Occidental Petroleum - Permian Basin Can Reap Returns

Jul.10.14 | About: Occidental Petroleum (OXY)

Summary

With the spinning-off of the California business, Occidental Petroleum can focus more on its lucrative assets in the Permian Basin.

To capitalize on the growth potential of the Permian Basin, the company has allocated 22% of its 2014 capital budget towards improving productivity in the region.

With the allocated capital spending, the Permian Basin is set to deliver production growth of 13-16%.

The company has achieved a reserve replacement ratio of 169%, indicating long-term production growth.

Occidental Petroleum (NYSE:OXY) will soon split off its California business. The company's Golden State assets will be spun off by the end of the year into a separately operated company called California Resources Company. In addition, the company is believed to be considering selling off its Middle Eastern assets as well. Upon successful completion, the operations of the new Occidental will be focused on the Permian Basin. Let us discuss the future outlook of Occidental Petroleum with special reference to its unrivaled position of 2 million acres in the Permian Basin.

Permian Basin

After adding 200k net acres to its portfolio, Occidental Petroleum has nearly 1.9 million net acres in the Permian Basin. Moreover, the company has identified nearly 4500 drilling locations that represent approximately 1.2 billion net barrels of resource potential. Given the lucrative position and resource potential of the Permian Basin, Occidental recognizes the basin as the corner stone of its growth operation.

Therefore, to position itself better and to capitalize on the resource potential of the Permian Basin, the company plans to invest approximately $2.2 billion of capex during 2014.This reflects an increase of $498 million from the capital budget of 2013.

Source: Investor Presentation

The company operates two business units in the basin: Permian EOR and Permian Resources. With the increased activity in the Permian Basin, rapid growth is expected from the resources business. The company is expected to operate 26 high potential rigs and drill approximately 340 wells during 2Q 2014 which will be translated into production growth of 13%-16% during the current fiscal year. However, in the long term, the segment is expected to increase production by 20 percent. Similarly, the EOR business is well positioned to generate significant cash.

Collectively, the strategically allocated capex will be translated in to approximately 6% growth in oil production. In addition to the increased production, Occidental is poised to deliver by reducing costs. During 2013, the company achieved an operating cost of $16.13 per BOE reflecting a reduction of almost 17% from 2012. Going forward, I believe that with continuous improvement efforts and higher capital efficiency the company will be able to lower its expenses even further.

Higher Reserves to Ensure Long-Term Production Growth

The company has active exploration initiatives to strengthen its reserve base. During 2013, the company reported a strong reserve replacement ratio of 169%. Currently, it holds reserves of approximately 3483 million barrels of oil equivalent. It is also worth mentioning that more than 90 percent of the reserves were added through the organic development program. The higher replacement ratio means higher production for the years to come.

Occidental: A Long Term Buy

Occidental Petroleum is currently streamlining its operations. The company has sold its Hugoton Field assets and a part of its investment in the general partner of Plains All American Pipeline. Moreover, the company also plans to spin off its Californian oil and natural gas assets.

Moreover, Al Hosn Gas Project is also expected to start production by the end of 4Q 2014. Upon successful completion of the project, it will be able to process 1 billion cubic feet of gas per day. Another project that ensures long term growth prospects is the Bridge Tex pipeline. The pipeline is 450 mile long and will have the capacity to transport approximately 300000 barrels per day. Additionally, it also includes the construction of oil storage with a capacity of 2.6 million barrels. The project is expected to begin operations by the end of 3Q 2014.These projects will not only be revenue assertive but will also strengthen Occidental Petroleum's position in the industry.

Concluding Remarks

Occidental Petroleum continues to enjoy its acreage in the Permian Basin. In order to further capitalize on the Permian Basin the company plans to spend 22% (10.2 billion) of the total capital spending budget. The company has made significant progress in the Permian Basin and is on track to deliver higher production.

In addition to higher production, the company is also putting efforts into adding reserves through the organic development program to its portfolio. It posted a record reserve replacement ratio of 169 percent during 2013. With the higher replacement ratio and the successful execution of the organic development program the company is well positioned to deliver higher production in the years to come.

Currently, the company has been trading at a P/E of 13.81 and dividend yield of 2.81%. Considering the long term benefits of the above-mentioned projects, I do not believe that Occidental Petroleum's upside potential has been exhausted.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.