Wall Street Slaps Occidental Over Reported Merger Plan.

FOURTH-quarter earnings that handily beat Wall Street estimates couldn't prevent Occidental Petroleum Corp. stock from stumbling after recent news reports that the oil-and-gas company would buy Altura Energy Ltd. in a $3.5 billion deal.

With a market cap of $6.8 billion and a long history of serious debt, Occidental saw its stock tumble from $18.50 to $17.25 the day of the reports on Feb. 14. The stock stood at $18 last week, down from a high of nearly $25 in November.

"This is like a patient that's never left the hospital, and every time you think he's getting better he goes back into a coma," said Fadel Gheit, an analyst at Fahnestock & Co.

Occidental executives have not commented on reports about the acquisition in The Wall Street Journal and Reuters, which cited anonymous sources, and a spokesman declined to comment on other questions about the company. But analysts said the market has turned thumbs down on a possible purchase of Altura, a joint venture between BP Amoco PLC and Royal Dutch Shell AG that operates 6,400 oil wells in Texas and New Mexico.

"To commit $3.5 billion, as is being talked about, throws up a caution flag. How are they going to raise this?" said John Parry, an analyst at John S. Herold Inc.

"People are concerned that at the prices mentioned in the press, you're paying a fairly high price for mature, high-cost reserves," said John Mahedy, an analyst at Sanford C. Bernstein. "So whether it's Occidental or anybody else, that would be the concern. It's along-producing field, it doesn't have a lot of production upside, and it probably has relatively high costs."

For the three months ended Dec. 31, Oxy reported net income of $383 million ($1.04 per share), compared with a net loss of $38 million (12 cents) for the like period a year earlier.

Earnings before special items, which included a $775 million payment from Chevron Corp. to settle a lawsuit, stood at 52 cents for the fourth quarter. Those results handily beat Wall Street estimates of 42 cents, according to Zacks, a financial tracking firm.

For all of 1999, net income was $448 million, up from $363 million a year earlier. Full 1999 figures won't be released until next month.

Like other oil companies, Occidental has benefited from higher oil and energy prices and lower production and exploration costs. In fact, the day of the reports about Altura, oil prices soared to $30.30 a barrel, the highest price since the Gulf War in 1991. Rising crude oil prices mean increased earnings for oil companies.

"For every dollar change in oil price, expect Occidental's earnings to change from 12 to 13 cents," Mahedy said.

On the production side, the company has lowered its exploration and development costs. While cash flow might improve as a result, Gheit noted that Occidental has recently paid up to $4 per gallon for oil, while selling its own reserves at less than half that.

"You know what that says to me? It says they do not have too much hope for their own reserves," he said. "It's like cooking dinner and then ordering Chinese food. That tells me you've tasted your own food and it doesn't taste too good. It undermines investors' confidence."

The settlement from Chevron was the culmination of a 17-year-old suit over a failed merger between Cities Service Co. and Gulf Oil Corp. Cities sued Gulf, and the lawsuit was inherited by the two parents after Occidental acquired Cities in 1982 and Chevron bought Gulf in 1984. The settlement is valued at $488 million net of tax. The money allowed Occidental to pay off some of its highest-cost debt.

Eliminating debt during profitable economic times is essential for Occidental, analysts said. The industry suffered from low crude prices in late 1998 and early 1999, and as a result, capital spending was cut. The current boost will allow increased flexibility during the next down period.

Occidental has announced a 2000 capital budget of $850 million, up from $600 million in 1999. About 75 percent of spending this year is earmarked for the oil and gas business; about 25 percent is being allotted to the chemical operations.

But some investors want more than just reduced debt, and it's not clear that Occidental can deliver.

"There's just no prospects for growth. All investors have one thing in mind: growth," Gheit said. "We are seeing consolidation by big oils, and middle-cap oils are all down by 30 percent or so from their 52-week high, meaning major oils are not interested in them, investors are not interested in them, and nobody's going to pay for these stocks."

                        Occidental Petroleum Corp.
YEAR (Dec. 31)                1998    1997
Revenue (billions)            $6.6    $8.0
Cost of Goods (billions)       4.5     5.1
Gross Profit (billions)        2.1     3.0
Net Income (Loss) (millions)   363   (390)
Earnings (Loss) Per Share    $0.99 ($1.43)

SUMMARY

Business: Oil and gas

Headquarters: Los Angeles 

CEO: Ray Irani

Market Cap: $6.8 billion

Dividend Yield: 5.41%

Total Liabilities: $11.89 billion

P/E Ratio: 12.07

Long-Term Debt: $5.37 billion