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Occidental Petroleum (NYSE:OXY) released its first quarter 2012 earnings report in late April, matching analyst expectations with earnings per share of $1.92. On the earnings conference call, CEO Stephen Chazen indicated that the company would continue to accelerate drilling in the liquids-rich Permian basin in West Texas, noting that his previous forecasts for this play over "the last five or ten years has been way too low". Thanks in part to this play, Oxy reported average revenue growth of 25.8% per quarter over the past year.

In 2011, Oxy declared dividends per share totaling $1.84, the fifth consecutive year over year increase, up from $0.94 per share in 2007. The dedication to dividend increases allowed Oxy to deliver total stockholder return of 769% since 2002. As of February 2012, Oxy's annualized dividend stood at $2.16 per share, equal to a compound annual dividend growth rate of 15.8% since 2002. As Oxy continues to post strong revenue growth, I think shareholders can expect to see dividends steadily increase for the future.

Actions to Watch

In a reversal of oil companies being taken to court by federal governments, Oxy is pursuing litigation against the federal government of Ecuador. Oxy is requesting damages totaling $3.2 billion over the Ecuadorian government's decision to cancel Oxy's operating contracts in that country in 2006.

Oxy is considering an $82 million purchase of the Naval Station Ingleside in Corpus Christi, Texas. The deal would give Oxy 815 acres of developed and undeveloped property, excluding the 101 acre campus on the property, though Oxy has the option to acquire that portion as well. The station would be an important acquisition for Oxy as it offers direct access to the Corpus Christi ship channel that travels to the Gulf of Mexico and is already improved with a 1,100 foot pier and berthing space. Additionally, the station is close to Oxy's existing Corpus Christi chemical plant.

Oxy's chemicals arm, Occidental Chemical or OxyChem, doubled in 2011 from 2010 to $861 million. Oxy attributed these strong results to increased export sales and higher margins resulting from increased demand. OxyChem is driving that demand in part through its stated strategy of remaining a low-cost producer that competes primarily on price.

Strong Presence in the Permian Basin

Credit Suisse is predicting 7% growth in Oxy's Permian production through 2015. This falls in the mid-range of Oxy's annual growth target of 5 to 8% per year. Oxy is the number one operator on the Permian, drawing 15% net of total Permian production from its 3 million acres. Oxy uses unconventional drilling methods to maximize its output from the Permian, with about 66% of its production here deriving from carbon dioxide flooding.

All told, Oxy's US operations account for 59% of its worldwide production. A further 37% of production derives from North Africa and the Middle East, with the remaining 4% in Latin American. 72% of Oxy's production is in oil and liquid natural gas (NYSEMKT:LNG), compared to 28% in dry gas. This helped Oxy post strong revenues in the first quarter in spite of lower US dry gas prices.

Competitor Apache (NYSE:APA) takes a more balanced approach to diversity than Oxy, long maintaining a 22% per region production cap, which Apache recently changed through acquisitions in the US. Plays in the US and Canada now contribute 38% of Apache's production. Apache tries to maintain a 50% / 50% balance between liquids and natural gas. This approach is leading to a decline in revenue for Apache considering the recent drop in US dry gas prices. Oxy, on the other hand, with less than 30% of its revenue dependent on dry gas, has a natural hedge against swings in dry gas prices, though swings in LNG and oil could affect it much more heavily.

Apache maintains a strong presence in the Permian basin, and now has 1.5 million net acres on the basin in play, second only behind Oxy. Devon Energy (NYSE:DVN) comes in at third place on the play, with 1 million net acres. Range Resources is arriving late to the play, recently revealing four explorations across 100,000 net acres just north of Laredo. Since Oxy established a strong, early presence on the Permian it is in a position that allows it to focus on its existing efforts, rather than re-direct efforts to hedge against its competitors. This will help Oxy maintain its dominance on this play and continue its strong year over year growth for the future.

Competitor Anadarko Petroleum (NYSE:APC) has a heavier presence in deepwater plays, but it still participates in many of the same unconventional plays as its peers. Anadarko plans to have 130 wells operating on the Permian by the end of 2012, and a total of 250 wells operating by the end of the same time period slightly further south, on the Eagleford shale.

Finally, Range Resources (NYSE:RRC) is another familiar name on US plays. Though historically it focused primarily on gas, 75% of Range Resource's 2012 budget is directed towards liquids and liquids exploration. However, Range Resources is much more focused on the Marcellus than on the Permian, with 86% of its 2012 capital budget earmarked for Marcellus and just 2% of its budget earmarked for the Permian. Currently, Range Resources does not represent serious competition to Oxy's production.

Outlook

Oxy continues to set company production records, reporting 455,000 domestic boe per day and 755,000 boe total per day, including international production in the first quarter of 2012. This domestic production gives Oxy the title of the number one liquids producer in the lower 48. As of the close of 2011, Oxy had total proved reserves of 276 mboe, small compared to competitor Apache, which has 2,464 mboe. However, Apache's latest daily production of 141,526 in the US boe is still far behind Oxy. Even Apache's worldwide daily production does not match that of Oxy, since Apache estimates 748,000 daily boe worldwide.

Devon's most recent estimates indicate that it has 2.9 bboe in proved reserves, making it much larger than either Oxy or Apache and slightly larger than Anadarko, which had 2.5 bboe at last estimate. Devon also maintains a similar diversification as Apache between liquids and gas, with a 55% liquids and 45% gas mix.

Comparing it to its competitors on value, Oxy is trading around $92, with a forward price to earnings of 9.7 and a price to book of 2.0. Apache is trading around $95, with a slightly better value on a forward price to earnings of 6.7 and a price to book of 1.3. Anadarko is trading around $74, with a forward price to earnings of 14.2 and a price to book of 2.0. Devon is trading around $70, with a forward price to earnings of 9.2 and a price to book of 1.3. Lastly, Range Resources is far above industry and competitor averages, trading around $64 with an incredible forward price to earnings of 38.9 and a price to book of 4.3.

Given its strong presence on the Permian, which is a high potential US resource, its openness to unconventional drilling methods, reliably growing dividends, and strong year over year growth, Oxy is a good value to shareholders, even with a higher price to earnings.

Source: Occidental: A Strong Buy Now On 7% Permian Growth Prospects