In my last few articles, I have discussed oil and gas companies that will benefit from oil price upside in 2017. Today, I will discuss some of the key growth drivers for Occidental Petroleum (OXY, Financial) that will trigger stock upside in 2017 and over the coming years. With some focus on the recent acquisition of Permian Basin assets and enhanced oil recovery interests, I will elaborate on the bullish factors.
Occidental Petroleum Corp. is involved in the acquisition, exploration and development of oil and gas properties, particularly in the United States. It operates in three segments :
- The Oil and Gas Exploration segment, which operates in the U.S., the Middle East and Latin America.
- The Midstream and Marketing segment gathers, processes, transports, stores, purchases and markets hydrocarbons and other commodities.
- The Chemicals segment, where Oxychem manufactures and markets chlor-alkali products and vinyls.
The company has given moderate returns of 9% year to date. I believe Occidental Petroleum has the potential to outperform in 2017.
Acquisition of interests in the Permian Basin
On Oct. 31, the company announced the acquisition of producing and non-producing leasehold acreage in the Permian Basin of West Texas. This included interests in several Permian Basin enhanced oil recovery (EOR) and CO2 properties and related infrastructure. The prominent feature of the acquisition is that it will further strengthen the company’s position in the Permian Basin.
In a situation where market conditions have tightened, it is essential for companies to focus on key and productive assets of the portfolio rather than investing in non-core assets. The acquisition would provide 7,000 barrels of oil equivalent per day (boepd) of net production from 68 horizontal wells.
Further, proximity to other Occidental Petroleum developmental areas like Barilla Draw would help the company cut down on costs and help develop infrastructure efficiencies. Additionally, the Permian EOR acquisition would help increase overall production by 4,000 boepd (80% oil). The EOR asset has a net proved developed producing reserves of around 25 million barrels of oil equivalent and total proved reserves of approximately 41 million BOE.
For fiscal 2016, the company expects to exceed the production growth guidance of 4% to 6%. The acquisition will further help Occidental to fulfill its key objective of increasing production by approximately 5% to 8% per year in the long term.
Visible cash flow
In addition to the company’s operations in the U.S. and cash inflow from its best asset classes, Occidental expects to improve its free cash flow by $850 to 900 million in 2017. The company has achieved record year-to-date production in Oman, Qatar and the United Arab Emirates and expects to increase its production to 65 to 70 million barrels of oil equvalent per day in Al Hosn. Hence, improved production and cost-reduction plans at Al Hosn are expected to increase free cash flow by more than $300 million.
Further, the midstream business is also expected to improve its free cash flow by more than $150 to $200 million due to better marketing economics, huge takeaway capacity and a new outlet for Permian oil production.
In the chemical segment, Occidental expects to increase its free cash flow by $400 million due to lower capital expenditure, the start-up of ethylene cracker production and higher product margins. Additionally, the U.S. infrastructure backlog is expected to provide significant upside and higher free cash flow. Hence, an increasing free cash flow will help the company focus on its objective of increasing shareholder wealth along with improving the company’s credit health.
Liquidity and capex plans
Occidental currently has cash and cash equivalents of $3.2 billion and the company reported operating cash flow of $2.5 billion for for the first nine months of the year. The company expects to increase its liquidity by another $2 billion through anticipated tax refunds in 2017, portfolio management, and optimization and monetization of non-strategic corporate assets. Therefore, Occidental is fully financed to fund its capital expenditure budget of $3.3 to $3.8 billion for 2017. With no current maturity of debt in next twelve months, the company will have sufficient liquidity to provide a consistent dividend.
Conclusion
Occidental Petroleum has a well-managed plan of increasing its oil and gas production growth by 5% to 8% per year over the long term. With the increase in production and improving oil prices, I believe the company is well positioned to meet its long-term obligations while creating value for shareholders through dividend growth.
Disclosure: No position in the stock discussed.
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