occidental’s operations in affected nations, according to Ted Harper, a fund manager at Frost Investment Advisors LLC.

‘Cleaner Stories’

“Investors are looking for cleaner stories and cleaner lines of sight,” Houston-based Harper, whose firm manages more than $8 billion and owns Occidental shares, said in a phone interview. “When you’ve got geopolitical risks that complicate the story, people are staying away.”

Occidental’s price-earnings ratio was 14.4 yesterday, lower than 27 of the 32 other North American exploration and production companies valued at more than $5 billion, according to data compiled by Bloomberg. Its multiple has fallen from more than 23 in November 2009.

Today, Occidental shares rose as much as 0.6 percent before ending the day at $82.65, up 0.4 percent even as rivals retreated. Among peers, the median move was a 0.7 percent loss as the Standard & Poor’s 500 Energy Index declined for the first time in four days.

Irani’s departure and the plan to replace Chazen, who has been at Occidental since 1994, may hasten the company’s effort to exit businesses in hostile areas, said Gianna Bern, founder of Brookshire Advisory, a Chicago-based risk-management energy industry consultant.

Phone Number

“Ray Irani’s legacy is in the plethora of relationships that he’s built in the Middle East and elsewhere,” said Bern, a former oil trader for BP Plc. “You could see that his imminent departure leaves some big shoes to fill.”

Irani, who retired as CEO in 2011 after drawing shareholder ire over a compensation package that made him the highest-paid oil executive, said in a 2009 interview that he made sure Persian Gulf oil ministers had his home telephone number so they could reach him day or night to discuss projects.

The biggest energy companies are under constant pressure to boost production, so they may be drawn to the international operations even if they’re no longer a fit for Occidental, Brookshire’s Bern said. She named Chevron and Shell as probable bidders.

Brian Youngberg, an analyst at Edward Jones in St. Louis, sees Shell and Total as possible buyers. He said companies in India and China might also be interested.

‘Good Company’

Shedding the international assets would let Occidental focus on Texas and California amid the industry boom. The company, which has posted record U.S. oil and natural-gas production for nine straight quarters, has the most acreage in California’s Monterey shale and is the top producer in Texas, which has the highest oil output of any U.S. state.

A U.S.-focused Occidental “would be a very good company,” Phil Weiss, an analyst at New York-based Argus Research Co., said in a phone interview. “Occidental would have advantages in a number of plays by having a very concentrated position. That really helps in terms of managing costs.”

If Occidental rid itself of the geopolitical risk from its international business, Weiss said the company would deserve a higher valuation because it produces more crude than natural gas, which sank to a 10-year low in April. West Texas Intermediate oil settled at $92.05 a barrel yesterday, higher than the 10-year average of about $71.

Last year, oil made up 61 percent of Occidental’s total production, compared with the median of 39 percent percent among similar-sized North American peers, data compiled by Bloomberg show. The median price-earnings ratio for rivals with at least 60 percent of output from oil was 22 yesterday, the data show.

Staying Focused

“It would make a lot of sense for new management to come in and divest those international assets and use the proceeds to stay more focused on their domestic businesses,” said Tim Beranek, a Denver-based money manager who specializes in energy companies at Cambiar Investors LLC, which oversees $6.6 billion and owns Occidental shares. “They can unlock value through divesting assets that don’t make a lot of sense. These are the kinds of things that investors want.”

Oppenheimer’s Gheit figures the international business would fetch about $35 billion in a sale or spinoff, based on the premium buyers would be willing to pay for assets where oil makes up a similar amount of output. That disposal, as well as the increased valuation the remaining Occidental would warrant, could generate $120 a share in value, he said. The stock closed at $82.33 yesterday.

Recent Splits

Occidental probably doesn’t have to take such drastic steps to boost returns, Frost’s Harper said.

“I don’t know that they have to cleave off an arm in order to save the body,” he said. “I don’t know that the situation has gotten that dire.”

Still, ConocoPhillips and Marathon Oil Corp. both split in recent years, delivering market-beating returns for shareholders.

Phillips 66, spun off by ConocoPhillips last year, has rallied 88 percent since trading began, topping the S&P 500 Energy Index by 78 percentage points. It also attracted Warren Buffett’s Berkshire Hathaway Inc. as one of its biggest investors. Marathon Petroleum Corp., jettisoned by Marathon Oil in 2011, has surpassed the market capitalization of its former parent, data compiled by Bloomberg show. The shares surged 89 percent in 2012, the most in the S&P index.

Investors are hungry for more breakups, Cambiar’s Beranek said.

“The big conglomerates are nice for executives in the corner office, but as a shareholder, not so much,” he said.

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