One of the largest international energy companies, Occidental Petroleum Corporation (NYSE:OXY) , is reportedly considering vending its overseas resources to boost share price by funding a stock buyback. There is another possibility that it may divide its strategic business units into three separate entities in an effort to restructure operations and improve market capitalization through stock price appreciation.
Occidental Petroleum Corporation (NYSE:OXY) has been active in the oil and gas production sector in the U.S. and in the international arena since the mid 1980’s. The company has three operational divisions. Its Oil and gas segment is responsible for exploration, development, and production of various condensates such as oil and natural gas liquids (NGLs). A subsidiary called OxyChem operates in the chemical industry, including production and marketing of chemical substances such as Vinyls.
The last strategic business unit (SBU) is called Midstream and Marketing, which deals with various operations such as transportation, storage, marketing, and processing diverse range of products such as Oil, Natural Gas, Carbon Dioxide, and Power.
Situation analysis
According to a recent study by Thomson Reuters, Occidental Petroleum Corporation (NYSE:OXY) is losing market capitalization and shareholder value is depreciating as net profit in the first quarter of 2013 fell to $1.36 billion from $1.56 billion. This constituted a fall in net profit to $1.68 per share from previous year’s $1.92 per share. This undesirable financial situation is illustrated further by a fall in revenue of 6% to $5.87 billion in the first quarter of 2013.
As a reaction to the dim first-quarter financial performance, Occidental’s share price fell from around $88 in February to below $78. As a result, top management has been devising various strategies to recover.
Others in the field
With over $73 billion in market capitalization, Occidental Petroleum Corporation (NYSE:OXY) is currently trading at around $93. Zacks Equity Research has ranked it as a “Hold” as the P/E ratio is currently 16.5 compared to 17.7 of the S&P 500 index. Competitors of Occidental are also poised for market appreciation as crude oil value is going up, which will directly contribute to better industry-wide profits.
One of the Warren Buffett’s Berkshire Hathaway favorite is National-Oilwell Varco, Inc. (NYSE:NOV) . It currently has a P/E ratio of 12.81 and gross margin of 25.32% compared to the industry’s 18.98 P/E ratio and 24.56% gross margin. The company’s CEO, Mr. Pete Miller, issued an optimistic outlook based on the upcoming expansions in China, Latin America, and Southeast Asia.
Another upcoming major player in the sector is Apache Corporation (NYSE:APA). Apache Corporation (NYSE:APA) has strong presence in the North American energy market. One of the biggest growth factors for it is the 50% stake in the LNG export facility based in British Columbia, Canada. Its share price is currently trading below the industry P/E ratio at 17.99, and its operating margin is 28.46, performing way better than industry’s operating margin of 22.55.
Management response
At a conference hosted by UBS Securities in New York last week, CEO of Occidental Petroleum Corporation (NYSE:OXY), Mr. Steve Chazen, mentioned that reducing the size of the company is an indispensable solution to maximize shareholder value. The lion’s share of Occidental’s production is U.S.-based, accounting for nearly two-thirds of its annual output. However, the company has major investments in Latin America and the Middle East.
To pursue the CEO’s prescription, Occidental is considering selling operations, particularly in the Middle East, including both onshore and offshore projects in Oman as well as Qatar. Nevertheless, according the sources, it is reasonably challenging from the international regulatory perspective to sell overseas assets country by country, which necessitates government approvals and is subjected to lengthy bureaucratic procedures.
Mr. Chazen “hypothetically” suggested that splitting its operations into three master limited partnerships (MLP) would be a considerably tranquil process. Not to mention this move will favor Occidental Petroleum Corporation (NYSE:OXY) regarding domestic taxation as far as corporate tax brackets are concerned. Thus, it is likely that management will pursue a course of action to split the three business segments to boost share price in the near future compared to the idea of selling region specific overseas assets.
Should you get in?
Regardless of which course of action Occidental chooses to boost share price, the company’s strengths can be observed in multiple dimensions. Regardless of the less than expected growth in net income, the stock price of Occidental has increased since early April 2013; from below $80 to an yearly high of $92.65 (as of May 28). Among 13 analysts surveyed by TheStreet on May 28, 2013, no analyst rated Occidental Petroleum Corporation (NYSE:OXY)’s share as a “sell.” Only five analysts conveyed a sentiment as “hold” similar to Zacks’ rating. The remaining eight analysts also rated the company a “buy.”
Conclusion
Based on the analysis of various financial ratios such as expanding profit margins and reasonable debt levels, it is likely that the market will push the share price of Occidental Petroleum Corporation (NYSE:OXY) higher going forward.
Mike Thiessen has no position in any stocks mentioned. The Motley Fool recommends National-Oilwell Varco, Inc. (NYSE:NOV). The Motley Fool owns shares of Apache Corporation (NYSE:APA) and National Oilwell Varco.
The article Which Course Will This Company Take to Boost Shareholder Value? originally appeared on Fool.com.
Mike is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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