Occidental plan to split off California assets seen as too early
BY BRADLEY OLSON and PETER WARD
LOS ANGELES (Bloomberg) -- Occidental Petroleum Corp.’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 U.S. oil reservoirs has yet to be realized. While Chazen hasn’t made any specific proposal public, shareholders including Cambiar Investors LLC and Frost Investment Advisors LLC 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 Denver-based Cambiar, which owns more than 1.6 million shares in Los Angeles-based 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 Oct. 18 announcement about asset sales in the Middle East and North Dakota. Occidental 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 AG analyst Paul Sankey said in an Oct. 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 U.S. energy officials to hold two-third’s of the nation’s potential shale oil resources, has been questioned by executives including Chevron Corp.’s John Watson and Continental Resources Inc.’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 Inc., 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.”
Other companies with significant California operations such as Warren Resources Inc. and Berry Petroleum Co. are valued among the lowest of producers focused more on oil than gas. Berry’s output is more than six times that of Diamondback Energy Inc., a newly formed operator in Texas’s Permian basin, yet the companies have about the same market capitalization, according to data compiled by Bloomberg.
“This management team is going to look at it methodically and make sure the timing’s right,” said John Williams, an analyst at T. Rowe Price Group Inc. in Baltimore, which has $647 billion under management, including Occidental shares.
Occidental might reassure skeptical investors by acquiring more traditional oil field assets in the state such as those being sold by Freeport-McMoRan Copper & Gold Inc., Duane Grubert, an analyst at Susquehanna Financial Group, said in an Oct. 7 note to clients. Having the cash from older assets to fund growth would command a higher valuation. Without that, a California spinoff or IPO may not be well received, he said.
Occidental saw the promise of a turnaround in investor sentiment in 2011 after announcing a big discovery in California’s Kern County. Shares rose to an all-time high of $115.74 on May 2, 2011, after an analyst said the company’s California prospects might hold as much as 10 billion barrels of oil.
Since 2010, Occidental hasn’t been able to increase production there beyond an average 1 percent in any three-month period—far below the expectations of analysts such as Bank of America Corp.’s Doug Leggate, who said in 2011 that the company could be worth $200 a share once it realized all the benefits of its California assets.
A slow permitting process and high costs have held Occidental back from boosting production more rapidly, CEO Chazen has said. The company’s business in the state will generate free cash flow of $1 billion this year based on a $1.5 billion capital program. Occidental’s California operations can raise output by 5 to 8 percent a year while generating a rate of return higher than 20 percent, according to a company presentation in July.
“For this asset, given its potential, I’m content to take a more patient approach to its development,” said Ted Harper, who helps oversee more than $9 billion at Frost Investment Advisors LLC, including Occidental shares. “It may be a little too early.”