Will Oxy’s Divorce Spur The Break Up Of Big Oil?
By Christopher Helman
ConocoPhillips spun out Phillips 66. Marathon Oil spun off Marathon Petroleum. BP has jettisoned $40 billion in assets since Deepwater Horizon. Apache has been shrinking to grow, as has Chesapeake Energy. And now Occidental Petroleum has decided to slim down as well.
Oxy’s plan, announced last Friday, will be dramatic. Its California assets will be rolled into a separate publicly traded company described as the largest oil and gas mineral holder in the state with 2.3 million acres and 160,000 barrels per day of oil (and natural gas equivalent) production. It will generate roughly $2.75 billion of free cash flow and boast an enterprise value of about $20 billion. The remaining Oxy will generate about 600,000 boepd, most of it from vast operations in the Permian basin of Texas. Analyst Tim Rezvan with Sterne Agee expects Oxy to sell down its Middle Eastern and Bakken assets as well as its oil trading division in order to focus on Texas.
In so doing, Oxy CEO Steve Chazen will be unraveling much of what former CEO Ray Irani knitted together over his two decades at the helm. Rather than continuing to look for big projects in tricky places overseas (Irani’s specialty), the two Oxy companies will have plenty of opportunities in Texas and California to drill to their hearts’ delight.
But the plan makes sense. Occidental was smart enough to see that the Great American Oil & Gas Boom has turned the nature of the industry upside down. Being big confers very little advantage in developing shale assets.
The question remains: Will Oxy’s move be the tipping point that sets off a flood of other oil company spinoffs? It should be. The giants should absolutely spin off selected assets, boost returns to shareholders and take on more debt to rapidly build out their best new projects. But they probably won’t, because they’ve simply become too big and too risk-averse — just too scaredy-cat to change their stripes.
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