Occidental Petroleum (OXY, Financial) is implementing design enhancements such as two-string casing design, optimizing bottom hole assemblies and bits and exploiting drilling dynamics to improve rates of penetration. Also, the company is bargaining with its commercial rates that should lead to further reduction of its operational costs for the year.
After having shed its capital expenditure by 33% at the start of the year, the company remains pretty strong attaining positive cash flow at the end of the year. It now concentrates on increasing production and cash flow, while decreasing its operating costs at Permian Basin. It has started drilling for profit and not just for volume growth. This strategy, coupled with its efficient capital spending, should improve its bottom-line performance in the remaining quarters of the year.
Improving its portfolio
For instance, during the first quarter the company improved its Permian Basin production by a robust 46% year-on-year basis through these plans. In fact, the production at this asset grew 22% sequentially. Also, it has significantly reduced completion and drilling costs, lowered its development costs and increased the inventory of well locations at the Permian Resources. It has saved approximately $400 million through its captured costs reduction program since year to date.
One should remember that oil at Permian Basin remains profitable and quite economical even at the current oil prices. Further, it has plenty of inventories of profitable oils at Permian Basin. It is developing these wells under the prevailing price environment with a high volume and low capital intensive. The company has portfolio of large conventional reservoir at Permian Resources. It plans to operate on an average about 13 drilling rigs to drill 150 wells in Permian Resources for the remaining quarters of the year. This is relatively a higher activity level than previously planned with better efficiency gains.
Moreover, Occidental has raised its production guidance for its Permian resources. It now expects its oil production to grow in the range of 105,000 to 108,000 barrels of oil equivalent per day, an increase of 7% at the mid-range from 100,000 barrels of oil equivalent per day.
Start-up of Al Hosn gas project to drive its growth…
Occidental Petroleum is pleased with the start of Al Hosn gas project in late April 2015. It plans to ramp up production at this plant in the current quarter to the average ratio of 7:13. The start-up of this project will add approximately 9,000 barrels of oil equivalent per day during the running quarter. This plant is expected to produce approximately 35,000 barrels of oil equivalents per day as it runs into the full capacity for the second half.
On the whole, strong production in the first quarter followed by the start-up of Al Hosn project allowed the company to pump up its production guidance by 60,000 and 80,000 BOE per day, up 20,000 BOE per day than its earlier guidance.
Furthermore, the company continues to make progress on the operational costs.
This significant reduction in the costs should improve its bottom line performance and release funds for the development of its flagship assets such as Permian Resources and Al Hosn gas projects in the future.
Conclusion
Occidental Petroleum is making significant progress to pump up its revenue and improve its bottom line performance. It has great assets at its disposal that can provide returns even at the lower oil and gas price environment. Moreover, further improvement in the oil price will lead to better returns for the company. Its balance sheet carries total cash of $3.79 billion with total debt of $6.8 billion. It has strong operating cash flow of $11.07 billion for the year.
