The second quarter of this year was the seventh consecutive quarter of record domestic production for Occidental Petroleum (OXY), which raised its total domestic production to 462,000 boe per day, 9% higher than the same quarter of 2011. Lower price realizations prevented Oxy from posting record sales numbers, as its revenues declined nearly 25% quarter over quarter. This was in no small part due to continuing declines in natural gas liquids, where Oxy's worldwide price realizations dropped from $57.67 per barrel in the second quarter of 2011 to $42.06 per barrel in the second quarter of 2012, nearly a 28% decline. Dry natural gas prices hit Oxy even worse given a 50% decline from $4.27 per mcf to $2.09 per mcf year over year, with 26% of that drop occurring between the first and second quarters of 2012.
Despite lower costs for raw materials, Oxy's chemicals arm is also struggling; it posted a 25% decline in earnings year over year. Oxy blamed lower export volumes and prices due to weakened economic conditions that lessened demand in Europe and Asia for the drop. This leaves the Middle East and North Africa as the strong growth areas for Oxy, where it increased daily production by 13,000 boe in the second quarter largely from operations in Dolphin, Bahrain, and Qatar. Its strong results in this area are supporting its expenditures on the Al Hosn Shah gas project, which accounted for 11% of Oxy s total capital expenditures in the first six months of this year. As of the end of the second quarter, the project was about 50% complete.
Hurt Worse Than Peers by Gas Price Declines
Like EOG Resources (EOG), Oxy is reacting to the nearly across the board drop in U.S. gas prices by shifting its resources, though it is also reducing its rig count for the near term, also indicating it is not afraid to release underperforming rigs and crews in light of the competitive market. As part of this shift, according to Oxy's President and CEO Stephen Chazen, "with our production growth wedged firmly in place at the back half of the year, we will focus our efforts on improving our profitability. This includes an increased oil program rather than drilling gas NGL wells."
For the time being, Oxy is retaining its place as the largest domestic onshore liquids producer in the lower 48, but as its competitors ramp up their own production it is open to question whether Oxy will retain its place six months from now. As indicated by Chazen, Oxy plans to drill the same number of wells in the second half of this year as it did in the first half of this year with fewer rigs, many of which will be released from the Williston Basin despite its recent acquisitions there (acquisitions of which Chazen recently appeared to be largely unaware).
Given the Williston's tendency to oil, I think the reasons for this decision are more weighted in the Williston's higher average well cost; still, for a company hoping to transition its liquids production, the decision is questionable. Competitors like EOG are focusing on the Williston as part of such a shift, as is Oxy's peer Apache (APA). However, Oxy can make up the difference in other oil prone plays, like the Mississippian Lime, where peer Devon Energy (DVN) is leaving a huge footprint.
A much anticipated ruling in Oxy's case against the government of Ecuador is expected this week. Oxy filed suit seeking $3.4 billion in damages from Ecuador following the government's decision to cancel its contract to operate in that country after Oxy transferred its rights in its Ecuadorean projects to Encana (ECA). Ecuador claims the deal was made without the approval of the Energy Ministry. Regardless of the decision, an appeal can still be made by either party to higher court, so a true resolution is unlikely for a further 18 months. However, given recent rulings on energy company disputes in South American countries and Ecuador's continued pursuit of Chevron (CVX) for billions in damages, I do not think Oxy will ultimately prevail.
Oxy is currently trading around $87 per share, giving it a price to book of 1.8 and a forward price to earnings of 10.6. Apache is also trading at a discount, at $86 per share with a price to book of 1.1 and a forward price to earnings of 8.0. Although Apache's discount is steeper, it is less deserved in light of its well outlined growth plan, which addresses many of the same concerns Oxy is facing but not outlining for its investors. In that light, even Chevron looks cheaper than Oxy, trading around $117 per share with a price to book of 1.8 and a forward price to earnings of 8.6. For further comparison, Encana is trading around $23 per share with a price to book of 2.5 and a forward price to earnings of 41.2, while Devon is trading around $61 per share with a price to book of 1.1 and a forward price to earnings of 11.6.
I think a leading contributor to Oxy's current discount is the fact that many investors are concerned about the murkiness of Oxy's plans; as Chazen admitted in the firm's second quarter conference call, "The shift is we are not quite through shifting yet," which failed to engender market confidence. I am sure that Oxy will have a more concrete plan in the near future, but its current operations on projects set in motion before the need to shift became apparent is leading to a dearth of new projects to drive growth. Its dividend, however, at a projected yield of 2.51%, does help blunt its more staid growth track. I believe that Oxy's near term future will be made clearer when it releases third quarter results on Oct. 25.