Occidental Up on California Assets Spin-off, Focus on Permian - Analyst Blog

On Dec 2, 2014, shares of Occidental Petroleum Corporation ( OXY ) surged around 1.6% from the previous day's closing. This followed the spin-off of its wholly-owned subsidiary, California Resources Corporation, on Dec 1.

California Resources commenced trading as an independent entity on the New York Stock Exchange under the ticker symbol "CRC" since Dec 1. Initially announced on Feb 14, 2014, the board of directors of Occidental had approved the transaction on Oct 2 (read: Occidental Up on Strategic Spin-Off Plan ).

On Nov 30, California Resources split from Occidental and distributed 80.5% of its outstanding shares to the shareholders of Occidental common stock. The shareholders of Occidental obtained 0.4 shares of California Resources common stock for each share of Occidental common stock at the close of the trading session on Nov 17. Occidental has retained 71.5 million shares of California Resources.

This strategic divesture is a common occurrence in the energy sector. Another oil and gas major Murphy Oil Corp. ( MUR ) had spun-off its U.S. downstream subsidiary in Sep 2013. The subsidiary currently trades on the New York Stock Exchange as Murphy USA Inc. ( MUSA ).

Occidental is the largest oil producer in the Permian Basin and this spin-off will allow the company enhance its focus in Permian. During the third quarter of 2014, the company's domestic oil production improved primarily on the back of higher contribution from the region. We believe Occidental's focus on the Permian resources will boost its future reserves.

According to a U.S. Energy Information Administration report published in Apr 2014, Texas is among the five largest crude oil and lease condensate states in the U.S. Continuous development activities in the Permian and Western Gulf basins in western and south-central Texas boosted reserves. Occidental continues to deploy more resources to unlock the Permian reserves.

We are concerned about the plummeting global crude oil prices . Currently, crude oil prices are around $70 per barrel, down from approximately $108 per barrel in Feb 2014. So Occidental's focus on the oil-rich Permian assets in this scenario therefore remains debatable.

Apart from the latest spin-off, Occidental is currently streamlining its existing operations through the divestment of non-core assets and concentrating on long-term growth ventures. On Nov 14, 2014, the company completed the sale of its 50% interest in BridgeTex Pipeline Company LLC to Plains All American Pipeline, L.P. ( PAA ) for $1.075 billion.

Occidental's third-quarter 2014 earnings and revenues were negatively impacted by lower average realized prices for crude oil and lower sales volumes. In the fourth quarter of 2013, average realized crude oil price hovered around $99.84 per barrel. A significant year-over-year gap in crude oil price will likely impact the company's future performance as well.

Occidental currently has a Zacks Rank #5 (Strong Sell).

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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