Occidental Petroleum Corp. would have a freer hand to develop its substantial Kern County assets under plans announced Friday to spin off the company’s California operations.
The move set for completion by early next year addresses analysts’ concerns that Oxy has been spending too much money on its California operations and not getting enough return on that investment.
Carving out the California operations would reduce that drag on Oxy and give the new company more flexibility to exploit what’s been unsurpassed investment in the prospective Monterey Shale formation underlying much of the southern Central Valley.
“I think it would make them more nimble,” said Steve Layton, president of Bakersfield oil and gas producer E&B Natural Resources Management Corp. He added that a spinoff would free Oxy to do more drilling in the Monterey while also focusing more on its local investments in conventional heavy oil.
Despite the company’s recent success in improving its cost efficiencies in California, some analysts have viewed its work in the state as a burden on companywide earnings. Oxy has had to invest large sums developing its unconventional oil production in the state, particularly in the Monterey in and around Kern.
In an Oct. 29 earnings conference, an analyst with Bank of America Merrill Lynch, Doug Leggate, criticized Oxy’s California unit as being an “underperformer.” He asked Oxy CEO Steve Chazen to explain his thinking on “whether or not California can do better on its own.”
Chazen responded by confirming that the company was considering spinning off its California operations, which he acknowledged would have higher capital costs than the company as a whole.
“As far as California is concerned, the fundamental question is, can it operate better as a standalone business with a different model,” Chazen said.
A California spinoff would offer little or no dividends but have “a more entrepreneurial background,” he said. It would also “enhance the visibility and the attractiveness of the remaining business” not included in the spinoff, he said.
Chazen noted in conference call that Oxy’s cost per barrel of production in California decreased about 18 percent from 2012 to 2013. He said the company was planning to boost its spending in the state by almost a third this year to about $2.1 billion, with most of that money going to 1 million “prospective acres,” likely a reference to the Monterey.
A company news release Friday said the spinoff would create a separately traded company with 8,000 employees and contractors across the state. It said there has been no decision on how the California spinoff would be managed and governed.
As part of the move, Oxy’s headquarters would move from Los Angeles to Houston, and the portion of the company not included in the spinoff would continue to produce oil and gas in Texas, the Middle East region and Colombia.
“Creating two separate energy companies will result in more focused businesses that will be competitive industry leaders,” Chazen stated in Fridays’ release.
Oxy produces more natural gas and owns more oil and gas property in California — 2.3 million acres — than any other petroleum producer in the state.
California accounts for about a third of Oxy’s domestic production — 90,000 barrels of oil and 260 million cubic feet of natural gas per day.
Last year, Oxy’s California operations earned about $2.6 billion before taxes, depreciation and amortization. It spent about $1.7 billion in the state over that period in what it termed “strong results.” The spinoff would have a “competitive balance sheet” with debt between $4 billion and $5 billion.