Ten years ago, Los Angeles-based Occidental Petroleum may have been far too many things to too many people to be understood simply and completely by the folks on the corner of Wall and Broad streets. "When I took over the reigns of the company in December 1990, shortly after the death of Armand Hammer, it was in many businesses other than oil and gas; in fact, oil and gas accounted for only a small part of the total corporation," says Ray R. Irani, Oxy's chairman and chief executive officer. Indeed, the company's inventory of businesses then included Iowa Beef Processors; Midcon, a natural gas and transportation company; coal; cattle- and horse-breeding; and chemicals. "The first thing we had to address is what we wanted to be," says Irani, the former Olin Corp. president and chemical research scientist for Diamond Shamrock and Monsanto. "And I concluded that being an oil and gas company with chemical interests was our best bet to excel." In the first of two phases of restructuring, Oxy (NYSE: OXY) spent the next five to six years getting rid of billions of dollars of noncore assets, including the pork of Iowa Beef. "The Street didn't reward us for these nonstrategic divestitures," says the Beirut-born Irani, who holds a Ph.D. in physical chemistry from the University of Southern California. "In essence, it was saying, 'We don't know if you can excel in E&P and chemicals; we'll wait and see.'" In its second, five-year phase of restructuring-aimed at improving its remaining core businesses-the company whittled its far-flung upstream focus down to just three regions: the U.S., the Middle East and Latin America. "We didn't have the resources to effectively manage 20 core areas, so we took aim at the ones that gave us the best advantage, in terms of low-cost, sizeable, legacy assets." The company is financially driven, not volume driven. "We won't invest to produce a barrel of oil unless it throws off good returns over the long term, which is the horizon we look at. Why? I can't predict what oil prices are going to be quarter-to-quarter or year-to-year. But I have a pretty good idea of what they'll average during a five- or 10-year period-and during the past decade they've averaged just under $20." In 1998, the company acquired the U.S. government's Elk Hills reserves in California. With this $3.5-billion purchase of the largest source of natural gas in the Golden State, Oxy added proved reserves of 425 million barrels of oil equivalent (BOE). It was followed in 2000 by the $3.6-billion acquisition of Altura Energy-a joint venture of Shell and BP-which gave Oxy 857 million BOE of proved reserves in the Permian Basin and made it the largest oil producer in Texas. Also in 2000, the company bought from BP the old Thums (Texaco, Humble, Union, Mobil and Shell) producing properties offshore Long Beach, California. The properties, with daily production in excess of 21,000 equivalent barrels and reserves of 95 million BOE, were picked up at a fire-sale price of $110 million. All these domestic acquisitions-made at an average cost of slightly more than $5 per BOE-were done at a time when oil and gas prices were low, Irani says. "We then added value by lowering overhead, cutting production costs, improving netbacks and stabilizing output, particularly at Elk Hills and Altura. As a result, when commodity prices later rebounded, the higher-priced production from those properties generated an enormous amount of cash flow, which was used to help pay down debt." That debt, $6.7 billion or 67% of total capitalization in 1997, was trimmed to $4.8 billion or 46% of total capitalization by the end of first-quarter 2002. But increased upstream efficiency and profitability from those three major U.S. acquisitions-whose assets were the key drivers of Oxy's 71% growth in reserves and 5% annual growth in production during the past five years-weren't the only contributors to balance-sheet improvement. "During the past five years, our chemicals business has been a good cash cow for us-and will continue to be," says Irani. "Last year was the worst in the chemicals industry in the past 20 years. Yet, our chemicals division still generated free cash flow of $185 million. And in the best of years, it has contributed free cash flow of more than $1 billion annually." Areas of operation While Oxy's U.S. upstream assets, including the gas-rich Hugoton Field in Kansas, are producing in excess of 330,000 equivalent barrels per day, its E&P operations in the Middle East-in Qatar, Yemen and Oman-are adding another 95,000 BOE to net daily output, and that number is far from static. "Because we've more than delivered on our promises to increase production in those countries since we began operating there in the early 1990s, we've established a reputation of reliability in the region that's now allowing us to participate in special opportunities for a company our size," says Irani. Indeed, along with ExxonMobil, Oxy has been selected to participate in Core Venture II-part of Saudi Arabia's historic Natural Gas Initiative. Core Venture II is focused on developing major, discovered gas reserves in the Midyan and Barqan fields in the northwest part of the kingdom, as well as construction of related gas-processing and pipeline facilities, and offshore exploration in and along the Red Sea. Negotiations leading to a definitive agreement are ongoing. This spring, the company was selected by the United Arab Emirates (UAE) Offsets Group-over competing major oils-to acquire a 24.5% interest in the $3.5-billion Dolphin Project. The project calls for the delivery by 2005 of 2 billion cubic feet (Bcf) per day of gas from Qatar's mammoth offshore North Field to markets in the UAE. The project is expected to increase Oxy's overall net gas production by 180 million cubic feet (MMcf) per day, beginning in 2006. Yemen may also give Oxy a significant reserve and production boost. "We have 15 million unexplored acres there-including a 50% interest in a block around which more than a billion barrels of oil and 3 trillion cubic feet (Tcf) of gas have been discovered," says Irani. "Also, in Qatar, we've bid on a block that's adjacent to the billion-barrel Al Shaheen oil field." In Latin America, the company has begun development of Ecuador's Eden-Yuturi Field. First production is expected in mid-2003, when a regional pipeline is completed. The start-up of Eden-Yuturi, together with the development of other nearby oil fields already onstream, is expected to add incremental net production to Oxy of at least 35,000 barrels per day. Domestically, the producer expects in late 2002 to see Horn Mountain, its deepwater Gulf of Mexico prospect, come online at 20,000 BOE, with production ramping up to 22,000 equivalent barrels by 2005. The company also sees daily output in the Permian Basin rising from 160,000 BOE this year to 175,000 by 2005-as the result of CO2 projects and an aggressive infill drilling program. "Overall, we're looking for a 5.5% annual increase in production through 2005, without the inclusion of any 'iffy' projects-and at rates of return consistent with our recent performance." Financial results That's quite a mouthful, considering the following: Oxy's total return to shareholders (stock-price appreciation plus dividends) last year was 13.8%-tops among its competitors. Its return on equity was 22.2%-second only to Conoco. Its return on capital employed was 13%-third best among its competition. And its profitability per barrel was $10.13-tops among majors and large-cap independents alike. Given all this, is Wall Street still taking a wait-and-see approach to the stock? "During the past two years, our shares have traded up from the high teens to more than $30 per share, then back down to the high $20s," says Irani. "But during the next few years, we expect our financially driven performance to become even more recognized by the market-enough that Oxy could well become a $40 stock." John Hammerschmidt, senior portfolio manager and analyst for Turner Investment Partners, Berwyn, Pennsylvania, says that Oxy, by trimming Altura's production costs, has managed to extract significant value from this purchase. "With current daily output around 142,000 BOE-roughly 32% of the company's total production-Altura is a workhorse that just keeps kicking out cash." Turner Investment Partners, a manager of some $8.5 billion of equity investments across all industries, has about a $500-million exposure to the energy sector and currently owns nearly 845,000 shares of Oxy. "At Elk Hills, the company has also lowered production costs to around $6 per equivalent barrel, and is again proving that it can take existing fields and make cash-flow workhorses out of them," says the analyst. "Nonetheless, some investors still don't seem to want to give recognition to that. In fact, as recently as a year ago, many in the industry itself didn't think the stock would ever break $30 a share. Well, it did." Internationally, the analyst believes Oxy has the best Middle East lease position of any of the nonmajors. With the Dolphin Project, the company has exposure to Qatar's North Field-the biggest gas field in the world with some 900 Tcf of reserves. After the [260-mile subsea] pipeline is built from offshore Qatar to markets in the UAE, the project will be yet another cash cow for the company, he expects. "This company is poised for significant cash-flow generation and growth, such that it could well become an acquirer rather than the target of an acquirer. Today, we would be buyers of the stock up into the mid- to high $30s." Steve Enger, integrated oils analyst for Petrie Parkman & Co., Denver, offers a Top 10 list-developed in late May-of reasons to own Oxy. "One, the company has significant leverage to improved chemical results, with the potential for after-tax operating income to exceed $400 million, possibly in the 2004-05." Other reasons are: Oxy's position in Lyondell, a petrochemical stock, is more liquid than its former stake in the Equistar joint venture; the company's three-year finding and development costs have fallen to less than $4 per BOE; its annual upstream production growth will be about 5% through 2004; it is building on its strong relationships in the Middle East; it's trading at a price-to-earnings ratio of only 13, based on 2003 estimated earnings of $2.40 per share; its dividend is currently 3.3%; it has reduced its debt to less than 50%; its California gas assets put it in a position to take advantage of any spike in price; and its narrower focus has improved its profitability. Duane Grubert, a senior research analyst with Sanford C. Bernstein & Co., New York, currently has an Outperform rating on Oxy's shares, with a 12-month target of $36. "This investment thesis is based on the competitive advantage the company has created with a simplified upstream portfolio, dominated by oil reserves in the U.S. and an emerging reserve position in the Middle East. Currently, we're modeling about a 6% annual production growth rate into 2005." The relationship advantage that Irani has brought to the table in the Middle East will allow Oxy to continue to build its prospect and production inventory there to balance the company's domestic and Latin American upstream asset portfolio, Grubert adds. "During the past decade, the company has gone from about a 20% E&P exposure to around 80%," he says. "Nonetheless, some investors have failed to recognize that the company is, in fact, a large independent, and they still continue to categorize it with the integrated oils, which is a mistake." Grubert notes that by almost any valuation metric-be it cash flow, earnings, enterprise value per barrel or debt-to-total cap-the market also continues to discount Oxy for issues which have improved. "For example, the old Oxy had too much debt, too much exposure to the chemicals segment, and frankly, investors weren't all that impressed with management. But under Irani, president Dale R. Laurance and chief financial officer Stephen L. Chazen, all that has turned around."