How This Big Oil Company Will Grow Production by High Single-Digits

A Permian Basin oilfield. Photo by Adam Levine. 

For energy companies, the 'law of large numbers' is very real. As companies grow, individual projects tend to move the needle less and less. Even in an environment such as today's, when oil companies are growing production thanks to new shale discoveries, most oil companies with market caps somewhere around $100 billion struggle to grow production by more than low single-digits.

For example, ConocoPhillips (NYSE: COP  ) , which is one of the faster growers of that larger peer group, expects production to grow by somewhere between 3% and 5% per year for the next few years. This tends to be at the top of the range. 

One stand-out exception is Occidental Petroleum (NYSE: OXY  ) . This $75 billion company expects to grow production by between 5% and 8%. How is Occidental separating itself from the pack by such a wide margin? By becoming somewhat smaller. Occidental is breaking itself up into two or quite possibly three business entities. 

Today Occidental's major operations are vertical and horizontal drilling in the Permian Basin of Texas, vertical drilling in California, and finally vertical drilling in the Middle East and North Africa. Occidental will soon split off its California business, and the company is believed to be in talks of selling off its Middle Eastern assets as well. Although some other operations will remain, the 'new' Occidental will be focused on the Permian Basin, where the company has an unrivaled position of 2 million acres. 

Something for everyone
Occidental's Permian operations consist of slow-growth but cash flow-rich, CO2-based vertical wells, and high-growth, capital-intensive horizontal wells in the Wolfcamp shale. It is from the latter that Occidental plans to drive the bulk of its impressive growth. 

Occidental Investor Relations

As you can see, oil production from "Permian Resources," which is the company's horizontal drilling program, will grow by between 13% and 16% this year. While Occidental surely isn't the fastest growing player in the Permian Basin, the company's combination of size and growth makes it unique: Occidental is the biggest acreage holder and biggest oil producer in the Permian, and the company's 2 million acre position in this shale makes the company a high-growth name in spite of its relatively large size.

With such exciting growth prospects, it's easy to forget about the company's steady and very profitable CO2-injection oil segment. In fact, Occidental's CO2 oil fields have among the lowest cost base in the country, and they therefore provide some of the highest margins. Together, Occidental's Permian operations are estimated to generate $1.8 billion in free cash flow. While it's unknown what the company's pro forma market cap will be going forward, the post-split Occidental will likely provide a generous dividend thanks to that impressive free cash flow figure. I foresee a post-split dividend of around 5% if the company sells off its Middle East assets and uses proceeds to buy back shares.   

A good hedge for the future
Occidental has the growth of a smaller company and the balance sheet flexibility of a larger one. If the U.S. ever does see an oil glut, Oxy could stop all of its Permian horizontal drilling and still have lots of cash flow to distribute to shareholders thanks to the company's low cost base CO2 operations. On the other hand, if prices stay constructive, Occidental will grow like a mid-cap oil name. Either way, I believe that Occidental represents a great opportunity here. 

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