Occidental Petroleum’s (NYSE:OXY) management has been pummeled since the deal with Anadarko Petroleum was announced last spring. Investors and stock analysts alike decried the purchase as being a “value destroyer,” lambasting OXY’s leadership in the process. Of course, over the short run, they’ve been right. OXY’s stock fell from the upper $60’s to the middle $30’s as the deal closed.
The magnitude of the deal, the early potential for a fight with Chevron (NYSE:CVX) and the surprise $10 billion buy-in from Warren Buffett to save the day all served to enhance the market’s interest in this tie-up between the two Permian oil giants.
Given the stakes, it came as no surprise to savvy market watchers when Carl Icahn entered the fray, with a plan to replace OXY’s board with his own slate of directors. With a billion dollars of his own at stake, and his position “under water,” Mr. Icahn opined loudly against the deal.
“Buffett figuratively took her to the cleaners,” Icahn said in a letter to shareholders. “The Buffett deal was like taking candy from a baby and amazingly she even thanked him publicly for it!”
“But you can’t blame Warren, if Hollub was arrogant enough to negotiate a deal with Buffett of this magnitude despite her admittedly limited experience in M&A and the Board was misguided enough to rubber stamp it, then one might say in Warren’s defense that it was almost his fiduciary duty to Berkshire Hathaway to accept it,” Icahn added.
It was a fairly safe bet that going into the annual meeting, typically in May, that current management would be seriously under the gun, if nothing changed. Momentum was clearly on Icahn's side, and the market wasn't doing OXY any favors as its stock has swooned over the past six months as previously noted. The smart money was betting for a clean sweep come May of 2020.
Then on January 2nd, the oilfield “worm turned”, and things changed. Carl Icahn may have had to reach for the Maalox, as a central theme of his "the board was unqualified" spiel had just had a gaping hole poked in it. What had looked like a walk-over for him on the 1st, became a cage-fight on the 2nd.
Andrew Gould joins OXY’s board
People (investors primarily) have been throwing a lot of potshots at Vicki Hollub, OXY's CEO, and architect of the Anadarko deal. They (Carl Icahn primarily) have also been throwing rocks at OXY's board, proposing a bunch of his guys and John Hofmeister (Former President of Shell NYSE:RDS.A) I haven't done a deep dive on the entire board, but its Chairman Eugene Batchelder has a pretty good oilfield pedigree. Most people think ConocoPhillips (NYSE: COP) is a model of what the modern Super Major oil company should be and Batchelder was its Chief of Finance in 2012. In that role he gets some credit in building that company up to that point. Related: China Finds Oil In Asia’s Deepest Onshore Well
The potshots at Ms. Hollub are just silly in my view and are driven by investor frustration at the stock action since the deal was announced. Investors are entitled to this frustration as it's been their treasure diminishing. That doesn't make them right. Vicki Hollub is absolutely the right person to integrate these companies. No one knows the Permian basin the way she does. She's worked in the Permian for much of her 30+ year career, in various roles from Drilling Engineer to Area VP for OXY. Suggestions that she's in over her head are just ludicrous, but that's the world we live in these days. I’ve written on the OXY/APC deal previously in this publication. You might have a glance at this earlier article (What The Market Is Overlooking In The Occidental Deal) for insight as to my rationale for lining up so strongly behind this deal.
Batchelder has been in lock-step with Ms. Hollub on the Anadarko deal, so we have to presume she has his confidence. A point worth making is that OXY and COP are often compared as regards low risk assets. One can only suspect that Batchelder's views have played a role here. Particularly with OXY's determination to acquire top-quality assets in America's most prolific oil and gas basin.
I expect the addition of Andrew Gould was driven by Batchelder to bring an experienced, and well-known voice to the OXY board. Andrew Gould was a frequent guest on money shows during his time as Schlumberger's (NYSE:SLB) Chairman and CEO, and oversaw a period of intense growth for SLB. He has name recognition that no one else on the board will have, including Icahn’s pick-John Hofmeister.
Among other things, I can see Gould resuming his advocacy on the money shows, joining Vicki Hollub. I think Gould's arrival is a good move that will serve to defuse Icahn’s pleas to the shareholders in May.
Batchelder comments on Gould's arrival:
“Andrew brings a valuable perspective to the board through his extensive experience as a chief executive in the oil and gas industry,” said Gene Batchelder, Occidental’s chairman of the board. “Throughout his long career, he drove significant value creation while managing a global business. Andrew’s knowledge and decades of operational and financial leadership in the industry will benefit the board and add valuable insight as Occidental continues to focus on generating returns for shareholders.”
In my estimation, most analysts given a choice of Gould or Hofmeister would take Gould. Why?
Andrew Gould drove Schlumberger's drive to become the preeminent provider of oilfield services during his thirty-plus year tenure with SLB. He knows what oil companies need as they go forward from this experience. As non-Executive Chairman of BG Group he also played a key role in Shell's acquisition in 2016. Gould punches all the tickets, and he's a money-guy as Batchelder notes in the quote above. Worth noting as well, Gould sits on the board of Saudi Aramco (a little company that you may have heard of) and BJ Services, the privately held spin-off from Baker Hughes (NYSE:BKR) during the Halliburton run at Baker Hughes in 2016.
In my view, Gould brings unassailable stature to OXY's board and should dispel Icahn's concerns about oversight and governance. Will Icahn admit this and stand down? Never, but at the end of the day Gould will carry the day for present management and board membership.
Analyst upgrades
At least a couple of analysts see daylight for the company going forward. On January 8, Mizuho Securities proclaimed that "the worst is over for Occidental," and set a price target of $58 citing "sustainable dividend growth through 2022." Related: 800,000 Bpd Offline After Haftar Affiliates Halt Exports
Just the other day, Morgan Stanley (NYSE:MS) set a price target of $59, and called the stock a top pick for 2020. The analyst went on to say he "sees a clear path for the stock to re-rate higher through debt reduction, synergy realization and operational improvements."
It’s an oilfield maxim. Any time you can pick up choice assets that are being under-managed, and then fix these problems, you jump all over it, OXY did.
It is with no small measure of satisfaction that we note these highly paid analysts coming to the same conclusion we did-6-months prior.
Your takeaway
If it were not OXY's dividend history and often stated commitment to maintaining the divvy, I might be concerned given the pullback in growth and capex for 2020. The fact that management has repeatedly committed to the dividend also gives me some comfort.
Cedric Burgher, OXY’s CFO
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“We have established a capital budget for 2020 that we expect will fully optimize free cash flow and position us to grow production in a capital-efficient manner while maintaining the safety of our dividend.”
Vicki Hollub, OXY’s CEO
“The substantial free cash flow we will generate in higher price environments, combined with our ability to pay a sector-leading dividend throughout lower commodity price environments, is unmatched.”
So, we've established the company has some challenges ahead of it. Which oil and gas company doesn't these days? The last five years have been an awakening for this business.
The good news is WTI pricing is and has been well above $55 for most of last year and seems to be building strength for a variety of reasons as the New Year begins. It's early days yet, but the trends for oil currently, including the massive inventory draw this week, are supportive.
As previously stated, I believe OXY has answered Icahn's challenge to the board, from a quality perspective. As the company continues delevering and executing on the synergies forecast, the most current it announced just last week, shareholders should be rewarded with a return to growth for the stock.
By David Messler for Oilprice.com
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