Should Investors Expect Big Changes at This Oil Company?

Should Investors Expect Big Changes at This Oil Company?

On its most recent earnings call, Occidental Petroleum spent a great deal of time drilling down into its California oil business. This left most analysts on the call to speculate that the California assets are about to be spun out into a stand-alone business. While that's certainly an option for the company, it might not be its best option to unlock value for investors. Let's take a look at some more creative choices that the company should also be considering.

California dreaming
One interesting option that Occidental has at its disposal is to package some of its conventional oil and gas assets into an MLP. The company has substantial assets in California and the Permian Basin, which are two areas that upstream MLPs, such as LINN Energy , tend to target. In fact, these are the two key reasons why LINN has been trying to acquire Berry Petroleum . In Berry's case, 70% of its reserves are in those two long-lived, low-declining plays.

Occidental has similar assets, which could be spun off as a stand-alone MLP if the company wanted to go that route. For example, its California assets are expected to throw off over a billion dollars in cash flow this year, and that's over and above the $1.5 billion that it's reinvesting in California to grow production. Occidental could slow down its production growth goal of 5%-8% annually and simply turn this into a cash-flow-gushing MLP asset with a high investor distribution. It could package some of its other conventional assets, like the Permian, to create a top-notch upstream MLP. Best of all, investors typically assign a much higher value to MLPs, as evidenced by LINN's EV/EBITDA multiple of 12.5 times, despite being beaten down by short-sellers. Occidental's whole business currently trades for less than half that at about 5.5 times.

Joining the midstream party
Sticking with the MLP theme, Occidental could also look to unload its midstream segment. It's already said that it plans to monetize a portion of its 35% general partnership interest in Plains All American , which is currently looking to publicly offer its interest. While an outright sale of the rest of its midstream-related assets is one option, packaging these midstream assets into an MLP and sending it public might be the better course to take.

This has been the recent trend in the energy industry. Just in the past month Philips 66 , itself a former spin-off of an integrated oil and gas company, completed the IPO of its midstream business Phillips 66 Partners . Phillips was able to sell about a 25% stake in the business and picked up nearly $400 million in cash, which can be reinvested into growth projects. Occidental could join that party by doing a midstream MLP IPO of its own.

Final Foolish thoughts
Occidental has a range of options at its disposal to unlock value; it also has a chemical business that could be sold, and the company could even sell off its international operations piece by piece. That makes this an interesting time for investors, because the company's move toward unlocking value could really pay off. For investors with an eye toward unlocking value, Occidental is certainly a stock worth digging into a bit deeper.

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Fool contributor Matt DiLallo owns shares of Phillips 66 and LINN Energy, LLC and has the following options: short October 2013 $25 puts on LINN Energy, LLC. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Originally published