U.S. oil production has increased significantly in recent years. A major driver of this growing oil production is the Enhanced Oil Recovery, or EOR, technique. EOR is a technique used to increase the amount of oil that can be extracted from an oil field. Various methods used are water flooding, carbon dioxide injection, and steam flooding, among others. Oil extraction using EOR is proving to be a game changer for exploration and production players in the U.S.
A smart way for investors to select a good company from the many available options is to look for those companies that have expertise in implementing EOR techniques. We are focusing on Occidental Petroleum (OXY), which has expertise in the use of EOR techniques. The company is also a leading player in terms of both acreage and production in the Permian basin, which is dominating oil production in the U.S. Occidental derives the bulk of its revenue in this region from its EOR techniques.
Even carbon dioxide can be useful
Carbon dioxide can be used to drill oil from an old well that has stopped coughing up oil. The U.S. domestic proven oil reserves are estimated at 21.9 billion barrels. According to an estimate by the U.S. Department of Energy, there could be 89 billion barrels of additional oil trapped in onshore reservoirs. This additional oil can be recovered using EOR techniques. Oil recovery is projected to increase from 30% to 60% using these techniques. Moreover, carbon dioxide EOR is one method that is gaining popularity.
Occidental thrives on its expertise in extracting oil out of declining oil fields by using carbon dioxide injection. In fact, carbon dioxide EOR is its most profitable business, and approximately 60% of its oil production in the Permian basin is from implementing these projects. Occidental is an industry leader in applying this technology, and it is one of the largest injectors of carbon dioxide for EOR in the U.S. Additionally, the company is a leading player in the Permian basin, where it is the largest operator with a net acreage of 2.5 million. The entire Permian basin accounts for 15% of the total U.S. oil production, and Occidental contributes 16% of the overall Permian oil production.
The Permian basin produced close to 900,000 barrels of oil equivalent, or BOE, per day in the first six months of this year. Occidental produced more than 20 million BOE in this period, riding on its EOR technique. Permian is expected to reach 1.4 million BOE per day by the end of 2013 and 2 million BOE per day in the next five years. It is expected that the average domestic oil production for Occidental in the second half of 2013 will be 6000 to 8000 BOE per day, which is about 3% more than the production in the first half. The Permian basin will be a significant contributor to this growth. This indicates the growth potential that exists for Occidental going forward.
Another dominant carbon dioxide injector is Denbury Resources (DNR). Apart from using naturally occurring carbon dioxide, Denbury is also planning to use carbon dioxide from companies that produce the gas. This will allow Denbury to use carbon dioxide for extracting additional oil, and it will help companies put gas that would otherwise be thrown out as industrial waste to good use. Denbury has identified a series of oil fields this year in the La Barge field at Wyoming, that can use the 100 trillion cubic feet of carbon dioxide. This amount of carbon dioxide is enough to revitalize the oil fields for a number of years.
Benefiting from water flooding
Moving west of the Permian basin, Occidental is using the water flood EOR technique in California. Water flood EOR is a secondary technique used to extract oil from oil fields that stop coughing up oil with conventional techniques. The company is expected to benefit significantly from oil extraction through water floods, which is its core competency. Occidental has several water flood projects this year, which are at various different stages from screening to implementation. In California, Occidental has allocated approximately $625 million capital for water flood projects this year. This is more than 40% of its 2013 capital budget of $1.5 billion in that region. Most of this capital will be used in the optimization of Occidental's most developed project - the Wilmington Field.
The company also plans to drill 35 horizontal wells in this region this year. These wells are highly beneficial, as their initial production rate is three times more than comparable vertical wells, at only 20% higher cost. There are several other water flood projects at various locations where Occidental intends to spend its California budget this year. These projects are expected to generate returns exceeding 20% on average.
Another company that expects to benefit from using water floods is Linn Energy (LINE). While Linn still remains embroiled in the intricacies of the Berry Petroleum merger (details can be seen in our previous article), it doesn't mean that it has turned a blind eye to other possibilities. Last month, Linn signed a purchase agreement to acquire oil and gas assets in the Central Basin platform of the Permian basin for $525 million. This deal will close this quarter. The East Goldsmith Field, which will be acquired as a result of this deal, has proven reserves of 30 million BOE and a production capacity of 4800 BOE per day. Additionally, this field has the Clearfork formation, which can be used to drill oil using water floods. This formation has a further potential of 24 million BOE using water floods in the future. Beyond the water floods, the acquired assets can also be used as candidates for oil recovery using carbon dioxide injection.
When conventional techniques for oil drilling stop working at old oil wells, companies have to resort to EOR techniques to drill any remaining oil from these wells. Occidental, being a leader in the Permian basin as well as a pioneer in employing the EOR technology, is uniquely positioned to benefit from additional oil exploration. Occidental's growth prospects look even more promising considering that the Permian basin is projected to be the top oil producer in the U.S. this year. With a 16% CAGR in dividends over the last 11 years, and a dividend yield of 2.7% at the current price, this stock looks even more appealing. Therefore, we are bullish on Occidental.
Additional disclosure: Fusion Research is a team of equity analysts. This article was written by Madhu Dube, one of our research analysts. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.