Investment Summary
- Permian basin has a strong outlook which would have a positive impact on Occidental growth
- The company has robust capital expenditure plans in the region with an expected 13% to 16% production growth in fiscal 2014
- Recent Spin-offs suggests a focus on concentrated business with higher investment returns
- Consistent share-repurchase plans will create shareholder value
- Valuation looks attractive when compared with peers
Company Overview
Occidental Petroleum (OXY, Financial) is an oil and gas exploration and production company. The company has its operations in three core areas, primarily in the United States with operations also in Middle East region and Latin America.
It also trades its assets and trades oil, NGLs, gas and commodities. The midstream and marketing segment of the company gathers, processes, transports and markets oil, natural gas liquids, carbon dioxide etc. The third OxyChem segment is the manufacturer of polyvinyl chloride resins, chlorine and caustic soda.
Permian Basin Outlook
Permian Basin is the primary growth driver of the company. With a supportive growth dynamics of the region, Occidental has huge opportunity to capitalize on the increasing oil production in the region.
Production in the Permian region has been increasing since 2007 and is expected to have similar growth going forward. Moreover, drilling permits in the region has increased nearly threefold since 2009 to 2013 with the number of rigs operating in the region also increased by similar amount.
In addition to this, the number of horizontal wells has also been increasing. In 2011, there were 96% of vertical wells operating in the Spraberry and Wolfcamp region but the number has decreased to 58% in May 2014.
This is because horizontal wells are able to produce greater hydrocarbons thus offsetting the increased initial cost. This increased activity in the region has had a positive impact on the oil drilling companies in the region.
The companies will continue to benefit with increasing drilling and production in the region as the region is expected to have a resource potential of 75 billion barrels of oil equivalent.
Occidental In Permian Region
Permian basin is the most important asset of the company. The company operates in two units: Permian EOR, the carbon dioxide and rest of the company’s business and Permian Resources.
A total of 9500 gross wells are operating in the Permian Resources units with 4,400 net wells. To maximise the production in one of the richest resources, the company plans to spend $1.6 billion for the development and production in Permian resources.
Also, Occidental has been gradually shifting its production to horizontal drilling and as discussed the shift will generate greater hydrocarbon thus making the initial cost worth the returns. This shift is expected to increase the production by 13% to 16% in 2014 and 20% going forward with estimated growth in production to more than 120mboe per day.
Source: Company Presentation
Strategic Long Term Plans
Occidental petroleum had interest in more than 1.4 million net acres in the Hugoton properties of natural gas fields of the United States. In February, the company has announced the sale of the asset for a pre-tax value of $1.4 billion. In addition to the sale of Hugoton assets the company has also announced the separation of its California business.
In terms of new projects to boost growth, two of the company’s big projects Al Hosn gas project and Bridge Tex pipeline are expected to start their production in 1Q14 and 3Q14 respectively. They are expected to have a considerable contribution to the company’s earnings and cash flow with an approximately 23% increase in return on capital employed from 2013 to 2015.
Source: Company Presentation
These strategic steps indicate that the company has been streamlining its operations and is focussed on operations where the company has depth and scale. This would help the company to achieve its long term strategy of growth and shareholder value creation.
Valuations
The company is currently trading at a low PE of 13.6. However, based on a better valuation technique of EV/EBITDA the company still looks attractive when compared with peers. Occidental is trading at an EV/EBITDA of 5.9 with EOG Resources (EOG, Financial) trading at 8.4 and Pioneer Natural Resources (PXD, Financial) trading at 17.7. Thus, considering the company’s current undervaluation and extensive growth plans in Permian region, robust shareholder return is likely.
Conclusion
Shares repurchase plans of the company also looks impressive. Occidental currently has 785 million shares outstanding and expects to bring down the number to 684-694 million. This is effective as follows: Separation of California from the main business would reduce the share count by 40-50 million, coupled with 25 million shares monetization through PAGP and 26.5 million of share repurchase through the current repurchase programme. Thus, a well planned share reduction would help the company to create value for the shareholders. Considering these factors, Occidental is likely to be a value creator for shareholders in the long-term.
