Occidental Board Should Keep CEO Chazen

 | Apr 09, 2013 | 2:10 PM EDT
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We first recommended Occidental Petroleum (OXY) last October. From our initial recommendation the stock has underperformed both the market and its Oil & Gas E&P companies peer group.

The underperformance largely came after the company's third quarter earnings call on Oct. 25, when CEO Stephen Chazen noted that drilling costs had reached unacceptable levels and would have to come down in order to sustain historic returns on capital.

He announced that a program to bring costs down was being put in place. We liked that program and continued to be very confident in the company, re-recommending OXY in late November and again in late December. The stock has in fact had nice gains since those postings.  

Fast forward to Occidental Petroleum's fourth quarter call on Jan. 31 when CEO Chazen reported that "with regard to driving efficiencies in our cash operating costs, we are running well ahead of my earlier plan."

In a recent meeting with Occidental Petroleum investor relations, we learned that the plan continues to run ahead of schedule; the goal to bring production costs down to the 2011 rate of $12.84 per barrel is well within sight and should be reached sometime this year.

All of this was good news for shareholders, as was the recent 18.5% dividend increase announced on Feb. 14, to $2.56 per share annually, in keeping with the company's commitment to returning capital to shareholders through above average dividend growth.

Not such good news, in our opinion, was the announcement that Occidental Petroleum's "board has formed a search committee to undertake a review of internal and external candidates to succeed President and Chief Executive Officer Stephen I. Chazen".

We however believe that Chazen is a key component of the investment case for Occidental Petroleum, and have been impressed with his leadership record there, first as CFO and now as CEO. In a survey published by Institutional Investor this year, Chazen was ranked as the No. 2 buy side rated CEO in the Oil & Gas E&P Industry.

As CEO, Chazen has clearly articulated a plan to grow production, to invest in high return-on-capital projects and to drive shareholder returns through opportunistic share repurchases and significant dividend growth. Under his leadership, the organization's performance against that plan is working to shareholders' benefit.

With the impending payoff of several large capital spending projects less than two years from now, and in the midst of an important cost cutting initiative that is progressing ahead of plan, we are adding our voice to the growing chorus of Occidental Petroleum shareholders who think that now is not the time to replace Chazen. It will be difficult to find as talented a chief executive to lead the company over the next few years and we think that better things will happen sooner for Occidental Petroleum shareholders if Chazen stays at the helm.

Some key items to watch for in upcoming weeks would include whether there are additional media pieces pointing to shareholder support for Chazen's tenure (The Wall Street Journal ran such an article last week, and Bloomberg and Barron's had follow up pieces with great detail in the past few days).

In addition, if ISS, Glass, Lewis and Co., or Egan-Jones questions some of the board's actions that would put further pressure on the board on Chazen's behalf, which we think would be a positive. And of course if the board re-calibrates its game plan towards a long term succession plan rather than a near term attempt to remove the CEO that should be a big boost for Occidental Petroleum stock.

Based on the board's press release Monday it seems that they will only get to that decision if shareholders send a strong message supporting Chazen in the weeks leading up to the annual meeting on May 3.

In our view, the board should stay the course with Chazen, and Occidental Petroleum shareholders should stay the course with their investment. 

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