Do Occidental Petroleum's Strategic Shifts Make Sense?

Occidental is selling off natural gas assets, spinning off its California business, and is betting heavily on U.S. oil.

Feb 20, 2014 at 11:21AM

It's a new era for independent exploration and production company Occidental Petroleum (NYSE:OXY). Occidental is doing some big things that will make the new Occidental Petroleum a much different company than investors are used to. Occidental has revealed a series of steps to reorganize itself. It appears the company's intention is to become much more oil-focused. This stands to reason, of course, due to the boom in domestic oil production in recent years. Occidental has considerable operations in some of the most prominent oil-producing regions in the United States, including the Permian Basin.

Read on to discover what steps Occidental is taking to streamline itself, and what the new Occidental has to offer.

Big moves under way
Occidental Petroleum plans to separate its California assets into a separate, independently traded company. The new California company will be headquartered there and will be the state's largest natural gas producer. This is a significant event, as Occidental's California assets accounted for approximately 20% of its 2013 production. The remaining Occidental Petroleum will operate its core oil assets, which are located in the Permian Basin, as well as assets in the Middle East and Colombia.

Occidental's Permian Basin operations are truly the major source of its production and growth. The Permian Basin is a massive formation that accounts for approximately 15% of total U.S. oil production. Not surprisingly, a slew of energy majors are lining up to profit from the Permian Basin. Occidental and Apache Corp. (NYSE:APA) are each focusing intently on the region. Apache has sold off international assets to double-down on the U.S. Over the past five years, it's cut its exposure to Egypt by half. Instead, Apache has increased its presence in the Permian Basin from 9% of production in 2009 to 21% today.

It should be no surprise, then, that Occidental has staked its claim in the Permian Basin. It's the biggest oil producer in Texas, and Occidental accounts for 16% of all oil produced in the Permian Basin.

Separately, Occidental also announced a major batch of cash returns to shareholders. Occidental increased its annual dividend by 12.5% and announced it will repurchase an additional 30 million of its own shares. This signifies management's confidence in its ability to keep production and profits growing in the future.

These cash returns will be financed partly with the company's existing cash flow, which is strong, as well as the proceeds from a recent round of asset sales. Occidental recently struck a deal to sell its interest in one of the largest natural gas fields in the United States. Occidental's Hugoton Field assets in Kansas, Oklahoma, and Colorado will generate $1.4 billion, which the company has earmarked specifically for its new share buyback authorization.

A more focused company in the works
Occidental's decision to spin off its California business and sell its natural gas field is all part of the company's over-arching strategy to become a smaller, more oil-focused company. Occidental has ramped up its domestic oil production heavily and stands to continue this trend in the upcoming year.

Occidental increased domestic oil production by 4.3% last year, and intends to double its U.S. oil production growth to 9% this year. This stands above the forecast production growth for close competitor ConocoPhillips (NYSE:COP). ConocoPhillips' long-term goals call for production growth of 3%-5% compounded annually. Conoco's trailing production growth lags Occidental's as well. Conoco increased domestic production by 7% last year.

The Foolish takeaway
While Occidental is gearing up its oil operations, at the same time, it seems that Occidental is shying away from natural gas. Even though it's going to substantially increase oil production, Occidental is simultaneously tapering off its natural gas production. Management expects domestic gas production to drop in 2014. When Occidental presented its fourth quarter results to analysts, it stated that it would look significantly different by the end of the year. It's clear the company is following through with its promise.

Occidental is re-tooling for growth. Why wait? Invest like our co-Founder

They said it couldn't be done. But David Gardner has proved them wrong time, and time, and time again with stock returns like 926%, 2,239%, and 4,371%. In fact, just recently one of his favorite stocks became a 100-bagger. And he's ready to do it again. You can uncover his scientific approach to crushing the market and his carefully chosen six picks for ultimate growth instantly, because he's making this premium report free for you today. Click here now for access.

Bob Ciura has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information