Occidental plan to split off California assets seen as early
By BRADLEY OLSEN & PETER WARD
LOS ANGELES (Bloomberg) -- Occidental Petroleum Corporation’s plan to separate its $16 billion oil and natural gas business in California as part of a restructuring effort may have hit a snag: some shareholders aren’t that interested.
CEO Stephen Chazen, who began talking to investors and analysts in April about the possibility of turning Occidental’s California operations into a stand-alone company, is facing skepticism as the promise of tapping one of the biggest United States oil reservoirs has yet to be realized. While Chazen hasn’t made any specific proposal public, shareholders including Cambiar Investors and Frost Investment Advisors are questioning whether more patience is needed to realize the best value from a spinoff or initial public offering.
“Keeping California under one umbrella with the other assets would be ideal right now until they prove it up more,” said Tim Beranek, a money manager at Cambiar, which owns more than 1.6 million shares in Occidental. “There needs to be more data, more understanding of California before an IPO.”
Producers including Occidental have been stymied by complex geology, the state’s strict environmental scrutiny and a slow permitting process for wells, all of which have historically led investors to discount California assets compared to other states, said Beranek.
Chazen made no mention of separating the California business in an October 18 announcement about asset sales in the Middle East and North Dakota. Occidental, which plans to announce Q3 earnings in the morning, is the biggest energy company to tackle restructuring after a year of shareholder activism spurred a wave of management changes and asset sales.
Melissa Schoeb, a spokeswoman for Occidental, declined to comment on the status of the company’s plans for California. The value of its business there is about $16 billion, Deutsche Bank analyst Paul Sankey said in an October 20 note to investors.
The feasibility of harvesting California’s Monterey shale, a vast rock formation that spans much of the state and is estimated by United States energy officials to hold two-third’s of the nation’s potential shale-oil resources, has been questioned by executives including Chevron’s John Watson and Continental Resources’s Harold Hamm.
Shale formations such as the Marcellus in Pennsylvania and the Bakken in North Dakota are fairly uniform, while the Monterey rocks are more varied, said Don Clarke, a consulting geologist based in Los Angeles. That means a producer might target a brittle layer of rock perfect for hydraulic fracturing, only to hit a more resilient, fracking-resistant rock farther along, Clarke said.
Venoco, which has 46,000 net acres in the Monterey, drilled 29 wells in the formation from 2010 to 2012 and as of June hadn’t seen any production, according to a company filing. It’s now reduced spending in the region.
The experience of shareholders in Venoco and other California oil and gas companies may be a cautionary tale for Occidental, Leo Mariani, an analyst with RBC Capital Markets in Austin, said in a telephone interview.
“If you look at the history of these companies in California, they’ve never had big multiples,” Mariani said. “There’s never been much of an interest from investors in California assets.”