Occidental Petroleum Corporation - Company Profile, Information, Business Description, History, Background Information on Occidental Petroleum Corporation

10889 Wilshire Boulevard
Los Angeles, California 90024

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We are becoming a more focused company with higher growth potential. We are making significant improvements in earnings power. We will maintain a strong balance sheet.

History of Occidental Petroleum Corporation

Occidental Petroleum Corporation is a giant U.S.-based oil, gas, and chemical firm. The largest public company in Los Angeles County, Occidental pumps oil from fields in the United States and abroad; transmits oil and gas through pipelines; conducts oil and gas exploration and marketing, and manufactures chemicals, principally petrochemicals and chlorovinyls. About two-thirds of the company's business involves oil and gas, and the remaining third is dedicated to chemicals.

Early History

Occidental Petroleum was founded in 1920 in California. Its early years as an oil-finding entity were largely undistinguished, with the company almost bankrupt by the mid-1950s. It was Occidental Petroleum's early difficulties, however, that laid the groundwork for its later success. In 1956 Occidental Petroleum came to the attention of Armand Hammer, a millionaire well-known for his savvy and success in business dealings with the Soviet Union in the 1920s. In 1921 Hammer had met Vladimir Lenin, the leader of the Russian Revolution, and had become the first U.S. businessman to establish ties with the Soviet Union. Among other enterprises, Hammer had operated an asbestos mine, imported grain, and manufactured pencils. While in Moscow, he had purchased Russian art treasures at bargain prices, later reselling many art objects in the United States at considerable profit. (Later it was revealed that many of Hammer's treasures were fakes, and he was well aware of it.)

In 1956 Hammer and his wife Frances each invested $50,000 in two oil wells that Occidental planned to drill in California. When both wells struck oil, Hammer, nearly 60, took an active interest in further Occidental oil exploration.

At Hammer's first association with Occidental, the company was run by Dave Harris, Roy Roberts, and John Sullivan. Hammer's increased involvement, his strong personality, and his ability to raise money for oil drilling propelled him more and more into the limelight. By July 1957 Hammer had become company president.

Growth Under Hammer in the 1960s

Hammer's influence played a key role in the development of Occidental. As Steve Weinberg wrote in Armand Hammer: The Untold Story, "Few Fortune 500 corporations have come so totally under the sway of one person, especially one who owned such a tiny percentage of stock."

From his earliest days as president of Occidental, one of Hammer's overriding drives was for Oxy to diversify. In his autobiography, Hammer reported that a prime rationale for diversifying was to make Oxy too big for the other major oil companies to take over. Acquisitions included energy and chemical companies, as well as meat-producing operations.

At the time Hammer became involved with Occidental, the company was listed on very small stock exchanges on the West Coast; within several years, however, Oxy was on the American Stock Exchange, boosted by the 1959 Hammer-led acquisition of Gene Reid Drilling Company of Bakersfield, California. This acquisition was to prove fortuitous for the growth of Occidental. Hammer attracted Reid, an engineer, and his son Bud, a geologist, to the cash-poor Occidental by offering them shares of the company. Hammer was to use the stock strategy to attract talent in other acquisitions as well.

In 1961 while working with Occidental employees Richard Vaughn, Robert Teitsworth, and the Reids, Hammer took a chance on drilling the Lathrop field, near San Francisco. It had been drilled previously for natural gas by Texaco and other companies, but only to a depth of about 5,600 feet. Reid and the others suggested that there was gas farther down, and at 6,900 feet they were proven correct. Occidental made one of the largest gas finds in California. Over the course of one night, the company found gas worth hundreds of millions of dollars.

By the end of 1961, Occidental was reporting a $1 million profit on revenues of over $4 million. The company's reputation and fortune were bolstered by continued success in natural gas, as well as through more oil finds. By March 1964 Oxy's shares were trading on the New York Stock Exchange.

Through the mid-1960s, Hammer pushed Oxy more and more to occupy an international position. The company built, for example, a superphosphoric-acid plant in England and helped build a $33 million ammonia and urea plant in Saudi Arabia. Oxy also had dealings with other countries, among them Nicaragua, Venezuela, Morocco, and Turkey.

Throughout the 1960s, Hammer kept up negotiations with Libya's King Idris for the use of Libya's natural resources. This persistence was to pay off handsomely. In 1966 Oxy's potential skyrocketed, with a billion-barrel oil field find in Libya. The find was vintage Hammer, as he wined and dined important Libyan officials and then took a risk on land previously drilled by others. The Libyan oil finds established Oxy as one of the largest petroleum companies in the world. From early 1967 until November of that same year, Oxy's stock doubled in value to more than $100 a share.

Hammer's skills as a negotiator were put to the test when the Libyan king was overthrown in a bloodless coup in 1969 and replaced by the Revolutionary Command Council, soon to be headed by Moammar Khadafi. Many analysts feared the new government would nationalize the oil fields; however, Hammer negotiated in late 1970 an agreement by which Libya received an immediate increase of 30 cents per barrel of oil, with another ten-cent increase spread over five years. Some industry observers viewed this agreement as the beginning of the end of cheap energy, as other multinational oil companies quickly signed similar agreements with their host countries. Most petroleum-producing countries called for matching increases, and oil prices headed upward.

Wheeling and Dealing in the 1970s-80s

In the early 1970s, Hammer caused a sensation with a $20 billion long-term deal with the Soviets that featured a barter agreement by which Oxy would supply phosphate fertilizer to the USSR in exchange for Soviet ammonia and urea. Many in the U.S. government criticized the deal, saying the agreement helped a communist country, despite the fact that the deal was consummated during a period of détente between the United States and the Soviet Union. Hammer, in fact, considered his dealings as détente through trade, and he continued this notion through trade with the Chinese, with whom he began negotiating in 1979. Oxy ended up with two offshore oil exploration and development contracts and a joint agreement to develop a Chinese coal mine.

In 1981 Oxy moved beyond the energy and chemical fields to acquire Iowa Beef Packers (IBP), the largest meatpacker in the United States. IBP cost Oxy $750 million in stock and proved a sound investment; in 1987 Oxy sold 49.5 percent of IBP to the public for $960 million. The astute business deal would be somewhat overshadowed, however, by numerous union strikes over pay and working conditions, as the United Food and Commercial Workers Union maintained Oxy management was unconcerned with workers at the packing plants.

In 1982 Hammer engineered Oxy's $4 billion acquisition of Cities Service Company, a huge domestic oil company headquartered in Oklahoma. The deal was viewed with skepticism by many investment bankers who, as reported in Hammer's autobiography, Hammer, regarded it as "Jonah trying to swallow the whale." Nevertheless, the deal made Occidental the eighth-largest oil company in the United States and the country's 12th-largest industrial concern. One of Hammer's first steps after the acquisition was to sell off those Cities Service units he felt Occidental did not need, resulting in about $1 billion in revenue for Oxy. Some 16,000 jobs were lost as the Cities Service work force dropped 80 percent.

In late 1985 Hammer made another multi-billion dollar transaction, acquiring Midcon, the huge domestic natural-gas pipeline company, for $3 billion. Shortly after the acquisition, the natural-gas industry was deregulated. The industry, as a whole, suffered from strong competition because of deregulation, and Occidental was no exception.

In a reorganization move in May 1986, Occidental Petroleum Corporation of California became a wholly owned subsidiary of the parent company. Corporate headquarters remained in Los Angeles.

The most successful of Oxy's operations during the mid- to late 1980s was its chemical branch, Occidental Chemical (Oxychem). The chemical operations were built largely through the acquisitions of other companies. Occidental purchased holdings from Diamond Shamrock Chemicals in 1986 and from Du Pont and Shell Chemical in 1987, among others. In the five year period from 1983 through 1987, Oxychem almost doubled its sales to nearly $3 billion. According to J. Roger Hirl, president and chief operating officer of Oxychem, as reported in Chemical & Engineering News, Oxy moved into the chemical industry as a balance to its petroleum business. While noting the cyclical nature of both the petroleum and chemical industries, Hirl said they normally were not in parallel cycles.

In 1988 Occidental, spending $2.2 billion to purchase Cain Chemical, moved up to become the nation's sixth-largest chemical producer, with sales accounting for almost 25 percent of Oxy's total. Cain Chemical then became known as Oxy Petrochemicals Inc.

The late 1980s brought challenges in the form of environmental litigations. In February 1988 Oxy was found liable for cleaning up the toxic wastes at the country's most infamous landfill, Love Canal in Niagara Falls, New York. After eight years of deliberations, a Federal judge ruled that Occidental was responsible for the improper disposal by Hooker Chemical of more than 21,000 tons of chemicals on the site, during the 1940s and 1950s. Occidental had purchased Hooker Chemical in 1968, unaware of the problems that began to surface in 1978. Before the ruling, Oxy had paid $20 million in damages to 1,300 former Love Canal residents, but nothing toward the cleanup of the site. Total cleanup costs were expected to exceed $100 million.

Also during this time, Oxy was hit by a disaster unequaled in oil production history. In July 1988, the company's Piper Alpha offshore oil platform exploded in Britain's North Sea, killing 167 people. The accident panicked the oil market, already made nervous by the continuing Iran-Iraq War. Oil prices were driven up immediately after the accident by as much as $1 a barrel. The accident was thought to be caused by a leak in a pressurized natural-gas line that triggered the massive explosion. Occidental immediately shut down the pipeline that served the platform and five others. In August 1989 Oxy resumed North Sea production. The accident was estimated to have cost over $1 billion, including an approximately $183 million settlement with families of the victims and surviving workers.

During 1989 Oxy restructured its domestic oil and gas operations, which resulted in the loss of 900 jobs, the majority from the Oxy Oil and Gas subsidiary's headquarters in Tulsa, Oklahoma. For the year 1989, however, Oxy reported an overall increase of about 1,000 workers, due primarily to expansion at IBP and Oxychem.

Hammer's Last Years

Hammer's decisions did not always please stockholders. One such circumstance centered around Occidental's funding of a $95 million museum to house Hammer's valuable painting collection. The collection was worth an estimated $250 million. Many shareholders did not see the expense of building and operating a museum as serving the best financial interest of the company. The disagreement ended in the courts, in 1990, and although the Armand Hammer Museum of Art and Cultural Center would be built as planned alongside Occidental's corporate headquarters in Los Angles, the proposed settlement called for limits on the amount of future contributions by Occidental to the museum and to other charities associated with Hammer.

Throughout his career Hammer had been able to attract talented people to Occidental. Nowhere was this more evident than with Ray Irani, the president and chief operating officer during Hammer's last years at Occidental. In 1983 Hammer had convinced Irani, the president of Olin Corporation, to run Oxychem. When Irani took over, Oxychem had an operating loss of $23 million and supplied about nine percent of Occidental's total sales. In 1989 Oxychem had an operating profit of $1.2 billion and supplied about one-quarter of Oxy's total sales. In February 1990, the board of directors of Occidental proposed Irani as the successor to Armand Hammer as chairman and chief executive officer whenever Hammer should vacate those offices.

In 1989, Occidental reported that 94 percent of its revenues came from domestic operations compared to 55 percent from the same source in 1980. Still, Oxy continued to be involved in large foreign operations. In June 1990, for example, Oxy was the only U.S. company in a four-country agreement to build a $7 billion petrochemical plant in the Soviet Union, the largest-ever joint Soviet-Western project.

Restructuring in the 1990s

When Armand Hammer died at the age of 92 on December 10, 1990, the changeover in command at the top was expected: Ray Irani, president and chief executive officer under Hammer for six years, took over as chairman of the board. Irani worked quickly to get Oxy out from under Hammer's slew of pet projects, many of which had no place in an oil company's portfolio. He sold the meat packing business, shed Oxy's investments in Arabian horses, got rid of its 5.4 percent stake in the makers of Arm & Hammer baking soda, and cancelled a $485,000 contract for a fourth authorized Hammer biography. The University of California agreed to take over the Armand Hammer Museum, which became known as the UCLA Arts Center. Occidental even sold off the "Codex Hammer," a Leonardo Da Vinci manuscript Hammer had bought with $5.6 million of the company's money and renamed for himself. Irani also announced he was cancelling the company's billion-dollar petrochemical deal with the Soviet Union. Perhaps most importantly, Irani outlined a strategy to reduce the company's debt load by 40 percent by 1992. Upon Hammer's death, the company's debt stood at a staggering $8.5 billion, and dealing with this was paramount. Irani's strategy called for selling unneeded assets, and also included slashing stockholder dividends to $1 a share from $2.50.

Occidental's restructuring went on in several stages throughout the early 1990s. By the end of 1992, the company had met its first set of goals, reducing its debt by $3 billion. However, Occidental announced that it still intended to cut its costs by $300 million by cutting capital spending, eliminating jobs, and instituting a salary freeze. At the same time, the company dedicated more money to international oil and gas exploration, increasing its production of oil from abroad, with operations in Yemen, Oman, and Ecuador. At that time, about half of the company's revenues came from its chemical business. In 1995, Oxy announced it was simplifying the management of its oil and gas operations in an attempt to grow that business and get away from its dependence on chemicals. Occidental formed a single operating company to take on all its oil and gas business, and then split this into four divisions: exploration, production, enhanced oil recovery, and finance and administration. The company hoped that by focusing its resources, it could both cut costs and improve future earnings.

Occidental's next big move came in 1997. The company spent $3.65 billion to buy a huge oil field, the Naval Petroleum Reserve, from the U.S. government. The naval reserve, called Elk Hills, produced both oil and natural gas. The field, near Bakersfield, California, had been owned by the government since 1900, as a secure source of domestic oil. Deciding it no longer needed the source, the government auctioned the reserve in a deal that was the largest privatization in U.S. history. Occidental bought 78 percent of Elk Hills; the remainder was already owned by Chevron Corporation. To finance this purchase, Oxy decided to sell its MidCon unit, a huge natural gas pipeline the company operated between the Gulf and western states and Chicago. Oxy soon sold MidCon to KN Energy Inc. for almost $4 billion. The company also sold off various oil production units it judged unnecessary, including properties in Louisiana, Mississippi, and Wyoming. By mid-1998, Occidental had transformed itself into a much more focused company than it had been during Hammer's reign. It had five major oil and gas operations in the United States, including Elk Hills, which was thought to have huge growth potential. For international growth, the company counted on a blossoming oil field it ran in Qatar. Only about one-third of Occidental was still invested in chemicals, freeing the company somewhat from the volatility of the chemical business cycle. Occidental was not nearly as complicated as it had been in 1990. It had reshaped itself into a genuine oil company, instead of a sprawling conglomerate, and though its growth in the 1990s still underperformed the stock market in general, Occidental had by 1998 put itself in a position to do much better.

Principal Subsidiaries: Occidental International Corporation; Occidental Oil and Gas Corporation; Occidental Chemical Corporation.

Additional Details

Further Reference

Brown, Christie, "The Master Cynic," Forbes, October 17, 1994, pp. 364-68.Bryant, Adam, "At Occidental, So-So Results But Big Pay for the Boss," New York Times, March 19, 1998, pp. D1, D8.Fan, Aliza, "Occidental Plans Broad Restructuring to Save Firm $100 Million per Year," Oil Daily, October 26, 1995, p. 1.Fritsch, Peter, "Occidental Plans $3.65 Billion Purchase," Wall Street Journal, October 7, 1997, pp. A3, A6.Glover, Kara, "Ray Irani Brings New Ways to Occidental," Los Angeles Business Journal, March 23, 1992, p. 12.Hammer, Armand, and Neil Lyndon, Hammer, New York: G.P. Putnam's Sons, 1987.Rundle, Rhonda, "Occidental Acts to Pare Further Its 1993 Costs," Wall Street Journal, November 20, 1992, p. A3.Shook, Barbara, "Oxy Nears Emergence from Restructuring as Simpler Company with New Profile," Oil Daily, April 1, 1998, p. 62.Weinberg, Steve, Armand Hammer: The Untold Story, Boston: Little, Brown and Company, 1989.

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