A New, Truly Improved Occidental Petroleum? : Management: Oxy, long a lagging performer, has made several strategic moves and shows signs of a rebound. But investors need to be convinced.

Could it be that Occidental Petroleum Corp. is finally ready for redemption?

After two decades of delivering lackluster growth and inviting investors’ wrath--Occidental stock is worth less today than 20 years ago--the energy and chemical company is at last showing signs of a genuine rebound.

Some of the credit, of course, goes to the recent surge in crude-oil prices, to their highest levels in nearly two years. But Occidental has made several strategic moves designed to bolster the company’s performance even when oil prices go back down--and the effort is starting to draw notice.

“The things we’ve been doing to add value to the company are intrinsic, they’re not related to [the] price” of oil, Occidental President Dale R. Laurance said in an interview at the company’s Los Angeles headquarters.

Thanks to a series of deals, Occidental now has a much stronger stable of energy assets that should enable its earnings and cash flow to swell regardless of oil prices. The new mix of assets also should allow the company to substantially raise its overall production of oil and natural gas in the next two decades.

In addition, Occidental’s overhead costs are coming down, in part because it has pared away some high-cost oil fields, and its debt-heavy balance sheet is healthier. The slump in chemicals prices that has plagued its chemicals unit seems to have bottomed. Wall Street analysts are nudging up their earnings forecasts for the company, and are starting to tout its stock. And Occidental might see a $1-billion windfall later this year if, as expected, it prevails in a protracted legal battle with Chevron Corp.

“There’s a lot more going on with this company than just the rise in crude prices lately,” said Michael Young, an analyst with Deutsche Banc Alex. Brown who recently raised his rating on Occidental stock to “buy.”

But the upturn at Occidental has been so long in coming that Laurance and Ray Irani, Occidental’s 64-year-old chairman and chief executive, know it won’t be easy convincing the world that Occidental’s recovery has legs. Skepticism about Occidental runs deep on Wall Street and among many investors.

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Indeed, although Occidental’s stock is up 20% so far this year, it still lags the 26% jump in the Standard & Poor’s index of major oil-company stocks, all of which have benefited from the rise in crude-oil prices to their current level of about $21 a barrel. Occidental stock closed Friday at $20.81 a share, up 50 cents on the day, in New York Stock Exchange composite trading.

“They still need to win back investor credibility,” said Christopher Stavros, an analyst at PaineWebber Inc. in New York, even though Stavros is among those who believe Occidental “has turned the corner.”

Laurance agreed that “a lot of the earnings power the company has today is not currently reflected in the stock. We still have work to do.” But Occidental’s strategic moves “are going to drive our earnings and our cash flow up, and hence will drive our stock price up,” he predicted.

That would definitely be a change of pace at Occidental, which was long identified with its flamboyant and controversial founder, billionaire industrialist Armand Hammer, who died in 1990 at age 92.

After moving to California in 1956, Hammer bought two wells owned by a faltering oil company named Occidental Petroleum, and the company surged into oil’s big leagues after it discovered rich oil deposits in Libya during the 1960s.

But during Irani’s reign in the 1990s, Occidental struggled to find a strategy that would deliver consistent growth in sales, earnings and in its stock price. Occidental’s oil and gas fields were relatively costly to operate, and so too often the company’s fortunes seemed strictly tied to swings in the price of oil.

Occidental’s stock became “a trading vehicle more than anything; you had to time your purchases and your sales correctly to make any money at all,” analyst Young said. Otherwise, its appeal was limited mostly to its lofty dividend payout--which dates back to Hammer’s reign, and which is currently yielding 5%.

It didn’t help Occidental’s public image that, as the company and its stock languished in the mid-1990s, Irani was collecting more than $125 million in pay and other compensation over several years. Fortune magazine called it “the most egregious example of lavish pay for lousy performance in memory.”

Matters only got worse in 1998 when oil prices plunged to nearly $10 a barrel--their lowest level in half a century. The earnings from Occidental’s oil business, which accounted for 55% of its $6.6 billion in total revenue last year, tumbled to $314 million in 1998 from $694 million the previous year, excluding one-time gains and charges.

Occidental also has been noticeably absent from the wave of gigantic mergers that have swept through the oil industry in the last 18 months, led by Exxon Corp.’s $75-billion agreement to buy Mobil Corp. The deals will make Occidental, already a mid-size player, an even smaller force in the industry.

Chemicals offered no relief for Occidental, owing to a sharp drop in chemicals prices. The company’s chemicals unit last year posted earnings of $296 million before one-time items, down sharply from $619 million in 1997.

The drooping prices for energy and chemicals “offset a lot of the good things we have done,” said Laurance, 54, a chemical engineer by training and odds-on favorite to succeed Irani as Occidental’s chief executive. But he said the efforts will pay off. “We’ve made a lot of progress in building things that have enduring value,” he said.

What things? Occidental divested several nonstrategic and costly energy fields in Venezuela and elsewhere, netting about $1.1 billion. The company also swapped some other assets with Royal Dutch/Shell Group and Unocal Corp., and it sold its MidCon natural-gas-transmission operation to KN Energy Inc. for $3.1 billion.

Occidental’s major U.S. oil-and-gas fields today are in California, Texas, Kansas, Oklahoma and the Gulf of Mexico. Overseas, Occidental’s main fields include sites in Qatar and Yemen in the Middle East; Colombia, Ecuador and Peru in South America; Russia; and Pakistan.

But it was in early 1998 that Occidental made the move perhaps most critical to its turnaround: It bought the U.S. government’s 78% interest in the Elk Hills oil field, 25 miles west of Bakersfield, for $3.5 billion. Uncle Sam had managed Elk Hills mostly as a petroleum reserve, but for Occidental the site will be a rich source of long-term oil and gas production, and one whose cost of operation is dropping as Occidental gets its state-of-the-art production equipment into the area.

Occidental is selling much of the oil it produces at Elk Hills to Tosco Corp., whose brands of gasoline include Union 76.

What’s more, it’s inherently a lower-cost site because Elk Hills “is a very large field in a small place,” as Laurance put it. Covering nearly 74 square miles, the field “is just more efficient” to operate than most others, and so will lower Occidental’s operating costs, he said.

Indeed, when Occidental acquired Elk Hills, the per-barrel cost of pumping oil from the site was $4.50; the company already has driven that down to $1.50, he said. As a result, Occidental can keep turning a profit overall, even if world oil prices go down.

Consider: In the fourth quarter of 1997, Occidental earned $160 million from its oil and gas operations. In the second quarter of this year, it earned $165 million--even though the price of crude oil had dropped about $3 a barrel during that span. (It was during this year’s second quarter that crude prices started their recent surge higher.)

“We have significantly lowered our break-even point,” Laurance said.

Occidental also is pursuing a goal of slashing its overhead costs by up to 40%, to less than $500 million a year. It’s paring its debt costs too, and that effort could get a big boost if Occidental wins an 18-year court battle with Chevron, as many expect it will.

The breach-of-contract suit stems from a terminated merger pact between Gulf Oil (now owned by Chevron) and Cities Service Co. (now owned by Occidental). In 1996, an Oklahoma court sided with Occidental and awarded it $742 million in damages and interest, and that interest is still accruing as Chevron appeals.

The tab is now up to $964 million, and Chevron only has one appeal left--with the U.S. Supreme Court. If it loses there, Occidental could see a check for nearly $1 billion.

“If we receive payment from Chevron, we would use it to repay debt,” Laurance said.

The legal case, in fact, has even prompted some analysts to speculate that Chevron should just buy Occidental if Chevron loses the case, because owning Occidental would boost Chevron’s energy reserves and chemical operations. Laurance declined comment about the speculation, as did Chevron.

Laurance also discounted the idea that Occidental needs to merge. “There is an advantage to being nimble and quick,” he said. “You don’t have to be big to survive in this world, you have to be good.”

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But chemicals are a different story. Some big merger announcements in the chemical industry recently raise questions about whether Occidental might want to part with its chemical business, either through a sale or spinoff.

Laurance said Occidental is always considering deals that might enhance its stock price but that right now OxyChem “is generating a significant amount of cash” and that the company plans to keep the unit. In the meantime, it appears that chemical prices have bottomed, and the business “is making a slow recovery,” said Young of Deutsche Banc.

But is it all enough to get Occidental back in investors’ good graces? PaineWebber’s Stavros said Occidental has made some deft moves but that it has to prove that its strategy has staying power.

“Investing is a business of trust,” he said. “If you want to gain back the trust of your shareholders, you need to show that they can expect management to do right by them.”

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Slippery Earnings

Occidental Petroleum Corp. is shuffling its mix of energy and chemical assets to generate

steadier growth and end its history of uneven earnings, which has hurt its stock price:

Year Earnings (Loss) from Continuing Operations. In millions: 1998 $325

Year Return on Stockholders’ Equity: 1998 8.5%

* Not applicable due to loss. Source: Occidental Petroleum Corp.

Source: Occidental Petroleum Corp.