Occidental Petroleum Corporation (NYSE:OXY)‘s boardroom has been a lively place of late. In early 2013, the company surprised shareholders with a “terse” announcement informing them of unexpected changes to the company’s executive team. Specifically, Occidental’s board announced that it was beginning an expedited headhunting process to find a successor for CEO Stephen Chazen.
While it is true that Mr. Chazen presided over a stock-price fall of more than 20 percent in 2012, the company’s shares have since recovered a significant amount of that lost ground. More importantly, many Occidental Petroleum Corporation (NYSE:OXY) shareholders regard Mr. Chazen as a good steward of the company who has instituted several positive changes.
The genesis of the boardroom disagreement is complex and political, but it could have serious ramifications for the company’s shareholders and employees. Some market-watchers even believe that it could result in a split like the one that recently separated drilling and exploration concern ConocoPhillips (NYSE:COP) and downstream refiner Phillips 66 (NYSE:PSX).
Occidental Petroleum at a Glance
Occidental Petroleum Corporation (NYSE:OXY) is an integrated energy company that conducts drilling and exploration for natural gas, oil and equivalents in a variety of locations around the world. At last count, the company claimed at least 3.3 billion barrel-equivalents of energy reserves. Occidental Petroleum Corporation (NYSE:OXY) also makes petroleum-based chemicals and distillates. Its midstream and downstream operations involve transportation, storage and refining in several key global energy hubs.
Some Occidental Petroleum Corporation (NYSE:OXY) shareholders have taken issue with the seemingly abrupt decision to replace the company’s current CEO. Although all parties involved have made clear that Mr. Chazen is not being fired and may continue to serve indefinitely, the search for a replacement proceeds apace. Once a suitable candidate is found, Mr. Chazen will be expected to step down without delay.
The architect of the leadership change may be Dr. Ray Irani, a former CEO who led the company for more than two decades. Since stepping down in 2011, Dr. Irani has held an unusual amount of sway over its board’s decision-making processes. Impartial observers could be forgiven for imagining that Dr. Irani never fully relinquished his claim to Occidental Petroleum Corporation (NYSE:OXY)’s throne. He and his allies may wish to dispose of Mr. Chazen in order to install a leader who hews closer to their whims.
At this point, shareholders appear to be deeply divided. Dr. Irani has several prominent allies, including some of the company’s longest-standing board members. On the other side, a group led by a number of fund managers has expressed support for Mr. Chazen in strong terms. The climax of this battle is likely to come at the company’s May shareholder meeting. If Mr. Chazen’s allies can drum up enough support, they may muster the votes to oust Dr. Irani and save Mr. Chazen’s job.
Such an outcome would probably preclude a split along the lines of the ConocoPhillips-Phillips 66 separation. Whereas Dr. Irani seems to favor the idea, Mr. Chazen has stated that he does not believe the company should be split into upstream and downstream components. If Mr. Chazen is ousted, the probability of a successful spin-off could increase dramatically.
The ConocoPhillips/Phillips 66 Situation
In early 2012, ConocoPhillips (NYSE:COP) and Phillips 66 (NYSE:PSX) officially became separate, distinct companies in a major spin-off. Phillips 66 received the bulk of the combined company’s refining and retailing operations, and ConocoPhillips (NYSE:COP) retained most of its production and exploration infrastructure. As one of the largest vehicle fuel retailers in North America, Phillips 66 (NYSE:PSX) has enjoyed increased visibility and solid share-price performance since the split.
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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