Occidental’s California Resources Falls on First DayZain Shauk
For California Resources Corp., the Occidental Petroleum Corp. spinoff focused on producing oil and natural gas in that state, today wasn’t the best day to make its official trading debut.
The stock fell 12 percent to $7.11 at 3:31 p.m. in New York, giving the company a market capitalization of about $2.7 billion. Analysts estimated in February that the Los Angeles-based producer could be worth as much as $19 billion.
When Occidental announced the spinoff, part of a plan to bolster its share price, oil was more than $100 a barrel. West Texas Intermediate crude today fell below $65 to the lowest level in more than five years, as the market continued to react to the Organization of Petroleum Exporting Countries’ decision last week to maintain production.
The company “could not start its life as a standalone company at a worse time,” Paul Sankey, an analyst at Wolfe Research LLC in New York, said in a note to investors. “With an oil price war underway, this pure California oil play is highly susceptible to price weakness.”
California Resources will face challenges compared with others producing from shale formations because of $6 billion in debt it’s carrying and the more challenging regulatory environment in its home state, said Pavel Molchanov, an analyst for Raymond James & Associates Inc. in Houston who doesn’t rate the stock. “Obviously, paying off that debt is not going to be realistic at all given these oil prices.”
The company is seeking to squeeze more oil out of a state that most producers have shunned for more favorable geological and political conditions elsewhere. California’s Monterey Shale formation, previously thought to hold the nation’s largest reserves of recoverable oil, was downgraded by the U.S. Energy Information Administration in May. The agency cut its estimates 96 percent after determining the reserves aren’t easily accessible using current technology.
Any effort to significantly boost production in California might require investment in a time of falling oil prices and revenues. The company will also have to push for added output in a state with a strong environmental movement, residents and local officials who have challenged drilling and regulations likely to make operations difficult.
“We are very comfortable with the flexibility our diverse portfolio affords us and how we are positioned in this pricing environment to operate within our cash flow,” Margita Thompson, a company spokeswoman, said in an e-mail.
California Resources owns 2.3 million net acres of drilling rights in the state, an area larger than Delaware. It produced the equivalent of 160,000 barrels of oil and gas a day in the third quarter, up from 153,000 a year earlier. Quarterly profit fell because of rising costs and a drop in oil prices, which have declined more than 35 percent since June.
California Resources paid its former parent company $6 billion as part of the spinoff plan.
“It’s a lot of debt and it costs about $300 million a year in interest expense alone,” said Molchanov.
Bank of America Corp.’s Doug Leggate said the company is undervalued. He rates it at a buy with a $14 price outlook.
Its “asset quality can enable growth even in the current environment,” Leggate wrote in a note to investors.
Occidental holders received 0.4 shares in the new company. Occidental has said it will retain ownership of 19.9 percent of the shares. The stock is part of Standard & Poor’s Midcap 400 Index.
Spinning off California Resources, which last year produced the equivalent of about one of every five oil barrels for its former parent, is among the final steps in Occidental’s plan to boost its share price. The company drew investor criticism last year after announcing Chief Executive Officer Stephen Chazen would depart. Instead, Chairman Ray Irani was ousted after almost three decades at the company.
Chazen, who now plans to exit after the 2016 annual meeting, has sought buyers for assets in North America, the Middle East and North Africa as he seeks to focus on fewer areas of profitable growth.
(An earlier version of this story corrected the price and market value in the second paragraph).