Occidental’s Game of Thrones

A coup ousting the architect of a sprawling multinational empire would not normally be welcomed by shareholders. But Occidental (NYSE: OXY) is different in that the coup was actually a counter-coup and in the fact that many investors have had enough of the empire’s burdens.

The man they ousted from the chairman’s post in last week’s board election, Ray Irani, had built the company into a global powerhouse, with nearly 40 percent of its recent production coming from the Middle East, Africa and Latin America. But Irani, who prided himself on close relationships with Middle East oil officials, had been judged guilty of imperial overreach as the global scale justified unusually lavish executive compensation, while growth plans in places like Libya and Yemen got sidetracked by the political unrest sweeping the Arab world.

The final straw, besides the underwhelming share price, proved to be the campaign by Irani and his allies on the board of directors to oust CEO Stephen Chazen, Irani’s successor and sometime protégé.

Chazen, a former investment banker, had staked his reign on Occidental’s promising domestic assets in Texas and California, including the Monterey Shale play in the Golden State whose development remains stymied by regulatory roadblocks. The recently disappointing domestic numbers created an opening for Irani’s “Middle East” faction (his chief ally on the board, the recently resigned lead independent director Aziz Syriani is also of Lebanese descent) to announce in February that the board had begun a search for Chazen’s successor. But large institutional shareholders rebelled, and at last week’s board meeting it was Irani who was unceremoniously dumped in an election landslide that made Chazen Occidental’s unquestioned master through the end of next year, while shoring up shareholder protections against executive privilege by reining in compensation and mandating an independent board chairman.

The chairman’s post went to Edward Djerejian, a former US ambassador to Israel and Syria. His diplomacy skills could come in handy if, as expected, Occidental now attempts to extricate itself from the Mideast by way of asset sales or a spinoff. Speculation is rife that Occidental could split itself into as many as four companies, with chemicals and the midstream pipeline and logistics assets spun off and the energy producing core split into separate US and international entities. Chazen only added fuel to the fire on last month’s earnings conference call, with his response to a question about a potential domestic/foreign split:

“I think that’s something that we consider all the time. Obviously, the cheaper the stock the more you have to look at other alternatives. And so valuing each piece, may be fairly straightforward to do the US, valuing the international standalone is really more complicated because there’s not a lot of good comps. So I think that we’ll look at everything, but obviously with a lower stock price things that might not have worked before might work now. That isn’t any kind of forecast or anything. It’s just sort of a tautology.

When the analyst followed up about a potential midstream spinoff, Chazen responded with, “I think you start looking for things that move the needle a lot rather than things to fine tune.”

Of course, Occidental’s share price isn’t quite as cheap as it was less than three weeks ago, having already run 12 percent since April 19 as shareholders asserted control and gave Chazen a mandate for the breakup.

A smaller Occidental more narrowly focused on its domestic assets with their rapidly declining operating costs would, it is hoped, become a growth story once again, unlocking more value for investors who did well early in Irani’s tenure but not so much in recent years. For now, Occidental’s tenure in the Growth Portfolio reflects our hopes for the future rather than the company’s drab recent past, with revenue in the latest quarter down 6 percent year-over-year.

Chazen with his investment banking pedigree seems like the right person for the empire-selling job, and he now has 19 months to cement his legacy before handing off to an as-yet unknown successor. He’s already being paid like a savior, pulling down more than $28 million last year according to The New York Times, more than any other energy executive including the bosses of ExxonMobil (NYSE: XOM) and Chevron (NYSE: CVX). Now it’s time to deliver.

Occidental remains a Growth Portfolio Best Buy with a buy limit of $100.

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