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OXY to spin off California assets into separate company

Occidental Petroleum Corp.’s (NYSE:OXY) board of directors has authorized the separation of Occidental’s California assets into an independent and separately traded company.

According to Occidental, the new California company will be the state’s largest natural gas producer and largest oil and gas producer on a gross-operated barrels of oil equivalent basis. The new company will also be the largest oil and gas mineral acreage holder in the state with approximately 2.3 million net acres, and will have major operations in the state’s high-potential oil and gas basins, including Los Angeles, San Joaquin, Ventura, and Sacramento.

Last year, Occidental's California business earned approximately $1.5 billion on a pre-tax basis. Earnings before income, taxes, depreciation and amortization were around $2.6 billion with capital expenditures of approximately $1.7 billion. Due to these strong results, capital expenditures planned for 2014 were increased to $2.1 billion. The company is expected to have a strong and competitive balance sheet with between $4 billion and $5 billion of funded debt.

Occidental Petroleum Corp. will be headquartered in Houston, Texas. It will have exploration and production operations in the Permian Basin and other parts of Texas, the Middle East region, and Colombia. It will also have a midstream and marketing segment and a chemical subsidiary, OxyChem. Each of these segments is a leader in its respective sector. The company believes that it will be better positioned to continue its strategy of generating growth with strong returns on capital and consistently increasing its dividend. Consistent with Occidental’s strategic review to focus in core businesses, it also plans to reduce its exposure to proprietary trading activities related to crude oil and other commodities.

President and CEO Stephen I. Chazen said, “Creating two separate energy companies will result in more focused businesses that will be competitive industry leaders.”

The board also announced that Chazen has been asked to remain as president and CEO to lead the successful completion of the strategic review and to ensure that a suitable management team is in place for Occidental. He has agreed to do so through the 2016 Annual Meeting of Stockholders. The board also has asked Ambassador Edward P. Djerejian, who was elected as chairman of the board last May, to remain as chairman for an additional one-year term.

Occidental will continue planning for the separation of the businesses, including determining management and governance of the California business. The company expects to announce the California management team in the third quarter of this year and complete the separation by the end of 2014 or the early part of 2015.

Sterne Agee analyst, Tim Rezvan, commented on Occidental’s announcement of the California spin-off, saying, “We estimate 6-7% oil-focused production growth in California in '14, accelerating in '15 and beyond. We believe the segment could trade at a 7x 2014E EV/EBITDA multiple, two turns higher than where OXY shares trade. This news, combined with last night's repurchase news, should support shares today.”

Rezvan noted that Occidental has a 2.3 million net acre leasehold position in the state. “2013 production from California averaged 154 mboe/d (58% oil)," he stated, "and we estimate 2014 production will average 163 mboe/d (61% oil).”

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