Oil field buy expected to boost lagging Occidental.

Occidental Petroleum Corp. did something novel last week: It enhanced shareholder value.

Occidental's deal last week to buy the federal government's 78 percent stake in the giant Elk Hills oil and gas field near Bakersfield for $3.65 billion will put the company solidly back in the oil business, which is expected to enjoy buoyant growth in coming years.

But that's not all. The Los Angeles-based oil company also announced plans to divest non-core operations and hold its executives responsible for overall performance.

"It is probably the best thing the company has ever done. It is a historic step in the company's effort to finally realize its potential," said Fadel Gheit, an analyst at Fahnestock & Co. in New York.

Elk Hills, estimated to hold the equivalent of I billion barrels of oil, will more than triple Occidental's reserves and almost double the company's natural gas holdings.

"It will allow a positive transformation of a middle-aged, low-growth company into one that will deliver higher returns to investors," said Steven Pfeifer, an analyst at Prudential Securities in Chicago.

Motivating the deal, which is slated to close early next year, was the fear that given Oxy's lackluster operating performance and depressed share price, the company was a prime target for a hostile takeover.

Analysts blamed much of the malaise on the death of Occidental's enigmatic founder and Chairman, Armand Hammer, in 1990. Known for his autocratic management style, Hammer loaded the board with his lieutenants, including current Chairman Ray Irani, who were likely to maintain the status quo.

"He wanted to make sure they were all cut from the same cloth," said Sanford Paganucci, an analyst at Collins & Co. in San Francisco.

As a result, problems that date back to the 1980s, such as the diversification into non-core industries, are only now starting to be dealt with.

"The company is entering a phase where it recognizes that if it does not change, then changes will be forced upon it," Paganucci said.

Occidental currently generates roughly 60 percent of its total earnings from chemicals. But with a growing number of overseas chemical plants coming on line, particularly in Asia, chemical profit margins are being squeezed.

Oil, on the other hand, is an increasingly strong commodity.

"Oil continues to surprise on the upside, and we expect that will continue. It looks like Occidental timed the deal quite well with a future rise in oil prices," Pfeifer said.

Occidental may have been attracted to Elk Hills by the relative ease associated with developing a domestic oil field.

"Where else in the world can you find a billion barrels of oil on a single plot of land just a couple of hours' drive from the corporate headquarters?" Gheit said.

By contrast, the company's Colombian operations have been beset by a growing number of attacks from leftist guerrillas.

Thrown in with the Elk Hills deal was news that Occidental is planning to sell its natural-gas pipeline subsidiary MidCon Corp. Analysts applauded that decision, saying it will allow the company to focus its resources on petroleum and chemicals.

The next move could be a spin-off of the chemical wing, OxyChem.

"Wall Street is never going to pay full price for a company made up of unrelated businesses. As a separate company, OxyChem would have a significantly more valuable market capitalization than Occidental has today," said Gheit.

The general euphoria over the Elk Hills deal was tempered by news that Occidental agreed to pay Irani a $95 million bonus over five years in return for him signing a new employment contract that cuts his base salary and reduces his retirement benefits. The bonus will be paid out only if the company's performance improves.

Analysts said the massive payoff highlights all that has been wrong with Occidental.

"Occidental has been run for the benefit of directors for a long time. Now they have to run it for investors," Paganucci said.

Occidental said it expects to take an after-tax charge of around 16 cents per share in the third quarter to cover the settlement of these contracts. As a result, the company expects to report earnings per share of approximately 40 cents, the lowest for six quarters.

Despite Irani's payoff, Wall Street celebrated the Elk Hills deal by pushing up the stock 11 percent on Oct. 6, the day the deal was announced - its highest level since 1990.

The stock has been a perennial underperformer for the last 10 years, due largely to the fact that Occidental has posted a loss in three of the past seven years.

Assuming the Elk Hills deal and the sale of MidCon go through as planned, analysts estimate the stock will trade near $35 a share by mid-1998. It was trading at around $29 a share last week.