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A smarter way to shrink

17 September 2013 By Christopher Swann

Occidental Petroleum’s quest for value looks half-cocked. The oil giant is considering selling a stake in its Middle East wells. Not only does Chief Executive Stephen Chazen appear to have put a cheap price on the asset. It also means he’s eschewing a better way to create value for shareholders: offloading products rather than places.

Granted, there is some sense in energy companies selling assets in the Middle East. They’re not particularly popular with U.S. investors, whether because of their financials, their location – or both. Apache’s stock jumped 8 percent on Aug. 30 when it announced it was selling a third of its Egyptian wells to China’s Sinopec.

Occidental, though, is likely to sell only a 40 percent chunk of its business in the region, according to Reuters and other news outlets. Moreover, the price tag could be around $8 billion, which pegs the unit’s value at $20 billion.

That appears to be lower than what shareholders currently think it’s worth. Here’s how: First, assume Oxy’s U.S. business would trade, as a standalone company, at the average 7.2 times 2013 EBITDA Raymond James has calculated for rivals – higher than the company’s overall multiple of 5.3 times EBITDA. That leaves its international assets worth $23 billion – virtually all of which are in the Middle East.

Based on that analysis, shareholders would be better served by Occidental hiving off other businesses. Its peers in pipelines, for example, trade at some six times next year’s EBITDA, while chemicals companies currently fetch around 16 times 2014 EBITDA. If both units were sold, that would unlock an extra $11 billion of value, according to Morningstar – equivalent to a 15 percent boost to the company’s market capitalization.

That would help the company catch up with the likes of Exxon Mobil and Chevron, whose stocks have jumped 19 percent and 25 percent respectively over the past two years. Occidental, though, has risen just 7 percent. Chazen is right to realize that smaller might be better. But he’s looking at shrinking the wrong part.


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