Occidental Petroleum: Streamlining Operations For Future Growth

Occidental Petroleum (OXY) decided to sell a minority stake in its Middle East and North Africa, also known as MENA, operations. The deal could amount to a 40% stake in MENA that could be worth $8 billion to $10 billion. Three state-owned firms in the Gulf have shown interest in picking up the stake and have formed a cartel for this purpose. The three firms are Mubadala Development, Qatar Petroleum, and Oman Oil; Citigroup is advising them on the deal.

This sale falls in line with Occidental's decision to streamline its business and concentrate on areas that have depth and scale, and improve profitability.
It will have many benefits. For one, it will reduce the company's exposure to the Middle East/North Africa region, thereby reducing the risk. It will also provide an opportunity to partner with key regional players, allowing the company to achieve grow from a lower base.

Occidental plans to use a large portion of the proceeds to repurchase shares, helping it to achieve its goal of maximizing shareholder returns. It also plans to use the funds to pay down debt, as well as reserve some portion of it to reinvest in high-growth return opportunities. The potential effects of this deal on EPS could be interesting. Assuming Occidental will use 50% of the funds to repurchase shares, the midpoint of the estimate will result in a repurchase of nearly 48.2 million shares at the current price. This will be accretive to EPS of nearly 6% once it all the shares are repurchased.

This asset restructuring is in line with the strategy of oil and gas players, which are reducing their international exposure to focus on high-growth opportunities in the domestic market. ConocoPhillips (COP), for example, plans to sell its assets in Kazakhstan, Algeria, and Nigeria. These deals are estimated to bring in around $9 billion. This move clearly indicates ConocoPhillips' plans to concentrate on domestic markets. The company has turned its focus to developing the Eagle Ford shale formation, because of its oil potential. It has acreage of about 227,000 acres in the play, with a resource potential of around 1.8 billion barrels of oil equivalent. The company plans to spend around $8 billion over the next five years in various Eagle Ford counties and $16.7 billion in capital expenditures to boost drilling in the U.S. shale plays.

Another company implementing an asset restructuring initiative is Apache (APA). This company plans to use its international operations to fund domestic growth. It will go lean on its Egyptian operations, selling a 33% stake in its Egyptian oil and gas business to Sinopec International Petroleum, wholly owned subsidiary of China Petroleum & Chemical (SNP). The deal was closed last month for $3.1 billion in cash. Apache will use the proceeds to fund its U.S. onshore operation. It will also reduce Apache's exposure in Egypt, in light of the political unrest in the country. Apache's strategic partnership with Sinopec will help the latter expand in the global oil industry and also improve China's energy security.

Reducing days to cover

Investors' confidence in a stock can be gauged by the short-interest data. Recent short-interest data from Nasdaq showed that number of Occidental shares short (short selling) for the Dec. 13 settlement date dropped to 7,398,728, 12.6% reduction from the erstwhile 14-day period ending Nov 29. Another useful metric is days to cover. Average daily volume of shares traded for the Dec. 13 settlement date improved to 4,207,220, up from 3,010,860 for the earlier 14-day period. Hence, days to cover for Occidental shares improved to 1.76, down from 2.81 -- a reduction of almost 37.5%.

Such a robust reduction in days to cover could indicate that short sellers, who were earlier expecting a high decline in stock prices, are no longer expecting the same kind of decline, and hence are covering their positions earlier than before. Moreover, the decline in days to cover has been brought about by an increase in the average daily volume of shares traded, showing investor confidence in the stock.

Conclusion

Occidental is streamlining operations by reducing its stake in the international market and focusing on only profitable projects. This is expected to provide long-term benefits for the company. Moreover, the stake sale will improve the chances of Occidental forming strategic alliances with its partners, thereby helping it to grow off a leaner base. A reduction in short-interest rates and the corresponding days-to-cover ratio lend support to the stock. Investors should consider entering into it at current prices.
Published on Feb 19, 2014
By Rohit Gupta

Copyrighted 2016. Content published with author's permission.

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