Occidental Petroleum (OXY): Oxy to acquire Vintage Petroleum - Goldman Sachs - October 14, 2005
Occidental Petroleum's (OXY; NR) acquisition of Vintage Petroleum (VPI; NC) adds primarily long-lived oil assets that look like a natural fit with Oxy's core competencies and strategic direction. According to Oxy's presentation slides, the deal price appears to be consistent with a net asset value calculation for Vintage that contemplates long-term WTI oil prices of around $35 per barrel, well below the current 5-year strip price of $61/bbl. In our view, Oxy is taking advantage of the gap between long- dated WTI oil prices and the much lower long-term oil price implied by E&P company share prices. In addition, we believe Oxy is arbitraging a market- implied cost of capital advantage it has to Vintage, which in essence signifies the market's greater comfort with a larger company like Oxy owning assets in country's like Argentina and Yemen than it has with Vintage. (Goldman Sachs & Co., and or one of its affiliates, is acting as financial advisor to Occidental Petroleum Corporation in the proposed acquisition of Vintage Petroleum Inc. Goldman Sachs & Co., and or one of its affiliates will receive a fee for its financial advisor role.)
VINTAGE ACQUISITION A SURPRISE, BUT APPEARS TO BE CONSISTENT WITH OXY'S STRATEGIC DIRECTION AND CORE COMPETENCIES
While Oxy management has consistently commented that it would be looking to add new assets in existing or complimentary areas of operation, we were nevertheless surprised by the announced acquisition of Vintage and suspect others on the Street will be as well. Though not expected, the deal appears to be consistent with the company's long-lived oil exploitation/development-oriented strategy. In our view, Oxy is likely going to be able to apply its enhanced oil recovery (EOR) expertise to the Vintage properties, generating both accelerated production growth, increased resource recovery, and competitive returns on capital.
OIL PRICE UPSIDE OPTIONALITY AND COST OF CAPITAL ARBITRAGE KEY BENEFITS TO OXY
It has long been our view that oil equities in general are discounting oil prices well below either our expectations or the forward curve. In our view, Oxy is looking to benefit from this apparent gap via its acquisition of Vintage. According to Oxy's presentation slides, the transaction price roughly corresponds to a Vintage net asset value that reflects $35/bbl WTI oil long-term. By way of comparison, the 5-year forward curve strip price for WTI is around $61/bbl.
Moreover, Vintage's stock price has exhibited significant historic volatility based on developments in Argentina and in crude oil markets in general, resulting in a higher market-implied cost of capital for it compared with Oxy. In essence, we believe the market will be much more comfortable with a larger company like Oxy having Argentina and Yemen as part of its overall portfolio of assets than it was with Vintage having 50% of its reserves in Argentina.
TRANSACTION EXPECTED TO BE ACCRETIVE TO EPS AND PRODUCTION GROWTH, NEUTRAL TO ROCE, BALANCE SHEET REMAINS HEALTHY
Our preliminary modeling of the transaction points to it being accretive to 2006E, 2007E, and 2008 (normalized) EPS by around 5%. Estimated 2006-2010 organic production growth accelerates to around 6% per annum on average from 5% previously expected. Finally, we estimate the deal will be broadly neutral to Oxy's return on capital employed (ROCE), which is expected to remain at top quartile levels over the long run relative to other integrated oil and E&P companies. Note, we have not made any changes to our previously published EPS estimates at this time pending additional color provided on the OXY's conference scheduled for this morning.
Immediately following the transaction, OXY's net debt-to-tangible capital will increase to a still healthy 20% from less than 5% we estimate at year-end 2005. We project that OXY's net debt-to-tangible capital will fall to near net debt free status by year-end 2006 from a combination of free cash flow and asset sales. OXY has also announced it will implement a 9 million share stock buyback in the open market from time to time, subject to market conditions and retention of its credit rating.
TRANSACTION DETAILS
The announced acquisition of Vintage Petroleum by Occidental Petroleum adds 437 million barrels of oil equivalent (mn BOE) proved reserves and 858 mn BOE of proved, probable, and possible ("3P") reserves for a total purchase price of $3.8 billion including assumed debt. The unadjusted purchase price equates to $8.79 per BOE of proved reserves and $4.48 per BOE of 3P reserves. The transaction price includes $1.37 billion of cash, $2.15 billion of OXY stock (29 million OXY shares), and $0.325 billion of assumed Vintage debt. Relative to total Vintage production of 76,000 BOE/d in 2Q 2005, OXY expects to sell around 19,000 BOE/d of production associated with assets located in East Texas, the Gulf Coast, and Mid-Continent areas of the U.S. OXY will retain core properties onshore California, Argentina, and Yemen. The deal is expected to close in 1Q 2006, subject to regulatory approvals.
I, Arjun Murti, hereby certify that all of the views expressed in this report accurately reflect my personal views about the subject company or companies and its or their securities. I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this report.
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Occidental Petroleum: Moving to Not Rated - Goldman Sachs - October 14, 2005
We have temporarily suspended the investment rating and price target (if any) for Occidental Petroleum. Such suspension is in compliance with applicable regulation(s) and/or Goldman Sachs policies in circumstances when Goldman Sachs is acting in an advisory capacity in a merger or strategic transaction and in certain other circumstances.
I, Arjun Murti, hereby certify that all of the views expressed in this report accurately reflect my personal views about the subject company or companies and its or their securities. I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this report.
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Previous Reports:
Occidental Petroleum (OP/A): Valuation gap with 'growthy' E&Ps should close, as Oxy hitting its sweet spot in terms of growth and returns Goldman Sachs July 24, 2005
Message 21537948
OXY (OP/A): OCCIDENTAL Petroleum upgraded to OP given reloading of E&P portfolio Goldman Sachs May 26, 2005
Message 21360559
OCCIDENTAL Petroleum (IL/A): Greater clarity on E&P growth outlook likely needed to regain valuation premium April 26, 2005 Goldman Sachs
Message 21269306 |
