OXY to spin off California oil and gas business

Occidental Petroleum Corp. (NYSE: OXY) reports that its board of directors has approved the spin-off of its California oil and gas business into an independent and separately traded company, California Resources Corp.  

The companies will be separated through the distribution of 80.1% of the outstanding shares of California Resources to holders of Occidental common stock. The distribution is expected to occur on Nov. 30.

Occidental shareholders will receive 0.4 shares of California Resources common stock for every one share of Occidental common stock held at the close of business Nov. 17, the record date for the distribution. Fractional shares of California Resources common stock will not be distributed. Any fractional shares of California Resources common stock will be aggregated and sold in the open market and the aggregate net proceeds of the sales will be distributed ratably in the form of cash payments to Occidental stockholders of record who would otherwise be entitled to receive a fractional share of California Resources common stock.

Following the distribution of California Resources common stock, California Resources will be an independent, publicly traded company, and Occidental will retain 19.9% ownership interest in California Resources for a period of up to 18 months. California Resources has been approved to list its shares of common stock on the New York Stock Exchange under the symbol “CRC.”

In response to the California spin-off approval, Jefferies analysts commented, “Oxy will distribute 80.1% of the equity in California Resources Co. (CRC) to Oxy shareholders on Nov. 30, and will concurrently receive a dividend of $6b from CRC. Oxy will retain the remaining 19.9% of the equity for up to 18 months and potentially exchange this equity for shares in Oxy. Any remaining equity at the end of the holding period will be distributed to shareholders. We expect the equity value of CRC to settle at about $6b.

“$6b dividend available for repurchases. CRC has successfully placed $5b of notes in three tranches to fund the Oxy parent dividend. While Oxy will have some restrictions on the use of the proceeds to maintain the tax-free treatment of the spin, the company can use the cash for debt reduction and share repurchases upon receipt. We expect that the early trading around the spin-out could be volatile, and Oxy will be able to take advantage of any negative price reaction by buying in shares.

“MENA transactions possible before year-end. We value Oxy's total MENA assets at $27b. Oxy intends to reduce its overall exposure to the region in multiple transactions, and we expect that the Al Hosn natural gas project could be the first transaction in the process. If Oxy successfully reduces its exposure in the region by 25%, we believe it would generate proceeds of about $7b.

“Repurchase program becomes a major catalyst. In addition to the CRC dividend and the MENA equity sell-down, we expect that Oxy will divest its equity in PAGP which would generate about $4b of proceeds at the current market price. If all these transactions are successfully completed, Oxy would have about $17b of surplus cash and we would expect a heavy bias to share repurchases in utilizing this cash. If Oxy's market cap reduces by $6b at the time of the CRC spin-out, the surplus cash would be 25% of Oxy's adjusted market cap.

“Permian takes center stage. Post-restructuring, Oxy is very weighted toward the Permian Basin, where it controls 1.9m net acres and has identified 4,500 drilling locations. While the market has expressed skepticism about Oxy's ability to execute a major unconventional drilling program, we believe that the repurchase program provides an 18 month insurance program for shareholders to see if Oxy can get it right. We also note the start-up of the Bridgetex pipeline, where Oxy owns 50% of the equity but more importantly has 200 kbd of throughput rights – protecting its basis in the Permian at near-Houston differentials vs. Midland.

“Top pick in large-cap oil. The market has rightly focused on the drop in oil prices in the 3Q, and Oxy's stock has responded in kind. However, in the near term, this actually makes the share repurchase program that much more effective. We believe that the magnitude of the restructuring will make Oxy defensive in a continued price decline, but also a strong offensive stock in an oil price recovery.”

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