Occidental Petroleum (OXY) released a spate of executive placement announcements this month, appointing Melissa E. Schoeb as Vice President, Corporate Communications; Dale Petroskey as Vice President, Public Affairs; Christopher G. Stravros as Vice President and Treasurer; and WCW (Willie) Chang as Executive Vice President, Operations. Oxy also appointed John Ale as its new General Counsel.
Never afraid to change the status quo, Oxy will be relying on these executives and its previously appointed leaders to help it meet its goal of 5 to 8% annual production growth. Already the largest liquids producer in the lower 48 states, Oxy is aiming to achieve its growth through liquids based on its existing deep inventory. This indication that the company is not currently looking to grow through large capital outlays on acquisitions is in line with subtle hints from certain of its competitors that it is time for a pullback, including Kodiak Oil & Gas (KOG) and Anadarko Petroleum (APC).
Overseas Projects
Oxy is receiving encouragement from its partnership with the National Oil and Gas Authority of Bahrain and Mubadala of Abu Dhabi. The joint venture does business under the name Tatweer Petroleum in the Bahrain Field. As one of the oldest producing oil fields in the Middle East, the Bahrain Field is benefiting from the enhanced recovery methods in which Oxy is a specialist, with production up 25% since the start of the project. There are still an estimated 1 billion barrels of oil in the field, and the government of Bahrain recently signed an agreement with Oxy to begin exploration for deep gas potential at depths of up to 20,000 feet.
The Ecuadorian Attorney General recently indicated that Oxy's suit against the Ecuadorian government should be decided by an international arbitration panel this year, though the Ecuadorian government is disputing whether the arbitrators have jurisdiction. The $3.2 billion suit seeks damages over Ecuador's decision to cancel Oxy's operating contracts in the country. At the time the dispute originated, in 2006, Oxy was the largest foreign investor in Ecuador and lost 7% of its worldwide production capacity when Ecuador seized its assets.
Reassessing the MidContinental U.S.
Oxy is slowing down production in the Bakken as per-wellhead costs soared from $6.5 million two years ago to $8.5 million today. U.S. shale oil producers are flooding the Bakken, pushing up equipment and manpower costs. Though these costs are expected to decrease by up to 10% in the coming months, this would still represent a 15% increase in costs compared to 2010, which is not cost effective given Oxy's fairly limited participation here.
These costs are part of the reason that Chesapeake Energy Corp (CHK) lost its foothold on the Bakken and is now marketing over half a million acres from its Bakken holdings. Estimates are that Chesapeake could receive between $1 and $2 billion for the sale, which I think is high, given Chesapeake's admittedly poor results here and the undeveloped status of most of the acreage. However, lower offers could come in from established players looking to reduce costs.
Companies on midcontinent shales are taking other creative approaches to cut drilling costs. EOG Resources (EOG) says that it reduced per-well costs on the Eagle Ford Shale by about $500,000 per well by using sand from its own mines. Whiting Petroleum (WLL) is saving $1.5 million per well by reducing drill set up time to 15 days. Kodiak is using the zipper frac technique, in which closely situated wells are fracked in a sequence rather than simultaneously to maximize recovery (and recoup increasing well building costs).
Expanding in California
California is a focus area for Oxy, representing 23% of its 2011 allocated capital expenditures and an estimated 20% of allocated capital expenditures in 2012. This makes it the largest focus area for Oxy in 2012 except for the Middle East and North Africa at 21%, though Oxy's seven-country thrust in this area broadens the focus and makes these numbers less directly comparable.
With 1.7 million acres, Oxy is the largest acreage holder in California, where it is operating 31 drilling rigs and constructing gas processing plants to handle its output from the Elk Hills field, the seventh-most productive field in the lower 48, where it holds a 78% interest. Since 1911, the field produced 1.3 billion barrels of oil, and estimates place remaining reserves around 107 million barrels. The field also has significant natural gas reserves, estimated at 700 bcf.
What's impressive is Oxy is managing to drill here at a cost of just $3.5 million per well, which is an enormous cost savings compared to the Bakken. This may well be part of Oxy's motivation for scaling back its Bakken presence despite the popularity of that particular play. However, production from the Elk Hills field is steadily declining, prompting Oxy to look at other areas of the state for development.
One of Oxy's most recent suggested plays would be built in the middle of Carson, California on the abandoned Dominguez Field. Oxy's proposal includes drilling 200 wells in a 6.5 acre lot in an industrial park. Given immediate resident reaction to the plan it appears unlikely to receive support. With its many global prospects, I do not believe that Oxy needs to stir resentment in Carson to follow what is most likely a nearly tapped play, though its early estimates indicate Oxy believes the field has the potential to return 6,000 barrels of oil and 3 mcf of natural gas per day. Carson is, however, an extreme example of looking for new unconventional plays, and as evidenced by its most recent presentation Oxy has a wealth of opportunity on acreage held elsewhere in the state.
Outlook
Oxy is a good play for dividend growth. It is committed to dividend growth superior to that of its peers, driven by its impressive free cash flow, which was approximately $4.8 billion for the year ending 2011. Its dividend currently stands at $0.54 per share, or 2.6%, short of Royal Dutch Shell's (RDS.A) 5.2% but ahead of Exxon Mobil's (XOM) 2.4%, and far ahead of Anadarko Petroleum's 0.6%. Oxy's consistent history of raising its dividend (and being able to afford to do so) indicates the underlying strength of Oxy's assets, and though the stock is trading down around $62, Oxy is still a play for growth and value.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
