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Occidental Petroleum Is Poised to Grow

May 22, 2014 | About:
abirk

abirk

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Occidental Petroleum (OXY) is an oil-related stock. Occidental Petroleum Corporation (Occidental) conducts its operations through various subsidiaries and affiliates. The company operates in three segments: oil and gas; chemical; and midstream, marketing and other. The oil and gas segment explores for, develops and produces oil and condensate, natural gas liquids (NGLs) and natural gas. The chemical segment (OxyChem) mainly manufactures and markets basic chemicals and vinyls. The midstream, marketing and other segment (midstream and marketing) gathers, processes, transports, stores, purchases and markets oil, condensate, NGLs, natural gas, carbon dioxide (CO2) and power.

Story So Far

OXY is a good dividend-paying stock. Since the beginning of 2013 Occidental is up 23.04% excluding the reinvestment of dividends. OXY has a massive potential in the Permian Basin. So far Occidental has drilled 18 horizontal wells in the Midland Basin portion of the play, with a dozen of those wells being drilled this year. These wells have an average initial production rate of 750 barrels of oil per day, or BOE/d. That was achieved with an average lateral length of 6,000 feet, but piloting wells with lateral lengths of up to 10,000 feet should help increase those production rates, as well as Occidental's economic returns.

Occidental Petroleum is also testing its acreage in the Delaware Basin to the west and its acreage in New Mexico. The company is gradually shifting toward horizontal drilling in the Permian Basin. Because of this it sees this segment producing 13% to16% production growth in 2014, with the potential to deliver 20% annual production growth in the years ahead. This makes it clear the Permian Basin is becoming the cornerstone asset of Occidental's domestic business.

The company has acquired 176,000 net acres in South Texas, along with 335,000 net acres in the Bakken region, but at this point none of those assets are driving meaningful production growth for Occidental.

The goard also has authorized the repurchase of an additional 30 million shares of the company's common stock. The share repurchase authorization remaining at the end of 2013 was 7 million shares. The program does not require purchases to be made within a particular timeframe. Share repurchases will continue to be funded from available cash from operations, excess cash on hand and proceeds from asset sales as part of the previously announced strategic review. Occidental expects to announce additional increases to its share repurchase authorization as the strategic review progresses.

Cost Curtailment

The company is set to reduce costs since 2012 to improve operational efficiencies in all categories, including capital. The plan was to reduce operating expenses and drilling costs to 2011 levels. The company plans to achieve a minimum of $300 million of savings in operating costs. Improving efficiencies and outright cutting of less efficient segments helped OXY to lower its capex $10.2 billion to an expected $9.6 billion in 2013 without affecting production growth.

Occidental Petroleum managed to reduce its overall costs by a margin of roughly 19% on a year-over-year basis. Its year-over-year cost reduction helped soften the blow that was felt by a decline in both oil and gas prices.

Increased Dividends

The board raised the company's dividend by $0.08 to $0.72 per quarter, or an annual rate of $2.88 per share, from the previous annual rate of $2.56 per share. Occidental has now increased its dividend every year for 12 consecutive years, and a total of 13 times during that period. The total increase in the annual dividend rate from 2002 is 476 percent. The company has paid quarterly dividends continuously since 1975.

The stock is suitable for dividend growth investors. In addition to a realistic expectation of an increasing flow of dividend payments, the investor may look for capital appreciation, fueled by buybacks and operations focused on profitable opportunities after non-core assets have been divested.

Impact of Restructuring

These various initiatives will generate substantial proceeds that can be used to pay down debt and buy back shares. For instance, the sale of a 40% share in Oxy's MENA assets, which are thought to be worth $22 billion, could bring in $8 billion to $10 billion for debt repayment and share buybacks, according to some analysts.

The sale of its MENA assets could also greatly boost the company's market value. According to Bank of America analyst Doug Leggate, Oxy's market value could be some $45 billion higher than its current value of $75 billion in the event of a split that separates its MENA assets.

Last but not least, asset sales will greatly streamline Occidental's portfolio and allow it to focus on its most profitable asset -- West Texas' Permian Basin, where it is one of the largest oil producers, accounting for nearly a fifth of basin-wide production.

Final Thoughts

By restructuring its portfolio, Oxy can now focus on its most profitable and most promising opportunities in the Permian basin, where it has decades of experience and advantages of scale. Meanwhile, asset sales will bring it plenty of cash that can be used to pay down debt and buy back shares.

Occidental Petroleum's strategic initiatives are a good first step in the company's plan to create value for its investors. Oxy, a relatively mature stock with a reasonable valuation, can achieve meaningful growth due to a renewed focus in the Permian Basin, as well as efficiency implementations. Since March 6, 2009, OXY has increased its quarterly dividend a total of five times by an average of $0.064 each time. From an income perspective, the company's forward yield of 2.83% coupled with its continued annual increases could equate into a very viable income option for long-term investors in search of a moderate dividend play.


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