Why Is Occidental Selling These Assets?
Oct 22nd 2013 12:39PM
Updated Oct 22nd 2013 12:42PM
Occidental Petroleum recently revealed plans to sell a stake in its Middle East business in order to reduce the company's geopolitical risk and to concentrate on its North American oil and gas business. Let's take a closer look at how the company plans to streamline its business and what that could mean for investors.
Occidental looks to shrink itself
Last week, Occidental announced that its board had approved a plan to sell a minority stake in its Middle East and North Africa business, where it is one of the largest U.S.-based operators.
As part of the strategy to streamline its business and boost overall profitability the company is also putting up U.S. assets for sale, including acreage in North Dakota's Bakken shale and the Rocky Mountain region. It is divesting a roughly 10% stake in the general partner of Plains All American Pipeline, one of the largest midstream companies in the U.S., for $1.3 billion.
In addition, Occidental CEO Stephen Chazen announced in July a possible spinoff of the company's California business. However, the company made no mention of the details of this proposed separation in its latest announcement, which could make some shareholders anxious as to the Occidental's intentions.
Other companies employing similar approaches
Occidental joins a growing number of U.S. oil and gas producers that are divesting assets to streamline their businesses and focus on onshore North American energy plays. Take Apache , for instance, which recently sold a third of its Egyptian oil and gas assets to China's Sinopec . Like Occidental, the company's motive behind the transaction was to diversify its global asset portfolio by reducing its exposure to growing risks in Egypt, as well as to raise cash to pay down debt, repurchase shares, and focus on "growth core" assets in the Eagle Ford and the Permian Basin.
Similarly, Chesapeake Energy has been aggressively divesting non-core assets in order to reduce its cash-flow shortfall and to fund an aggressive drilling campaign in core North American plays such as the Eagle Ford and the Greater Anadarko Basin. Despite targeting $4 billion-$7 billion in asset sales by year-end, the company believes it can continue to grow oil production robustly as it continues to improve efficiency and cut costs.
ConocoPhillips is another company that has been rebalancing its asset base by divesting smaller, nonstrategic resources in order to focus on North America, which is expected to generate the majority of its production growth in coming years. After spinning off its midstream and downstream businesses into Phillips 66 last year, the company has sold its stake in Kashagan, the massive oil project in Kazakhstan, as well as midstream assets in the Caribbean and its Clyden assets in Canada's oil sands.
Strategies for profit
In my view, Occidental's decision to shrink itself could prove to be a good one for the stock price and for the company's longer-term future as long as it is managed well. By focusing on its successful North American operations, where it has much greater depth and scale, and by reducing exposure to political risk in the Middle East, Occidental should be able to better streamline its business and improve profitability.
A spinoff of its California business could be another catalyst to propel Occidental's stock price higher. However, to keep investors happy, the company might consider offering a more clear and detailed blueprint on how it intends to separate its California segment and exactly how such a move would unlock value for shareholders.
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The article Why Is Occidental Selling These Assets? originally appeared on Fool.com.Fool contributor Arjun Sreekumar owns shares of Chesapeake Energy. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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