Occidental breaks away from the pack
By Sheila McNulty in Houston
Published: January 4 2010 22:50 | Last updated: January 5 2010 16:04
 |
| California dreaming: oil finds in the state could be ‘game changing’ for Occidental, say analysts |
Stephen Chazen, president of Occidental Petroleum, likes to tell the story of a university professor who in 1968 urged him against entering the oil industry, insisting he would not have a full career before supplies ran out.
As if to illustrate how wrong that professor was, Occidental in July announced the biggest oil find in California in 35 years, a field some analysts estimate could hold 1bn-2bn barrels and mark the start of a new era of exploration in the US.
The California-based oil company would only say it had found 150m-250m gross barrels of oil equivalent reserves in a part of Kern County it would not specify, using techniques it declined to reveal.
Occidental, the fourth biggest US oil company, has made enhanced oil recovery its focus amid estimates that two-thirds of the world’s oil remains in the ground. Much of it was once considered inaccessible or uneconomical to extract, and it has long been routine for the majors to stop pumping once the easy oil was out.
“We work the assets harder than the typical major,” Mr Chazen says. “Our objective is to acquire oil fields that require work to get more oil out of the ground. It is a philosophically different approach.’’
Doing so effectively, with everything from steam to carbon dioxide forced down into wells, has elevated Occidental to fourth-largest oil and gas company in the US, based on market capitalisation.
More than a quarter of Occidental’s oil and gas production comes from the Middle East-North Africa region – where the company has been an active investor for more than four decades – leaving it with the sixth-biggest position among global oil and gas groups. It is present in Libya, Oman, Qatar, Bahrain and Yemen.
The group also has a presence in Argentina, Bolivia and Columbia, but it is the California field generating the excitement.
Doug Leggate, analyst at Bank of America Merrill Lynch, says Occidental is poised for a period of growth, lifting oil and gas production almost 45 per cent within five years.
“Longer term, opportunities have emerged that extend the growth outlook further, anchored by the recent discovery in California that we view as a potential game changer for the stock,’’ Mr Leggate says.
Fortune Magazine’s 2009 survey of the “most admired companies’’, ranked Occidental top in mining and crude oil production, and in the world’s top 10 in the use of corporate assets, management quality, financial soundness, and long-term investment. It is hard to compare Occidental to peers in the industry because it is several times larger than the typical independent but significantly smaller than a major.
Like a major, it has little exploration risk because it buys known fields that other companies did not have the technology or expertise to tap once the easy oil has been recovered.
It also pays a rising dividend and boasts an “A” credit rating by all major ratings services.
Occidental can also boast very little debt (its debt to capital ratio is 9 per cent, among the lowest in the industry).
Like an independent, it has no refining or marketing business and a focused international scope, representing almost 40 per cent of Occidental’s production. It moves quickly to acquire assets. “We write cheques quickly,” Mr Chazen says.
Most are for small fields or plots of land from individuals; so small that they do not require disclosure. This allows Occidental to average between 40-45 acquisitions a year, quietly bulking up on assets with good production potential given improving technology. The company is forecasting 5-8 per cent annual production growth to 2012.
“We believe that Occidental’s momentum, strong balance sheet and high oil leverage will lead it to outperform peers over the next 12 months,’’ says Thomas Driscoll, energy analyst at Barclays Capital.
Ben Dell, senior analyst at Bernstein Research, said in a recent report on exploration and production companies that Occidental breaks away from the pack with consistently lower than average search and development costs.
“Its peer group-leading returns and low debt have made it a darling of investors, who see the company as one of the only safe places in the exploration and production space,’’ he says.
The company carefully chooses where to invest: California, Texas, New Mexico and Colorado in the US, which provided 60 per cent of Occidental’s production in 2008.
The company is more focused on oil – 75 per cent oil to 25 per cent natural gas – in spite of the rush to develop natural gas projects.
It also has no interest in renewables, which Mr Chazen says have nothing to do with its expertise in oil and gas production.
“Shareholders can take the dividends we pay and buy Chinese solar stocks,’’ Mr Chazen says. “There’s no real good substitute for oil. Forty years from now, there is still going to be a vibrant oil industry.’’
No comments:
Post a Comment