Occidental Petroleum: Why You Should Be Positive

Shares of Occidental Petroleum (OXY) have declined approximately 18% in 2015. This drop in its share price has come despite a strong earnings performance for the last two quarters as the company has suffered due to the negativity in the oil market. However, it looks like analysts are positive about Occidental’s performance.

For instance, Deutsche Bank recently upgraded Occidental to buy from hold. Deutsche Bank is of the view that the combination of its asset qualities as well as a strong balance sheet will enable Occidental to deliver a healthy return in a moderate oil price environment.

Operating cash flows to cover capital spending and dividend outlays

Occidental Petroleum is doing the right thing to maintain positive cash flow during a time when oil prices are down comprehensively.
It plans to achieve cash flow neutrality with its cash flow from operation being redeployed for both its capital as well as dividend spending.

All in all, Occidental has learnt to deliver more with less. It has reduced its capital expenditure by more than 33% in fiscal 2015. In fact, its second-quarter capital spending came in at $1.5 billion, down 14% from the prior-year period. Its capital spending is being focused on development activities in core areas of the Permian Basin and parts of the Middle East, with an emphasis on growing its production volumes and more importantly its operating cash flow.

For example, despite reduced capital spending, its production increased to 658,000 BOE per day from last year’s 580,000 BOE per day. This represents an increase of 13% in production. In fact, its oil production at Permian Basin increased 78% year-over-year. With this enhanced production, Occidental delivered an incremental $175 million of operating cash flow as compared to the last six months of 2014.

Cost reduction efforts will enhance its bottom line performance

Occidental has realized significant cost reductions year-to-date. For instance, in the second quarter, its oil and gas operating costs came in at $12.10 per barrel of oil equivalent. This represents about 9% decline as compared to the first quarter of 2015. In fact, Occidental has saved more than $450 million in costs in the first half of fiscal year 2015. This is a result of lower surface, maintenance, and workover costs.

Looking ahead, Occidental is expected to benefit from its petrophysical and geochemical models that will improve well performance. Also, it is looking for ways to reduce service and materials cost further. Moreover, Occidental is enhancing its base management and maintenance operations to maximize production at minimal incremental costs. These activities will help it generate higher-than-expected production and lower its finding and development costs.

In addition, the company keeps adopting innovative oilfield technologies such as an advance mud system. This is enabling Occidental to remove casings across the salt interval in the wellbore, while reducing its well costs. In fact, this improvement in drilling efficiency is a structural change to its business that will lower its cost base irrespective of pricing concessions from suppliers.

For example, in the Delaware Basin, its Wolfcamp A 4,500-foot well cost decreased by about 40% from 2014's cost of $10.9 million. In fact, it has reduced its drilling time by 23 days from 2014's average of 43 days.


In a difficult oil pricing environment, Occidental has made the right moves to counter the weakness by reducing its costs and focusing on assets with higher returns. So, I think that investors should give this stock a though from a long-term perspective as it will do well when oil prices recover.
Published on Sep 22, 2015
By Harsh Singh Chauhan

Copyrighted 2020. Content published with author's permission.

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