INITIATING COVERAGE REPORT
William C. Dunkelberg Owl Fund April, 14th 2014
Sector Outperform Recommendation: BUY Key Statistics: Price $93.33 52 Week Low $79.00
Return 19.61% 52 Week High $99.42
Shares O/S (mm) 790.1 Yield 3.00%
Market Cap (mm) $74,460 Enterprise Value $78,227
Earnings History: Quarters EPS Rev. YoY Price
1Q13 $1.684 -6.32% -1.45% 2Q13 $1.577 3.36% 2.39% 3Q13 $1.970 12.15% -1.09% 4Q13 $1.710 0.00% -0.55% Earnings Projections: Year Q1 Q2 Q3 Q4 Total
2011 $1.721 $2.213 $2.160 $2.025 $8.119
2012 $1.908 $1.638 $1.701 $1.858 $7.105
2013 $1.684 $1.577 $1.970 $1.710 $6.941
2014e $1.706 $1.730 $1.789 $1.789 $7.014
2015e $1.748 $1.738 $1.797 $1.773 $7.056
All prices current at end of previous trading sessions from
date of report. Data is sourced from local exchanges via
CapIQ, Bloomberg and other vendors. The William C. Dunkelberg Owl fund does and seeks to do business with
companies covered in its research reports.
Michael Lam: Lead Analyst
Niclas Dombrowski: Associate Analyst
firstname.lastname@example.org Ethan Friedland: Associate Analyst
COMPANY OVERVIEW Occidental Petroleum Corporation (OXY) is an integrated oil and gas company operating within the US (65.5% of revenue) and internationally (34.5% of revenues) through three segments: Oil and Gas, Chemical, and Midstream & Marketing. The Oil and Gas segment (75.5% of revenue, 77.3% of net income) explores for and produces oil, natural gas, and natural gas liquid. The segments primary domestic operations are in California and Texas. International operations include South America, North Africa, and the Middle East. The Chemical segment: (18.4% of revenue, 15.4% of net income) manufactures and sells basic
chemicals and vinyls. The Midstream& Marketing segment (6.1% of revenue, 7.3% of net income) provides specialized services to support the other segments and includes gathering, processing, transporting, storage, and marketing. INVESTMENT THESIS OXY is currently trading at a 12% discount to its peer and historical 5 year average EV/ EBITDA multiple. OXY first became undervalued at the end of 2012 after investors became concerned with the drop in natural gas, OXYs high production costs ($17.38 per barrel of oil equivalent (BOE)), and increasing capex. OXY is still undervalued due to the recent energy sell off, and investors waiting to see how OXYs restructuring initiatives unfold. OXY is still amongst the leaders in the Oil and Gas industry and has built a narrow moat via its location and expertise/asset quality advantages.
OXYs locations advantage is seen most prominently in its acreage ownership worldwide, and in key areas like the Permian in Texas and across California. OXY expertise/asset quality is seen in its commitment to exploring and producing on proven legacy assets through its specialized enhanced energy recovery techniques. OXY has been able to leverage its chemical and midstream & marketing segment to provide efficiencies and diversification. To combat the current investor sentiment, OXY has engaged in a long list of restructuring inanities to unlock value and to grow through shrinking. These initiatives include the spinoff of its California Business, selling a minority stake in its MENA segment, and other divesting initiatives. These initiatives along with the startup and completion of the Al Hosn Gas project in the Middle East, and the Bridge Tex Pipeline should expand margins, and generate a more profitable long
term outlook. As a result, OXY should start to trade back at its fair value to yield a price target of $108.84, or a dividend adjusted return of 19.62%.
Occidental Petroleum Corp. Exchange: NYSE Ticker: OXY Target Price: $ 108.84
T h e W i l l i a m C . D u n k e l b e r g O w l F u n d
Restructuring Initiative: To unlock more value and create a greater focus, OXY, like the rest of the industry, will divest or spinoff parts of its business. However, unlike its competitors, OXY will maintain its diversity and spinoff/divest within its Oil and Gas segment. This allows OXY to focus more of is resources and capital expenditure on the Permian, a more proven operation that still offers stable production growth through conventional means, and growth opportunities through unconventional means. Expectations are that all cash flow generated will go to a buyback program. o California Spinoff: On Feb14th, OXY announced the spinoff of
its California Business. The split will allow OXY to focus on exploration and production in the Texas area, and its two other business segments. OXY expects to complete the separation by the
end of 2014 or early 2015. Analyst have valued the spinoff at $15 to $18 billion, assuming an EBITDA of $2.6 billion, and about $5 billion in of debt.
o MENA Minority Sale: OXY announced in Oct. 2013 that it is planning to sell a minority stake in its Middle East and North Africa (MENA) operations. The selling process has been difficult because of the size and complexity of the deal. The deal could be for 20% of its MENA operations in the range of $6 to $8 billion.
o Other initiatives: OXY sold a portion of its 35% investments in Plains All-American Pipeline GP for a pre-tax gain of $1.3 billion. The first part of the sale is expected to be completed by Q3 2014, where OXY will still have 25% worth $4 billion. On Feb, 2014, OXY announced the selling of its Hugoton Field, one of the largest natural gas fields in the mid continental area, for $1.4 billion and will close the sale at the end of April. Expectations are that there will be more divestitures of its mid-continental assets.
Projects: OXY expects the start-up and completion of certain projects throughout 2014 and 2015 to apply incremental gains in top and bottom line growth. The key projects that should include the Al
Hosn Gas Project, and Bridge Tex pipeline Project, and a focus on chemical growth. o Al Hosn Gas: In the United Arab Emirates, OXY has been
developing one of the largest natural gas fields in the Middle East. This 30 year joint project, (OXY has a 40% stake), is anticipated to produce over 500 million cubic feet per day of natural gas as well as over 50,000 bpd of NGLs. Production is anticipated to start in late 2014, and should contribute to OXYs production growth.
o Bridge Tex Pipeline OXY teamed up with Magellan to form the BridgeTex Pipeline Company, LLC. This project will build a new crude oil pipeline from Colorado City, Texas to the Houston Gulf Coast area by mid-2014. This pipeline will span over 400 miles and an initial capacity of 278,000 barrels per day with access to seven terminals, transportation hubs and refineries. The pipeline should increase efficiency and expand the midstream & marketing segment.
o Chemical Growth: OXY has made investments in developing chlor-alkali manufacturing plant in Jacksonville, and should come online this year. OXY has also formed a joint venture with Mexichem to build a world scale ethylene cracker starting in mid-2014. These investments are the two major examples of OXYs commitment to growing the downstream portion of its natural gas and NGL operations.
Commodity: Fluctuation in commodity prices (oil, natural gas, and chemicals) would have adverse effects on operations. Price fluctuations are attributed to economic
conditions, production levels, exploration activity, and geopolitical activity.
Restructuring: OXYs restructuring efforts could experience lower proceeds, longer timelines, or create situations where OXY retains more than expected liability. This would
affect OXYs financial stability and stock price.
Operational: The capital intensive nature puts daily operations at risk of delays, costs over runs, and other events that could derail
operations. This would negatively affect OXYs top and bottom line growth.
Regulations: Any reform, increased regulation, or environmental laws would increase the operational difficulties. This risk would decelerate revenue growth and squeeze
margins through increased expenses.
International: OXY operates in multiple different countries and is exposed to currency and geopolitical risks. Major concerns include
fluctuating currency, government intervention, and OPEC activity.
Summary: OXY owns a narrow moat created through a location and asset quality advantage
Location: OXY has large acreage positions in both California and in the Permian. In California they are the largest acreage holder
with 1.7 million acres, opening them up to multiple types of development including 870,000 acres prospective for shale. In the
Permian OXY has increased its acreage from 1.7 to 1.9 million acres. This enables OXY to add projects quickly and efficiently due to its
large acreage positions in certain areas. OXY accounts for 20% of Permian production.
Expertise/Asset Quality: OXY is the leader in enhanced oil recovery (EOR) where a large portion of OXYs assets are legacy assets that have been in production for multiple years. In
turn, this limits OXY to very little exploratory risk. EOR is also known as tertiary recovery, and can extract 30 to 60%of the reservoirs
original oil vs. 20 to 40% using primary or secondary recovery. EOR is known to be the much more complex method that does have a
higher cost associated with it. However, OXY has been able to