Occidental CEO's new role tested by debt, lagging share price and large dividend payments to Berkshire
Richard Jackson, Occidental Petroleum CEO for less than a month, has been tasked with finding ways to boost a lagging share price and pay off more debt.
Jackson could face a fundamental question in the long term: whether it should seek a buyer of its oil company, which has a market capitalization of $51 billion.
Berkshire Hathaway already owns a third of the company. The preferred stake, which costs Occidental hundreds millions of dollars annually in dividends, is owned by Berkshire Hathaway. Jackson, who joined Occidental back in 2003, assumed control of the Houston-based firm on June 1, 2008. Jackson succeeded Vicki Hollub who led Occidental over a decade. She engineered two acquisitions which shifted Occidental’s oil production to the U.S. This positioning proved advantageous when the U.S. - Israel war with Iran rattled the confidence in Middle East supply. Exxon Mobil was more vulnerable to disruptions, with 20% of its production located in the Middle East.
Occidental acquired companies at a high cost, and the long-term debt accumulated by the company reached up to $38.5?billion. Hollub reduced the company's debt to $15,2 billion at the end of Hollub's tenure. During this time, the stock price dropped 26% and was far behind the peers. ConocoPhillips and Chevron both returned 153% over the same period.
David Byrns is a portfolio manager for American Century Investments. According to LSEG, the company holds an Occidental stake valued at $131 million. Jackson stated that his top priority during an earnings call held in May was to reduce the?principal loan to $10 billion within the next few years, to boost free cash flow, and to increase oil production through technology. Richard has spent time with investors to hear their views and reinforce that our value enhancement starts with executing with a strong financial position," said an Occidental spokesperson. GETTING OUT OF UNDER BERKSHIRE Occidental purchased Anadarko Petroleum in 2019 for $55 billion, including debt. This was made possible by a $10 Billion investment from Berkshire. The investment requires Occidental pay Berkshire an 8% dividend annually. This is a much higher dividend than what a typical junk bond offers. It sparked criticism that Occidental was rewarding Berkshire more than other shareholders.
Occidental paid off approximately $1.5 billion in preferred stock. It plans to redeem the remainder at a 5% discount when it becomes eligible to do so, which will be August 2029.
Berkshire owns 26,9% of Occidental common stock and has warrants to purchase $5?billion in additional shares until a year after Occidental redeems its preferred stock.
Former Occidental executive stated that Jackson is a good leader who has been able to turn around a dysfunctional 'global drilling team'.
Bill Smead is chief investment officer of Smead Capital Management. The firm owns a position in Occidental worth approximately $201 million.
In recent years the oil industry has witnessed a wave mega-mergers as producers sought to consolidate and reduce operational costs.
Smead said, "Either Occidental has to grow and increase the amount of oil in its tanks or they will have to become part of a bigger oil and gas company."
He added that Occidental should be clear about their intentions to make Occidental a subsidiary. 'Billionaire Warren Buffett who was Berkshire CEO when it invested in Occidental has stated that he does not intend to buy the firm. Greg Abel is the new CEO of Berkshire. The company declined to comment.
Smead stated that Berkshire's sizeable stake in Occidental limits the interest of potential acquirers. It keeps other investors from becoming aggressive. Sheila Dang reported from Houston, Jonathan Stempel contributed additional reporting; Nathan Crooks edited the story.
(source: Reuters)
