Three-Way Financial Comparison
Despite uneven stock-price performance, all three of these companies are in decent financial shape. In 2012, Occidental earned $4.6 billion on gross revenue of $24.2 billion. This was good enough for a profit margin of nearly 20 percent. Meanwhile, ConocoPhillips earned $7.4 billion on $60.4 billion gross revenue for a final margin of 14 percent. Its former downstream division took in $166.2 billion and earned approximately $4.1 billion. Phillips 66’s margin was just under 2.5 percent.
All three of these companies saw significant quarterly earnings drops of between 60 and 80 percent. What’s more, all three have way more debt than cash. With $7 billion in debt to $3.5 billion in cash, Phillips 66 is in the best shape. ConocoPhillips has over $25 billion in debt to just $3.6 billion in cash, and Occidental Petroleum sports a debt-to-cash ratio of five-to-one.
Probable Outcome and Possible Plays
Occidental’s ultimate decision to split its upstream and downstream components likely depends on the outcome of the upcoming shareholder meeting. If shareholders decide to oust Dr. Irani and his allies, the committee tasked with finding Mr. Chazen’s replacement may be dissolved. In this case, Mr. Chazen would probably remain as CEO for some time. If shareholders return a vote of confidence for the current board, Mr. Chazen will probably be ousted.
If this occurs, a spin-off is a real possibility however it is unclear whether Occidental’s downstream division could stand on its own like Phillips 66. Without a major retailing component, it may lack the margins and product diversity that undoubtedly supports Phillips 66’s profits. Many market-watchers are not convinced that such a move would be prudent.
In sum, investors who wish to play Occidental Petroleum Corporation (NYSE:OXY) for a potential spin-off should watch the outcome of the pending shareholder vote. Some may also look to other spin-offs to see potential value creation, such as this example. While such a split would not be a slam dunk, it might eventually create value for the company’s long-term holders. More importantly, it could create a significant arbitrage opportunity in the meantime.
The article Could Boardroom Battle Lead to Successful Split? originally appeared on Fool.com and is written by Mike Thiessen.
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