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Occidental Petroleum Has Growth Despite Size

Posted: Mar 19, 2009 11:21 AM by Eric Fox

Tickers in this Article: DNR, CVX, COP, OXY

With steady growth over the last few years, something many of its competitors can't claim, Occidental Petroleum (NYSE:OXY) is a well-rounded player in the energy sector. Occidental is an interesting mix of mature domestic properties and higher-growth assets that give the company good production growth, despite its size.

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Company Background
Occidental Petroleum is a partially-integrated oil and gas company with operations in areas around the world, including North America, Libya, the Middle East and South America. The company also has a sizable chemicals and midstream business. (Learn more in The Industry Handbook: The Oil Services Industry.)

While most integrated oil companies seem to have problems growing production due to, if nothing else, sheer size, Occidental has grown production by a compound annual growth rate of 8.3% since 2005. This growth rate assumes 2009 production of 660,000 barrels of oil equivalent (BOE) production. The company's long-term production growth target is 5-8%.

Other large oil companies have not been as successful at growing production. ConocoPhillips (NYSE:COP) announced last week that production would be flat at 1.8 million BOE per day for the next several years. Chevron (NYSE:CVX) also lowered its long-term production growth target to 3%. Both companies cited lowered spending on projects that aren't economical at current prices.

Occidental spent $4.7 billion on capital expenditures in 2008, and cut its spending in 2009 to $3.5 billion to reflect lower commodity prices. The biggest cutbacks in its capital program are in the Permian Basin and certain areas in California. Projects in other areas were planned using lower normalized prices for oil and gas and will continue.

Exploration and Production
The company has a large prospective inventory of five million acres in which it can explore and develop, given its years of inventory. Sixty percent of Occidental Petroleum's total production comes from the U.S. In contrast to other exploration and production companies that are active in high-profile shale plays, much of the company's U.S. production comes from mature wells in old fields. For Example, Occidental has properties in the Hugoton gas field in Kansas, which has been producing natural gas since the 1920s.

Occidental Petroleum has also been active in the Permian Basin in West Texas since the 1920s. This area is very important to Occidental, as it produces one-third of its production. (To learn more on this industry, see the Oil And Gas Industry Primer.)

Enhanced Oil Recovery
Occidental Petroleum is using enhanced oil recovery (EOR) methods in the Permian Basin and is injecting carbon dioxide (CO2) into the wells to enhance production. Denbury Resources (NYSE:DNR) is another company that uses EOR techniques to boost production in mature wells. The company uses CO2 from the Jackson Dome to stimulate production in its Mississippi properties.

The company also has properties in Elk Hills and other areas in California, and is the largest acreage holder in the state. Although these U.S. properties produce good cash flow, production growth is limited and has been essentially flat the last few years.

International
Occidental Petroleum has seen major growth in the Middle East and North Africa as its projects have come on line. Production was 103,000 BOE per day in 2005, increasing to 164,000 at the end of 2008.

Chemicals and Midstream
Occidental Petroleum's chemicals division makes chlorine, caustic soda and other products, and earned $759 million pretax in 2008. The midstream segment also showed a profitable 2008, earning $520 million. It displays better production growth than its larger, integrated peers, and has profitable chemical and midstream assets that make the company attractive to investors looking for an energy rebound.

By Eric Fox

Eric J. Fox, is the founder of Brittain Capital Management, LLC., which manages the Alesia Fund, LP., a Value oriented long/short investment partnership. You can read more of his views on investments at his blog - Stock Market Prognosticator.

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