Occidental Petroleum Slips

As more energy companies report calendar fourth-quarter earnings, we are beginning to see how much the downward swing in energy prices has affected earnings. Occidental Petroleum's (NYSE: OXY  ) fourth-quarter earnings were no exception.

For Oxy, much of the drop came from lower realized natural gas prices, which fell from $9.81 mcf down to $5.64 mcf. Oxy's realized worldwide barrel of oil was relatively flat at $51.18 per barrel for the quarter, compared to $51.87 per barrel in Q4 of 2005. Offsetting the loss of pricing, Oxy cranked out 616,000 barrels of oil equivalent a day (mboed) up from 546 mboed in last year's Q4. Production benefited from increased output in California and Latin America, specifically Argentina.

The smaller chemical division OXYChem also struggled with high prices as well as an unfavorable shift in sales mix. The chemical division's core earnings, which are adjusted for a comparable basis, were $156 million for the quarter, down 9% from Q4 of last year.

Even with lower earnings, management returned a significant amount of cash back to shareholders. For the year, the company spent $1.5 billion buying back 30.6 million shares, which more than accounted for the 28.7 million shares issued for the Vintage acquisition. Also for the year, the company paid out $645 million in dividends, up 34% from $483 million paid out in 2005.

Looking ahead, management plans to continue to develop its existing properties, especially those acquired from the Vintage acquisition. Capital spending for 2007 should be roughly $3.3 billion-$3.4 billion, up from 2006's $3 billion budget. Management also believes it can produce 590 mboed-600 mboed, which should increase when the Dolphin Project in Qatar comes online later in the year.

Considering Oxy's capital budget and potential growth in production brings up the very important issue of future commodity prices; how much do companies spend to increase production or replace reserves when commodity prices are falling? If the realized prices of oil and natural gas continue to fall, an exploration and production company like Oxy could find itself with a capital budget larger than the earnings from the production of oil and natural gas.

That's where Oxy and the lower-cost outfits like XTO Energy (NYSE: XTO  ) have the advantage. We won't know for sure how well Oxy increased its reserves (which were estimated on the conference call to have increased by a total of 230%) through organic means until February's audited report. However, my guess is it will be better than ConocoPhillips' (NYSE: COP  ) recently reported weak organic replacement estimates and probably better than the other majors as well.

So while energy prices are wrecking most energy companies' fourth-quarter earnings, Oxy's strong cash flows, disciplined capital spending, and low balance sheet leverage should help stabilize it from any continued weakness in the energy market.

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Fool contributor Matthew Crews welcomes your feedback -- really! He has no financial position in any of the companies mentioned. The Motley Fool has a disclosure policy.

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  • Report this Comment On October 17, 2011, at 9:13 PM, MHedgeFundTrader wrote:

    I have kept oil companies in my long term model portfolio for many years now. But there are a lot of belles at the ball, but you can’t dance with all of them.

    While a student at UCLA in the early seventies, I took a World Politics course which required me to pick a country, analyze its economy, and make recommendations for its economic development. I chose Algeria, a country where I had spent the summer of 1968 caravanning among the Bedouins, fighting rebels and bandits, crawling out of the desert starved, lice ridden, and half dead. I concluded in my paper that the North African country should immediately nationalize the oil industry, and raise prices from $3/barrel to $10. I knew that Los Angeles based Occidental Petroleum (OXY) was interested in exploring for oil there, so I sent my paper to the company for review. They called the next day and invited me to their imposing downtown headquarters, then the tallest building in Los Angeles.

    I was ushered into the office of Dr. Armand Hammer, one of the great independent oil moguls of the day, a larger than life figure who owned a spectacular impressionist art collection, and who confidently displayed a priceless Fabergé egg on his desk. He said he was impressed with my paper, and then spent two hours grilling me. Why should oil prices go up? Who did I know there? What did I see? What was the state of their infrastructure? Roads? Bridges? Rail lines? Did I see any oil derricks? Did I see any Russians? I told him everything I knew, including the two weeks spent in an Algiers jail for taking pictures in the wrong places. His parting words were to never take my eye off the oil industry, as it is the driver of everything else. I have followed that advice ever since.

    When I went back to UCLA, I told a CIA friend of mine that I had just spent the afternoon with the eminent doctor (Marsha, call me!). She told me that he had been a close advisor of Vladimir Lenin after the Russian Revolution, had been a double agent for the Soviets ever since, that the FBI had known this all along, and was currently funneling illegal campaign donations to President Richard Nixon. Shocked, I kicked myself for going into an interview so ill prepared, and had missed a golden opportunity to ask some great questions. I never made that mistake again.

    Some 40 years later, while trolling the markets for great buying opportunities set up by the BP oil spill, I stumbled across (OXY) once more (click here for their site at ). (OXY) has a minimal offshore presence, nothing in deep water, and huge operations in the Middle East and South America. It was the first US oil company to go back into Libya when the sanctions were lifted in 2005. (OXY’s) substantial California production is expected to leap to 45% to 200,000 barrels a day over the next four years. Its horizontal multistage fracturing technology will enable it to dominate California shale. It has raised its dividend for the eighth year in a row, by 15% to 1.60%. Need I say more?

    The clear message that has come out of the BP oil spill is that onshore energy resources are now more valuable than offshore ones. I decided to add it to my model portfolio. Energy is one of a tiny handful of industries I am willing to put my money in these days (technology and commodities are the others), and BP has handed me a rare opportunity to get in as the tightwad that I truly am.

    Oh, and I got an A+ on the paper, and the following year Algeria raised the price of oil to $12.

    The Mad Hedge-Fund Trader

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