Occidental Split Foreshadows $100 Billion Breakup WaveBradley Olson and Edward Klump
Occidental Petroleum Corp.’s proposal to split its U.S. and foreign businesses is pressuring more oil companies to follow suit, as the allure of breakups to create more than $100 billion of market value entices investors.
ConocoPhillips, Anadarko Petroleum Corp. and Talisman Energy Inc. are among those being asked whether the U.S. shale boom has made their global business model obsolete. Separating relatively low-cost investments in U.S. shale resources and foreign assets that carry higher political risks and bigger potential rewards will unlock a bounty for shareholders, according to Paul Sankey, an analyst with Deutsche Bank AG in New York.
Cabot Oil & Gas Corp., a producer mostly in Pennsylvania’s Marcellus shale, more than tripled in the past three years, the best stock performer among peers in the period. Occidental, with wells in Libya and Yemen plus commodities trading and pipelines, rose 7.3 percent. Large conglomerate structures can suppress the value of more profitable units that must support less lucrative parts of the company, said David Neuhauser, a managing director at Livermore Partners Inc.
“If you’re smaller, you can be much more dynamic by really focusing on your assets and growth,” said Neuhauser, who helps manage almost $100 million including Occidental, ConocoPhillips and Talisman stock. “You’ve got to play to your strengths.”
Occidental, with a market value of $74 billion, could be worth $47 billion more if it carved its domestic assets away from international operations, according to Doug Leggate, an analyst at Bank of America Corp.
That represents a 64 percent premium over Occidental’s closing price yesterday. If breakups at ConocoPhillips, Anadarko and Talisman brought a comparable share increase, it would create $84 billion more in market value, according to data compiled by Bloomberg.
The upside for Occidental comes from a separated domestic company’s ability to use cash from the split or sale to accelerate drilling and buy back as much as $20 billion in shares, and to extend contracts for its international assets, Leggate said in investor notes.
In the U.S., exploration and production spending will rise 3.4 percent to about $146 billion this year, Barclays Plc estimates. The explosion of drilling projects is based on a relatively low regulatory risk compared with Latin America, where Repsol SA’s Argentine unit was expropriated in 2012, or North Africa, where revolts toppled three governments.
ConocoPhillips and Marathon Oil Corp. already began moving toward a tighter focus in the past two years by separating their refining and pipeline units. The next phase of breakups is emerging as investors ask companies to consider splitting North American properties from foreign holdings in places such as the Middle East and Asia.
“The pure-play trend is going to continue,” said Gianna Bern, president of Brookshire Advisory & Research, a Chicago-based energy consulting firm. “Companies that develop a portfolio of assets in one area will be rewarded in the end given the amount of technology and investment that goes into exploiting any one of these shale plays.”
Oil producers are trading at the low end of their historical range at about 4.1 times estimates of 2014 cash flow, according to a May 31 Bloomberg Industries analysis.
Whether or not they want to, companies may be forced to pursue a breakup, said Brookshire’s Bern.
The energy industry has seen several high-profile cases of shareholder activism in recent years as producers such as Occidental and Hess Corp. saw their stock performances lag industry peers. Ray Irani failed to get enough votes to remain chairman at Occidental, and Hess announced plans to shed refining assets and split its chairman and CEO roles.
The rationale for ConocoPhillips, Anadarko and other companies to compete in the far corners of the world no longer holds, said Deutsche Bank’s Sankey in a June 3 note to clients. The global conglomerate was shaped for a time when oil prices were low and international project development was the main driver of growth and returns, he wrote in his note.
“Those days have gone,” Sankey said.
Daren Beaudo, a spokesman for Houston-based ConocoPhillips, and Brian Cain, a spokesman for The Woodlands, Texas-based Anadarko, pointed to comments from each company’s CEO this year expressing satisfaction in a global business model.
Occidental is exploring a breakup that would “move the needle” of the company’s shares, Chief Executive Officer Stephen Chazen said on an April 25 conference call with analysts and investors.
Occidental is weighing a split into as many as three companies, according to comments Chazen made in meetings with Oppenheimer & Co.’s Fadel Gheit, Bank of America’s Leggate and Deutsche’s Sankey, the analysts said in notes to clients last month.
Chazen has laid out a proposal to separate oil and natural gas businesses in Texas, California and the Middle East and North Africa into different companies, the three analysts said. An announcement on plans to spin off foreign operations could come within three months, Gheit said.
Occidental’s assets in such a breakup might have a “theoretical” value of as much as $150 a share, Leggate said in a June 9 note to investors. That’s 64 percent more than yesterday’s closing stock price of $91.25 and would give the company a potential market value of about $120 billion, up from $74 billion.
Melissa Schoeb, a spokeswoman at Los Angeles-based Occidental, declined to comment on a possible breakup.
The global oil model is far from dead. In 2012, when production revenues were hurt by a 10-year low in natural gas prices, Exxon Mobil Corp. posted the second-highest annual profit in U.S. history thanks to higher income in its fuel refining business, according to data compiled by Bloomberg.
Exxon, the largest U.S. oil company, told reporters in March that splitting wasn’t up for discussion.
Still, Talisman needs to do something with its “disparate, far-flung asset base,” said John Stephenson, who helps oversee about C$2.7 billion ($2.65 billion) at First Asset Investment Management Inc. in Toronto, including shares in Talisman. Within a year, Talisman might agree to be sold or split its assets into two companies, he said.
Talisman CEO Hal Kvisle already has said he wants to sell properties in Europe’s North Sea as part of a plan to raise $3 billion through assets sales or joint ventures, though he’s not seeking to sell the company’s Asia business.
Most investors aren’t asking Talisman to split up the company, David Mann, vice president of communications, said in a phone interview on June 6.
ConocoPhillips and Anadarko should consider splitting off their international operations, said Deutsche Bank’s Sankey, who questioned whether high risk, multi-billion dollar international projects have anything in common with production in U.S. shale formations that require specialized drilling techniques.
“We don’t think so, because the activities are fundamentally totally different,” he wrote in his research note.
A further split of ConocoPhillips may happen around 2017, Sankey said in a June 6 note. The company could dispose of another $25 billion of assets and divide itself into a North American business and another focused on global deep-water projects and liquefied natural gas, he said.
Anadarko, which trails only ConocoPhillips in the market value ranking of U.S. independent oil and gas producers, boasts a portfolio with assets in such locations as Texas, Colorado, the Gulf of Mexico, Algeria and off the coasts of Ghana and Mozambique.
Company executives told analysts in a March 2012 meeting that they might look at asset sales and restructuring efforts if the stock didn’t reflect the company’s value. Anadarko shares have climbed 39 percent in the past year amid the company’s efforts to sell assets in Brazil and a stake in a project off Mozambique.
Last month, CEO Al Walker said he had “no interest” in a possible split of the company’s domestic and international assets as the current arrangement “gives us a lot of flexibility.”
At ConocoPhillips, the dividend yield is more than 4 percent, which outpaces Exxon. ConocoPhillips has announced plans to sell assets in Kazakhstan, Algeria and Nigeria, continuing a disposal program that’s lasted for more than three years as it positions for future growth around the world.
“We believe that diversification and size and scale and scope is a competitive advantage in this business,” ConocoPhillips CEO Ryan Lance said in a February interview.