Of all the times to be searching for a new chief executive, now might be one of the worst for Occidental Petroleum Corp.
At least five other North American oil and gas companies are also conducting searches for their top positions, raising fears of a bidding war that could drive up Occidental’s once-controversial compensation costs.
“With such a high number of companies looking now, I do think Occidental’s board has to be careful,” said Philip Weiss, senior energy analyst with Argus Research Group in New York.
Whoever the board picks to succeed current Chief Executive Stephen Chazen will lead a company facing pressure to shed some business segments and focus on the domestic oil and gas market.
“The company’s new leadership should seriously take a look at becoming a domestic U.S. oil company,” Fadel Gheit, an analyst at New York’s Oppenheimer & Co., recently told Bloomberg News.
The chief executive search was announced last month. The company did not give a timetable for the search or for Chazen’s retirement. Chazen, 66, has been with the company since 1994. The company also announced that Ray Irani, who stepped down as CEO in May 2011 but remained executive chairman, would leave the board at the end of next year.
According to a recent Bloomberg News article, in the last four months, Marathon Oil Corp. of Houston; Chesapeake Energy Corp. of Oklahoma City; and three Canadian companies – Encana Corp., Bill Barrett Corp. and KKR & Co.’s Samson Resources – are looking for new CEOs; some officially, others according to sources.
For several years, Irani, Occidental’s former chief executive, was ranked among the top three public company chief executives in the entire United States for total compensation. Facing pressure from major shareholders, Occidental’s board changed its compensation policies and forced Irani to relinquish his chief executive post.
Weiss said a bidding war for a chief executive is especially risky for Occidental because of the controversy over his compensation.
Oppenheimer’s Gheit told the Business Journal last week that Occidental’s board failure to establish a line of succession has brought the company to the market at an inopportune time.
“Shareholders should demand a new board before the current one picks the new CEO,” he said.
Occidental spokeswoman Melissa Schoeb said the company would not comment for this article.
Since reaching a peak of $115 in May 2011, the share price has tumbled more than 30 percent to a closing price March 6 of $81. Among its peers, Occidental stands out as a poor market performer. In the last year, its shares have fallen 18 percent while comparable companies rose an average of 14 percent.
The poor showing is partially the result of Occidental’s exposure to geopolitical instability in North Africa and the Middle East, especially in Libya, Oman and Iraq. Under Irani’s leadership, Occidental rushed into many of these areas. But except for some forced exits from Latin America as governments there threatened to nationalize oil production, Occidental has held on to its international operations, despite growing tensions in North Africa and the Middle East. More than one-third of the oil and gas the company produces still comes from those regions.
Gheit said that Occidental could boost its valuation by selling those international operations and using the cash for share buybacks.
But Weiss said potential buyers might be wary because many of Occidental’s partners are foreign oil companies that are controlled by governments or monarchies.
Occidental in recent years has focused more on American oil and gas operations, especially in California and the Permian Basin of west Texas. But that has presented its share of problems as cost overruns have plagued drilling operations, particularly in the Bakersfield area. In summer, the company began a drive to cut domestic costs and reduce capital expenditures.
Selling U.S. segments?
Occidental could also follow the lead of other companies, and sell nonoil operations. Hess Corp. of New York and Murphy Oil Corp. of El Dorado, Ark., have recently divested all of their nonoil and gas production segments.
Occidental has a division that produces chemicals and vinyls used in paper, pharmaceuticals and other industries. Occidental also owns pipelines, gas plants and trading operations.
Alex Morris, an analyst with the Houston office of Raymond James & Co. of St. Petersburg, Fla., said Occidental might benefit from divesting.
“We think Occidental lends itself to Hess-Murphy-esque breakup, where activist shareholders prompted the companies to announce spinoffs of several business units and focus on their domestic exploration and production portfolios,” Morris said.
But in the recent analyst teleconference call, Chazen said the company had no immediate plans to do that. He said the midstream segment was crucial for the company’s oil and gas production, especially in the Permian Basin.
“We believe that our oil company gets better prices for the product, the oil,” he said.
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