Occidental Petroleum - Divestment And Investment Play

Sep. 1.14 | About: Occidental Petroleum (OXY)

Summary

Occidental continues to post higher production growth in the Permian Basin and is on track to deliver a long-term production target of more than 120,000 BOE/D.

Some analysts believe that the company is too dependent on the Permian Basin and that makes it a risky investment compared to other diversified exploration and production companies.

The company is progressing with its strategy of divesting old assets to introduce new assets and this will allow the company to improve cash flows.

As part of its divestment strategy, Occidental recently announced its intention to partially sell its stake in the Shah natural gas field in the UAE.

The Permian Basin is one of the most productive oil fields in the U.S. Moreover, the U.S. Energy Information Administration ((NYSEMKT:EIA)) believes that the Permian Basin is one of the three onshore oil fields that are driving the U.S oil boom that have been producing at least 1 million barrels of oil per day. Given the current and expected production growth, the Permian Basin is considered one of the most lucrative fields in North America. Owing to the expected production growth of the field, Occidental Petroleum (NYSE:OXY) has been putting efforts into strengthening its foothold in the Permian Basin. The recent quarter's report presents justification for this observation. During the second quarter of 2014, the company was able to generate more than half of its oil production from the Permian Basin. The Permian Resources produces an average of 72,000 barrels of oil equivalent per day reflecting an increase of 7 percent from the figure reported in the same quarter last year. However, the oil production field grew by 21% to 40,000 barrels of oil per day.

Going forward, the company has increased the Permian Resources capital to $1.9 billion reflecting an increase of $200 million. With the increased capital spending, the company expects the 2014 production growth to be 15%-18% higher than the previous year. In addition to the increased production the company is determined to maximize the realized value of produced barrels. To do so the company has initiated midstream projects that are directed at optimizing existing assets while targeting maximized value by building key assets across the value chain.

Though the company enjoys a lucrative position in the Permian Basin and is well positioned to post higher production growth there are analysts who tend to think otherwise. At this point I would like to refer to the recently published article at fool.com that shares a similar view. The contributor believes that the company is becoming too dependent on one basin and this will create an opportunity for loss. The author stated, "If there's any sort of disruption there (Permian Basin), Occidental would be really exposed". To some extent, I agree with author's statement that over-concentration on any production region could certainly create risks particularly when compared with other E&P companies who are more diversified. For instance, EOG Resources (NYSE:EOG) continues to benefit from a well-diversified portfolio of assets particularly in the Eagle Ford and Bakken field. Similarly, Anadarko Petroleum (NYSE:APC) also enjoys lucrative positions in both onshore and offshore fields.

However, that does not mean that Occidental has limited production growth potential. As a matter of fact, the company has been pursuing a strategy of systematic asset divestment which was announced in October 2013. As a part of the strategy, the company recently announced its plan to partially divest its stake at the Shah natural gas field in the U.A.E. Bloomberg reported that the company is planning to sell approximately 30 percent of the $10 billion Shah Natural Project which will lead to a cash inflow of approximately $3 billion.

The possible sale of the project marks another step in the company's long-term strategy of restructuring its assets through spin offs and divestments. In addition, Occidental is also planning to divest its stake in Dolphin Energy which is jointly owned by Occidental, Mubadala, and Total. Moreover, Occidental is on track to spinning off its California oil and natural gas assets into a separately traded company. The company is putting efforts into closing the spin off deal by the end of 2014. However, it could be delayed and close at the start of 2015. In addition, Occidental recently closed the Bolton acquisition. The amount utilized for the transaction was generated as a result of the divestment of the Hugoton assets in Colorado and Oklahoma.

With these initiatives, the company will be able to focus more on high potential assets. Going forward, the company will be able to utilize the proceeds of these divestments to introduce new assets to its portfolio that are expected to generate higher cash flows.

Final Words

The company's increasing concentration on the Permian Basin certainly has its pros and cons. However, as the company has increased its capital spending budget by $200 million, I believe that Occidental is well positioned to deliver production growth of 15%-18%. Moreover, the recently announced divestment of the Shah natural gas project is another step forward in the company's long term strategy of restructuring its portfolio.

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.