Well-Oiled Turnaround

One spring day last year, Ray Irani’s search for oil led him 6,800 miles from his sumptuous Westwood office to a tent in the Sahara Desert.

There, Occidental Petroleum Corp.’s chief executive met Libyan dictator Moammar Kadafi, whose oil-rich nation had just emerged from 18 years of U.S. economic sanctions and was again ready to award exploration rights to Western oil companies.

Irani wanted to be first in line and was granted a meeting at Kadafi’s desert retreat. Speaking in fluent Arabic, the Lebanese-born Irani made his pitch -- even though Kadafi seemed noncommittal.

“He was courteous, but clearly he wanted us to have a cup of coffee and leave,” Irani recalled.

But the 70-year-old Irani pressed on, Kadafi kept listening and the pair met again two months later. Then, in January, Libya awarded its first batch of 15 exploration sites -- with nine going to Occidental.

“That’s not a bad batting average,” Irani said in an interview. “I was pleasantly surprised.”

Libya is just one reason Occidental has been hitting them out of the park lately. Through a combination of shrewd asset management, cost controls, acquisitions, promising exploration deals and record-high oil prices, Occidental has rebounded from two decades of subpar performance to become one of the nation’s strongest midsize oil companies.

It also has finally rewarded investors who, in the late 1990s, were loudly criticizing Occidental for being a perennial laggard and chiding Irani, who is also chairman, for his lavish compensation.

The rebound “has been nothing short of spectacular,” analyst Ben Dell of Sanford C. Bernstein & Co. wrote in a report last week. Occidental is “one of the few genuine turnaround stories” in the exploration-and-production industry, he added.

Although it’s a fraction of the size of Exxon Mobil Corp. or Chevron Corp., Occidental is the largest producer of natural gas in California, thanks to the Elk Hills field, just west of Bakersfield, that Occidental acquired in 1998.

It’s also the largest producer of oil in Texas, owing to several properties it gobbled up in the state’s Permian Basin. In fact, despite Occidental’s interest in finding oil in Libya and other foreign locales, the majority of its reserves are in the United States.

Occidental also is one of the last major oil companies headquartered in California. The ranks are thinning: El Segundo-based Unocal Corp., recently agreed to be purchased by San Ramon, Calif.-based Chevron for $16.4 billion in cash and stock.

Given its performance of late, Occidental -- which also owns a chemical business -- has been mentioned as a potential takeover candidate. But “no one has approached us,” Irani said, adding that “we prefer to remain independent.”

Occidental would no longer come cheap. With its total stock market value having surged to nearly $30 billion, “somebody has to come in with a check of $40 billion” so that shareholders get a premium, Irani said, noting that not many suitors have that kind of money.

“And we don’t like paper,” he added, referring to stock. “Somebody has to come up with the cash.”

To be sure, Irani and the rest of Occidental’s directors have a fiduciary duty to consider any bona fide takeover offer -- whether it involves cash, stock or both -- on behalf of its shareholders. Analysts note that several major oil companies are believed to be seeking acquisitions, including Royal Dutch/Shell Group, ConocoPhillips, China National Offshore Oil Corp., Total of France and Eni of Italy.

“There’s no question in my mind that Occidental is an attractive package,” said analyst Fadel Gheit of Oppenheimer & Co. “Ray Irani will not decide” whether Occidental gets acquired, he added. “It will be decided for him. The market will decide.”

For its investors, there has been plenty to like about Occidental’s stock.

In the three years ended December 2004, its total return -- price gains plus dividends -- was 140%. Although all oil company stocks enjoyed a tailwind from the surge in oil prices, Occidental’s percentage gain was more than triple the 41% increase in Exxon Mobil’s stock and the 45% gain in Chevron’s stock over that span.

Occidental’s stock also has outpaced them so far this year, shooting up 30% and closing Friday at $75.42.

Business Week magazine, in its annual rankings of companies in the S&P; 500, ranked Occidental as the sixth-best performer based on several financial measures.

Goldman, Sachs & Co. analyst Arjun Murti upgraded Occidental’s stock to the equivalent of “buy” from “hold” last month, partly on an expectation that Occidental’s output would grow 5% annually over the next five years, outpacing the projected 4.5% average growth of other major oil companies.

Occidental’s profit soared 73% last year to $2.6 billion from $1.5 billion in 2003, and its revenue climbed 24% to $11.4 billion from $9.2 billion. In this year’s first quarter, net income surged 74% from a year earlier, to $846 million, on a 27% revenue gain to $3.3 billion.

Occidental’s stock has drawn strength from several other recent developments, including:

* Occidental won rights from the Oman government to develop one of the country’s largest oil fields, which could substantially boost Occidental’s total production.

* The company stands to reap an after-tax gain of $360 million, or 90 cents a share, from Valero Energy Corp.’s planned acquisition of another refiner, Premcor Inc., because Occidental owns 10% of Premcor’s stock.

* Occidental has acquired several more fields in the Permian Basin, which enables the company to spread its overhead and infrastructure costs there over a wider array of properties. That helps keep a lid on the cost of producing each barrel of oil in the petroleum-rich area of West Texas and southeastern New Mexico.

In addition, Occidental has whittled its long-term debt to $3.4 billion as of March 31 from $5.2 billion in 2000, which has strengthened its balance sheet and allowed more of the profit from high oil prices to drop to the bottom line.

But what if oil prices start tumbling again, which Goldman Sachs’ Murti called one of the “key risks to our favorable view of Occidental”?

Irani is unconcerned. First, he said Occidental earns one of the highest profits on each barrel of oil in the industry, so it can still make money at lower prices. Also, a drop in crude prices would be “an opportunity for us to buy additional reserves” at a lower cost, he said.

Occidental already has been finding enough oil and natural gas that its build-up of reserves continues to outpace its annual production, a feat several major oil companies have struggled to achieve in the last 18 months.

In 2004, Occidental’s production of oil and gas averaged the equivalent of 566,000 barrels of oil a day, up 3.5% from the prior year. Yet its reserves still climbed 2.5% to a company record of 2.53-billion barrels.

How? It stems from a risky bet Irani made after he inherited the CEO’s job from Occidental’s flamboyant longtime leader, Armand Hammer, who died in 1990 at age 92.

Irani first jettisoned a hodgepodge of companies that Hammer had assembled, including a beef-processing company, to focus on energy and chemicals. Then he decided that while Occidental would look for growth in the Middle East and Latin America, the bulk of its oil and gas reserves would be concentrated in California and Texas.

It was a gamble because Occidental’s fields, such as Elk Hills and the Permian Basin sites, were aging properties with uncertain growth prospects.

The payoff was slow in coming. As Irani began rejuggling the portfolio of assets, Occidental’s earnings, sales and stock price failed to grow consistently. The collapse of oil prices in the late 1990s made Occidental’s outlook even dimmer and the criticism of its strategy even louder.

But Irani stuck to his plan and now feels vindicated. Although the U.S. fields are mature, Occidental is known for using cutting-edge technologies to find more oil and pull it from the ground. It’s a key reason why its reserves keep growing faster than its production.

Take Elk Hills. When Occidental bought the field seven years ago from the U.S. government, its proven reserves were the equivalent of 425 million barrels of oil. Since then, the company has produced about 235 million equivalent barrels, yet its proven reserves now total 462 million barrels.

Occidental credits an aggressive program that included using 3D seismic surveys to find oil, drilling 1,200 new wells on the property and injecting water, carbon dioxide and acid into wells to stimulate output.

“You have to give them credit where credit is due,” said Sean Sexton, an analyst with Fitch Ratings in Chicago, after the firm raised Occidental’s investment-grade debt ratings another notch last month. “This is a very different company from six or seven years ago.”

Occidental’s foreign projects are expected to grow faster than its domestic ones because they have more untapped reserves. In the Middle East, Occidental operates in Oman, Qatar and Yemen and is a partner in a $4-billion project called “Dolphin” to carry natural gas from Qatar to markets in the United Arab Emirates. It also has properties in Colombia, Ecuador, Russia and Pakistan.

Then there’s Libya. Besides seeking new exploration tracts, Occidental also wants to resume operating some existing oil fields that it left behind in 1986, when President Reagan imposed the sanctions on Libya for its support of terrorism.

Indeed, Occidental probably had an advantage when Kadafi resumed awarding exploration rights because Libya is integral to the company’s history.

Occidental was a tiny, faltering oil company in the mid-1950s when Hammer acquired control. But in the 1960s, Occidental discovered rich oil deposits in Libya that dramatically increased the company’s size. Its daily production in Libya climbed as high as 660,000 barrels a day; by comparison, all of Occidental’s worldwide production in this year’s first quarter averaged 565,000 barrels a day.

But the company and Irani still catch their share of flak.

Environmentalists continue to complain about Occidental’s projects in areas such as Ecuador, where they contend that a major Occidental access road threatens the Amazonian rain forest. Others have argued that the sensitive environment there should be completely off-limits to oil exploration.

Irani countered that “Oxy’s objective is to operate under the highest possible environmental standards, and our record demonstrates that.” One of Occidental’s relatively new projects in Ecuador, the Eden oil field, has been cited by some watchdog groups as one of that nation’s most environmentally friendly oil facilities.

Some stockholders also griped at Occidental’s annual meeting last month that the dividend, despite having risen to $1.24 a share annually from $1 in 2002, remained stingy.

Irani’s pay also still gets scrutiny. He pocketed more than $125 million in salary, bonuses, exercised stock options and other compensation in the 1990s, when Occidental was much less prosperous. In the last five years, he has taken home $127.4 million, Forbes magazine reported last month. That was more than the $123.6 million reaped by Lee Raymond, the chief executive of Exxon Mobil, whose revenue is 25 times larger than Occidental’s.

Corporate Library, a corporate-governance watchdog firm, gives Occidental an “F” grade for Irani’s “excessive” compensation, most of which came from cashing in on Occidental’s soaring share price.

“A rising stock price can happen for all sorts of reasons, the price of a barrel of oil being one of them,” said Paul Hodgson, senior research associate at the Corporate Library.

Irani is unmoved. “I’m not ashamed by my compensation by any means. I’m proud of it,” he said, noting that Occidental’s total market value has soared 15-fold in the last decade. “I think I’m entitled to share in that success.”

He also plans to keep getting paid. Irani’s contract recently was extended to 2010, when he would reach Occidental’s mandatory retirement age of 75. At the moment, his odds-on successor is Stephen Chazen, Occidental’s chief financial officer.

Why doesn’t Irani just retire with his wealth and avoid having to wrestle with the likes of Kadafi over complicated drilling rights? “I enjoy my work,” Irani explained. “The business, the pressure, the strategy. It’s fun.”