Market Overview

ETFs Are The Safe Way to Occidental Exposure

ETFs Are The Safe Way to Occidental Exposure

Apparently inspired by last week's NFL draft, CNBC brought in some experts last Friday to conduct a stock draft. One of the "drafted" stocks was Occidental Petroleum (NYSE: OXY), the fourth-largest U.S. oil company.

The experts did touch on some of the important issues pertaining to California-based Occidental. For example, the idea of Occidental following Marathon Oil (NYSE: MRO) and ConocoPhillips (NYSE: COP) in spinning off its midstream or downstream operations to unlock shareholder value was floated.

Indeed, that is a good idea as Occidental's earnings from midstream, marketing and "other" related segments jumped to $215 million in first quarter from $131 million a year earlier, according to the company's latest earnings release.

CNBC also briefly touched on the role some activist investors are attempting to play at Occidental due in large part to some issues in the C-level executive suite.

Long story short when it comes to who is actually running Occidental, Steve Chazen sports the title of chief executive officer and he will keep that post until the end of 2014. Unfortunately for Chazen, and arguably for shareholders as well, he must do his job under the watchful eye of former CEO and current chairman, Ray Irani. Some investors believe it is really Irani that still runs Occidental.

That poses some risk to the stock because for as much as they have complained and tried to do something about it, activist shareholders are still struggling with Irani's compensation package that would make any Wall Street banker blush. Irani received nearly $46 million last year just to be chairman. For the five years through April 2010, Irani received a staggering $782.48 million in compensation, according to Forbes.

Put Irani's five-year compensation into context this way: Based on a current annual dividend of $2.56 per share and just over 805.5 million shares outstanding, Occidental has a dividend obligation of about $2.06 billion. Irani's five-year compensation through April 2010 ate up nearly a third of the company's current tab.

ETFs to Consider

In other words, there are a lot of moving parts with Occidental that may make ETFs the better way for investors to get exposure to potential upside. Occidental is not nearly the size of rivals Exxon Mobil (NYSE: XOM) and Chevron (NYSE: CVX), two companies that dominate cap-weighted ETFs. However, there are a couple of credible ETF options for Occidental exposure.

The iShares Dow Jones U.S. Oil & Gas Exploration & Production Index Fund (NYSE: IEO), which was highlighted earlier this year, features a 13.1 percent allocation to Occidental making the stock the ETF's largest holding by about 500 basis points over Anadarko Petroleum (NYSE: APC).

Year-to-date, IEO has outpaced the Energy Select Sector SPDR (NYSE: XLE) by 170 basis points. IEO is home to over $319 million in assets under management and charges an annual expense ratio 0.46 percent. The ETF works out to be a little cheaper than because its annualized tracking error is 0.43 percent, according to iShares data.

Another Occidental ETF option is the far small Market Vectors Unconventional Oil & Gas ETF (NYSE: FRAK). FRAK, which debuted in February, is most often remembered for its catchy ticker. However, the ETF has been a decent performer this year with a 9.3 percent gain. Occidental is FRAK's second-largest holding at a weight of 7.43 percent behind the 8.25 percent allocated to Anadarko.

FRAK is focused on companies with significant shale and oil sands footprints. Other top holdings include EOG Resources (NYSE: EOG), Devon Energy (NYSE: DVN) and Hess (NYSE: HES).

Why ETFs For Occidental
One of the primary advantages of ETFs is that these instruments help investors mitigate single stock risk and some does exist with Occidental. The stock has significant upside potential if the board could convince Irani the company is not his personal ATM machine, but betting on that happening anytime soon could be a losing bet.

Of course, Occidental, although it does not explore offshore, has a comparable amount of international geopolitical risk as of any of its rivals. For example, Occidental is a major operator in Libya, not exactly the most stable country in the world.

Maybe even more risky to the Occidental investment thesis than Irani or Libya is the company's home state government. A major part of the long-term thesis for owning Occidental is the company's dominant presence in California's Monterey Shale. The estimates for recoverable reserves there vary, but it is fair to say the Monterey Shale could be a major part of domestic oil production going forward.

Unfortunately, California's government is no more reliable for Occidental than Libya's. Despite an unemployment rate that remains among the nation's highest and a desperate need to close funding gaps created by California's desire to make millionaires out of public employees, Occidental cannot get all of the permits it wants to fully tap the Monterrey Shale.

Bottom line: There is a lot of potential with Occidental, but ETFs, for now anyway, look like the safer play.


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