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Occidental Petroleum, America’s fourth-largest energy firm, could take a value-creation lesson from ConocoPhillips. The move by Conoco to break in two a year ago is being vindicated in the stock market. Shares in Conoco’s component parts have beaten peers by a wide margin since the separation last May. Nearest rival Occidental should take note. Matching Conoco’s market lift would produce a windfall.
It was once an article of faith that drillers should refine their own oil. A year ago Conoco became the largest explorer to abandon this integrated model. Spinning off refining, the company argued, gives clarity to investors and leads to a higher valuation. That seems to have been the case.
The value of the two legacy companies – driller ConocoPhillips and refiner Phillips 66 – are up a combined 18 per cent since the split. A selection of peers that have stuck with the integrated approach – including Exxon Mobil, BP and Royal Dutch Shell – are flat, on average.
Occidental has a particularly powerful incentive to follow Conoco’s lead. Its shares have fallen 11 per cent since its rival’s schism, hit by surging drilling costs and a feud between chairman Ray Irani and departing chief executive officer Stephen Chazen.
Since mr. Irani’s term ends next year, neither should mind bequeathing a smaller empire to their successors. And shareholders would thank them. Reproducing Conoco’s post-split performance would add about $12-billion (U.S.) to Occidental’s $66-billion market capitalization.
A sum-of-the-parts analysis points to chunkier gains. Occidental trades on an enterprise value of around 4.7 times 2013 forecast EBITDA, according to Thomson Reuters data. That is below the average of around six times for rival U.S. drillers, such as Continental Resources. On that basis, Occidental’s upstream operations alone could be worth about $83-billion, based on 2013 EBITDA estimates from Morningstar.
Occidental is also not getting full credit for its pipeline and chemicals operations, which typically trade at 16 times and seven times, respectively. Applying these multiples would value Occidental at $99-billion.
As Conoco proved, it takes time for investors to fully appreciate the benefits of a spinoff. Conoco lagged most peers between the July, 2011, split announcement and its consummation nine months later. Still, Occidental’s leaders may find that a breakup would be the best parting gift they can offer investors.