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Occidental: From Excess to Success


In his 34-year reign at Occidental Petroleum Corp. (OXY), former Chairman Armand Hammer developed a world-class reputation for corporate excess. In Hammer's time, Oxy Pete dabbled in Arabian horses, produced documentary films about Hammer's own exploits, acquired coal mines, and got into the beef processing business. Hammer even used over $60 million of Occidental's money to start his own art museum -- an act of hubris that prompted shareholders to sue the company. Drop by the UCLA Hammer Museum, as it's now dubbed, and you can see Hammer's collection of 19th century French art.

But go upstairs from the museum, into Occidental's Los Angeles headquarters, and you'll see a onetime corporate profligate with a new sense of discipline. Led by Hammer's successor, Lebanon-born Ray R. Irani, 68, management is reaping the gains from a bold gamble Oxy made in the late '90s that it could squeeze profits from a collection of aging Texas and California gas and oil properties. Last year, Oxy Pete earned $989 million on sales of $7.2 billion, for an industry-leading 17% return on equity. Occidental's profits climbed from a scant $1.20 per barrel in 1995 to a best-in-the-business $6.90 last year. Its shares, now at about $30 apiece, have returned 7.1% per year for the last five years, vs. only 3.7% for the average large oil company. "You have to give management credit," says Fadel Gheit, a senior energy analyst at Fahnestock & Co. "They went from the ugly frog to the handsome prince."

Yet even Irani can't squeeze production out of his domestic oil fields forever. That's forcing him to reverse gears and shift the company's focus to overseas oil and gas production -- precisely the sort of risky ventures that paid off big for Hammer, but that Irani had avoided. He is now counting on major new fields in Qatar and Ecuador to help boost oil and gas production by 5% annually over the next five years. At a time when other big oil companies are reducing their growth projections or eliminating them entirely, Irani is confident that Oxy's production will grow at twice the industry average. In fact, the Middle East and Latin America could account for 75% of the 85,000 bbl. per day in new production that the company predicts it will achieve by 2006. "People say, 'What are you doing in Qatar? It's so close to Iraq,"' Irani says. "I tell them the opportunity makes the extra effort worth it."

Irani, a onetime chemist who took over 13 years ago when Hammer died at age 92, began his tenure by dismantling the hodgepodge of assets his predecessor had collected. Out went the natural gas pipelines, the coal mines, the vanity investment in Church & Dwight Co., the maker of Arm & Hammer baking soda. He also sold off many of the company's foreign investments, cutting the number of countries in which Occidental operated from 16 to 9.

The most important change, however, was in realigning Occidental's oil and gas business. While most of the industry was shifting exploration efforts overseas because of the high cost and difficulty in finding new domestic reserves, Irani took a contrarian direction, piloting Oxy into two huge purchases in the U.S. He spent $3.5 billion in 1998 to gain control of the federal government's Elk Hills oil and gas field in California. Two years later, he spent $3.6 billion to buy Altura Energy, a joint venture of Royal Dutch/Shell Group (RD) and BP (BP).

Almost overnight, Occidental became the largest producer of oil in Texas and natural gas in California. Both Elk Hills and Altura were mature when Oxy bought them. But the aggressive use of new drilling and well-stimulation technologies have allowed Irani to add to Occidental's U.S. reserves. Irani also got lucky. Rising energy prices put a premium on Occidental's close-to-home U.S. production. "We used to get heavy oil from Peru that would sell at a large discount to West Texas [crude]," Irani notes. "It was poorer in quality and further away from the market."

But now Occidental faces the depletion of those two big late-'90s purchases. The company's sophisticated recovery techniques should keep them active for another 12 years. To offset their eventual decline, Irani has ramped up development of big overseas oil fields. Although the political situation abroad is often risky, oil is both more plentiful abroad and cheaper to extract. This summer, with the completion of a new pipeline in Ecuador, Occidental expects to add another 30,000 bbl. of oil per day from the 150-million-bbl. Eden-Yuturi field there.

The company also has a promising new investment with its 25% stake in the $3.5 billion Dolphin Project, undertaken with the government of the United Arab Emirates and France's Total Fina Elf (TOT). Dolphin will transport 2 billion cubic feet per day of natural gas from Qatar to the U.A.E., where it will substitute for oil in electricity generation and water desalination starting in 2006. That, in turn, will allow the U.A.E. to take oil now used for its own domestic energy consumption and sell it in world markets.

Overseas expansion, however, is both risky and controversial. In Colombia, for example, guerrilla groups have long battled the government, with Occidental caught in the middle. The rebels have attacked the company's main pipeline more than 900 times in the past 17 years. The risks in the Middle East are even greater. In mid-March, three oil workers were murdered in Yemen, where Oxy has operations.

Occidental will also have to finesse objections from environmentalists if it wants to fully exploit its overseas projects. In Ecuador, eco-activists have targeted Occidental's expansion, saying it will add to political instability and environmental degradation in the region. Irani contends that Occidental has always operated internationally under the highest human-rights and environmental standards.

Not all of Irani's problems will come from overseas. Despite the company's strong financial performance, the chief executive is under fire on the home front from shareholders outraged over his years of giant pay packages. In 1997, he collected $95 million in a contract renegotiation. And in 2002, Irani's pay more than doubled from the previous year, to $22 million. The company says his compensation is tied to Occidental's improved stock price. But some see the specter of Armand Hammer hovering.

Irani's challenge, then, will be to duplicate his predecessor's success at finding oil overseas while not succumbing to the numbing excesses that aroused the shareholders' ire. So far, Occidental's superior performance has muffled his critics. No doubt he is hoping that as long as he can keep pumping up Oxy Pete's profits, he'll be able to take some of the heat off of himself. By Christopher Palmeri in Los Angeles


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