Since it was founded in California in 1920, Occidental Petroleum (OXY) has grown to become one of the leading domestic-based oil and gas companies. Operations are concentrated in the United States (roughly 60% of total output at present), the Middle East/North Africa (around 30%), and Latin America (more than 10%). The company’s expansion has been achieved through a series of acquisitions, asset swaps with rivals, and its expertise at boosting production from mature fields and accessing difficult-to-reach reserves.
Through the first nine months of 2010, the company generated earnings per share of $4.10, substantially higher than the year-earlier tally of $2.49. The core oil and gas segment was aided, in part, by a sharp rise in energy prices. What’s more, production was boosted by operations in Bahrain, Oman, and California. Meanwhile, the midstream segment enjoyed expanded margins in the gas processing unit and increased earnings from the pipeline and power generation businesses. On the negative side, the performance of the chemicals division was hurt by softness in the domestic market (although improving business conditions have helped earnings to improve on a sequential basis).
In 2009, a major discovery was made in Kern County, California, estimated to contain between 150 million and 250 million gross barrels of oil equivalent (BOE) reserves. The company is currently producing over 30,000 gross BOE per day from this 80%-owned site, and a host of new wells is planned. (Approximately two-thirds of the find is believed to be natural gas, and the remainder oil.)
In Bahrain, Occidental is partnering with Mubadala Development Company to redevelop the Bahrain field. Operations began there in 2009, and oil production is expected to reach more than 100,000 barrels per day, around three times the present level, over the next seven years. What’s more, plans are under way to boost daily gas output by over 65%. (Occidental’s stake in that venture is 48%.)
Meanwhile, in Iraq, the company is part of a consortium that was awarded a license last year to develop the Zubair property, now producing roughly 200,000 barrels of oil per day. The goal there, to be achieved over the next six years, is to increase output to 1.2 million barrels daily. (Oxy’s stake is 23.4%)
``Free cash flow’’ through the first nine months of 2010 exceeded $3 billion. Cash and equivalents were roughly $2 billion, while long-term debt was quite manageable, at around 10% of total capital. Unused lines of credit from banks amounted to around $1.5 billion for that period (quite a feat, given that conditions in the lending industry remain less than optimal). These factors have enabled Occidental to utilize funds for a variety of purposes, including capital expenditures (which were a whopping $3.6 billion last year), increasing the dividend, and establishing business combinations.
Those desiring to take a position in this equity should be aware of the risks involved. One of them is that stock performance is tied heavily to fluctuations in energy prices. Indeed, these shares reached their highwater mark of $100 around mid-2008, when oil prices peaked, but plunged to a year low of $39.90 shortly afterward, in tandem with the sudden, sharp decline in oil prices (reflecting the drop in demand caused by the global economic downturn). Another factor to consider is that some of the company’s operations are located in lands that may be affected by political instability, particularly those in the Middle East and Latin America. It should also be mentioned that CEO Ray Irani will be stepping down in 2011, after 20 years in that position. But we think Occidental will be in capable hands, given that his successor, Stephen Chazen, has some 30 years experience in the oil and gas industry, and has served at the company since 1994, mainly in the role of Chief Financial Officer.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.