Activist company

This Warren Buffett-backed oil company is America’s hottest stock. Why isn’t its CEO pumping more oil?

By Matt Peterson

‘There’s no pressure to increase production’: Vicki Hollub’s Occidental dominates the nation’s largest oilfield, landing her on MarketWatch’s 50 list of the most influential people in the markets.

Vicki Hollub’s Occidental Petroleum controls most of the most important area for oil production in the United States. Not so long ago, a tanker in a position like this – and it would have been a man, before Hollub arrived – would have gone bankrupt, pushing production to its physical limits.

Not Hollub. Occidental produces the equivalent of about 1.15 million barrels of oil per day on average, and that’s more than enough to turn a profit. The company can make money as long as oil prices are above $40 a barrel. They have topped $80 for most of the year as the war in Ukraine weighs heavily on global markets and the Saudi-led oil cartel, OPEC, now cuts production.

“We don’t feel like we’re in a national crisis right now,” Hollub told MarketWatch in an interview. And that means Hollub can continue to execute on its plans: to make shareholders happy by paying down debt and buying back stock. “When you have such a low break-even point, for me there’s no pressure to increase production right now, when we have these other two ways to increase shareholder value,” Hollub said. .

This market-driven logic puts her at odds with President Biden, who is acting as if there is an ongoing national energy crisis precisely because of what oil CEOs like Hollub are doing. The size of oil company profits is outrageous, Biden said Monday. They make money not from innovation or investment, but as a boon from the war in Ukraine, Biden said. “Rather than increasing their investments in America or giving American consumers a break, their excess profits are going back to their shareholders and buying back their stock, so executive compensation is going to skyrocket,” Biden said. He ordered releases from the Strategic Petroleum Reserve to reduce gas prices and asked Congress to tax oil company profits.

But Hollub is determined to seize the opportunity to improve the company’s financial situation. Occidental still has significant debt from a difficult acquisition Hollub led before the pandemic. In the second quarter alone, the company used its windfall to pay off $4.8 billion in debt. If Biden called, she would listen, but she didn’t speak to him one-on-one. Hollub said she spoke to the administration through Energy Secretary Jennifer Granholm. (“She doesn’t know the industry very well right now, but that’s because she hasn’t been in the job for very long,” Hollub said.) The White House and Department of Energy n did not return requests for comment.

Hollub says she’s just following the market. “If demand drops, we reduce production, if it increases, we increase.” Oil prices have fluctuated rapidly over the year, and with a recession widely expected in the near future, demand could fall, Hollub said. Biden’s SPR oil dumps, she added, may have lowered gas prices, but at the expense of national security. “The SPR should be reserved for emergencies, and you never know when those might come up,” Hollub said.

Hollub’s message may not be politically convenient, but it’s exactly what its shareholders want to hear. Occidental (OXY) is the hottest stock in the United States and has returned 150% this year, making it the best performing company in the S&P 500. Investors who bought shares of Occidental in January and kept them today would have more than doubled their money, even as the broader market collapsed. Warren Buffett’s Berkshire Hathaway has been on a buying spree this year and now owns more than 20% of Occidental shares. How Hollub got here is America’s biggest corporate saga in recent years, from its debt-fueled decision in 2019 to buy its biggest rival Anadarko Petroleum over vocal objections from activist investor Carl Icahn. , to the pandemic-induced oil price crash that nearly bankrupted Occidental, and the extension, removal and re-extension of Buffett’s support.

With Occidental now on a solid financial footing, Hollub continues to leave her mark on the oil industry and the world, landing her on MarketWatch’s 50 list of most influential people in the markets. Hollub’s entanglements with the wise men of Wall Street left her wiser about how to run her business. Stung by previous boom-and-bust cycles, Hollub helped steer America’s oil frackers away from being “swing producers” who could counter the war-induced rise in energy prices, as it paid off debt and returned cash to shareholders in the form of dividends and stock. takeovers instead of investing some of that money in the shale oil fields. It also encourages investment in Occidental’s massive new carbon capture effort.

More than anything, Hollub focuses on guys like Bill Smead, founder of Smead Capital Management, who is a long-term investor in Occidental and a fan of Hollub. “She’s someone we have a lot of respect for and we appreciate all the money she makes for us,” he said.

With this kind of support, Hollub envisions putting Occidental in the driver’s seat of the massive national climate change-induced economic transition. It positions Occidental as the energy transition company, a company focused not on everyone’s economy of the last century or a carbon-free vision of the next, but on the oil company of today. It might even stop drilling new oil wells altogether.

“Now we feel like we are in control of our own destiny,” Hollub said.

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For the chief executive of a company enjoying a banner year on Wall Street as investors snuff out generational losses, Hollub seems to be constantly on the lookout for threats. Talking about the company’s prospects, she repeats a certain phrase: “I know this will end up getting me in trouble, but…”

Difficulty? Hollub and Occidental have had their share.

The drama surrounding Occidental’s 2019 acquisition of Anadarko would make for a good boardroom thriller — or at least a lively business school case study. Anadarko had big assets in the crucial Permian Basin region of Texas and New Mexico, where horizontal drilling in shale rock had reinvigorated an aging oil field in the nation’s largest producing area.

Hollub and his team made an offer to buy Anadarko after months of research. She thought she had a deal, only to hear on the radio that Anadarko had announced plans to partner with Chevron. She almost left the road, says the Texas Monthly.

Hollub turned to Buffett for help. He accepted what was effectively a $10 billion loan at 8% interest, in the form of preferred stock, as well as warrants that allow Berkshire Hathaway, Buffett’s company, to buy more of ordinary shares. It gave Hollub what she wanted, but many on Wall Street hated it. “The Buffett deal was like taking candy from a baby and amazingly she even publicly thanked him for it!” Icahn wrote in a letter to fellow shareholders. Icahn had bought a handful of shares in Occidental, and in the months that followed, the billionaire investor waged a shareholder campaign against Hollub, insisting she needed stronger board oversight. administration. Icahn’s allies became Western directors.

In 2020, as COVID-19 flattened the global economy, the deeply indebted Occidental was forced to cut its dividend for the first time in decades. Buffett sold his stock. At Icahn’s request, the company issued 113 million warrants to its shareholders, allowing them to buy shares at $22, at a time when the stock was trading at $17. Gary Hu, one of Icahn’s directors on Occidental’s board, pointed to those terms as evidence of their success. “Our involvement with Occidental represented activism at its finest,” Hu said.

Hollub strongly disagrees. Icahn saw an opportunity to make an easy profit by derailing the deal with Anadarko, Hollub said. “And what he expected was that we would lose and he would take advantage. As that didn’t happen, he managed to work his way up the board.” Icahn’s board representatives came to Hollub with a number of plans, including terms of reference. She felt that no harm would be done. “So that’s what we agreed on, but yeah, the other 10 weird things, we didn’t do them.”

Former Occidental CEO Stephen Chazen returned to chair the board at Icahn’s insistence. Icahn and Occidental eventually reached a settlement. Its board members left and the activist sold its common stock earlier this year. Chazen passed away in September. The experience has soured both sides, but there is one point of agreement: Hollub will do what she wants. “We were clearly wrong about the board’s ability to restrain Vicki’s ambitions,” Hu said.

Icahn made a profit of $1.5 billion. At a MarketWatch event in September, Icahn said he still holds the warrants. But he hasn’t let go of the issues that motivated him to push for Occidental in the first place, although he insists he personally has no problem with Hollub. He compared her to a kid who got lucky playing in Vegas. “The system allowed her to do that. And she’s just one small example of what’s wrong with corporate governance.”

But as Icahn himself has shown, the corporate money system in America is malleable. Its players can learn the rules of the game and adapt. Quarter after quarter since the dark days of the pandemic, Hollub has answered corporate earnings calls by pledging to maintain strong cash flow, invest in the most profitable assets and not fall into the trap of overinvestment. in debt-fueled or costly production. capacity, as so many failing shale producers have done in the past. It reduced the company’s debt from nearly $40 billion after the Anadarko acquisition to less than $20 billion today. She increased the company’s dividend earlier this year. Along the way, she went from market pariah to textbook CEO.

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11-05-22 1139ET

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