There are concerns within the oil industry that the U.S. might be nearing its peak production rate, including from the prolific Permian Basin that runs through parts of Texas and New Mexico. If that's the case, oil companies will struggle to expand their output in the future. That would make it tougher for them to grow value for their shareholders.
However, according to Occidental Petroleum (OXY 1.69%) CEO Vicki Hollub, the Permian has plenty of resources to keep pushing production higher. That suggests Occidental has ample fuel to grow, positioning it to continue growing value for investors, including top shareholder Warren Buffett.
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Key Data Points
Drilling down into the Permian
Production from legacy oil and gas wells steadily declines as energy companies extract those resources from underground formations. Because of that, oil companies need to continually drill new wells to offset the decline rate of existing ones. However, there's a finite inventory of future drilling locations. Furthermore, many oil companies have already drilled through their best resources. As a result, oil and gas production in many regions is in decline.
It's still heading higher in the Permian Basin. According to the U.S. Energy Information Administration (EIA), crude oil production in the Permian Basin will rise to 5.62 million barrels per day this month. That's 26,000 barrels per day above March's level and a new record high for the region.
Occidental Petroleum and many of its Permian peers believe that the region's output will continue rising. Several factors fuel that view. For starters, many companies have significant undrilled inventory. For example, leading regional producer Pioneer Natural Resources (PXD +0.00%) estimates it has enough high-quality locations remaining to maintain its current drilling pace for over 20 years. That significant available inventory is a big reason why ExxonMobil (XOM 1.37%) has considered making a run to acquire Pioneer.
Exxon believes it can leverage its drilling expertise to get the most out of the region's remaining undeveloped locations. It's a skill that Occidental Petroleum also possesses:
Image source: Occidental Petroleum.
As that slide showcases, Occidental has continually improved its drilling productivity, partly driven by its expertise in understanding how to best tap the region's resources. The company's CEO, Vicki Hollub, believes it has the resources and capabilities to continue growing its output from the region. Occidental controls thousands of untapped drillable locations with break-even levels well below the current oil price.
Growing value for shareholders
Occidental Petroleum has steadily grown its production out of the Permian in the past year. It produced an average of 565,000 barrels of oil equivalent per day (BOE/D) in the fourth quarter of 2022, up from 472,000 BOE/D in the first quarter. By growing its production, Occidental can improve its profit margin by spreading its fixed costs over those additional barrels. It also puts the company in a greater position to capitalize on higher oil prices, as it did last year.
The company initially used its cash-flow windfall to repay debt and get its balance sheet back on solid ground. It has since flipped the switch and started returning more cash to shareholders. It has significantly increased its dividend over the past year. Occidental Petroleum has also been buying back its shares. It repurchased $3 billion of its stock in 2022 and refreshed its program this year with a new $3 billion authorization.
That combination of production growth and increasing cash returns is growing shareholder value. It's one of the many factors that has drawn Warren Buffett's company Berkshire Hathaway (BRK.A +0.16%)(BRK.B +0.14%) to become Occidental's leading shareholder. Berkshire Hathaway has continued to buy shares of the oil stock hand over fist. It now owns over 211.7 million shares, 23.6% of Occidental Petroleum's outstanding shares. With a current market value of over $13.7 billion, Occidental is Berkshire's seventh largest holding at 4.1% of its portfolio.
The fuel to continue growing
Occidental Petroleum believes it has the resources and expertise to steadily expand its production in the Permian Basin. That positions the company to continue growing value for shareholders (including Buffett) even if oil and gas prices flatline. As production rises, profitability should follow, enabling the company to produce more cash to fund new sources of growth and return money to shareholders. Occidental's growth prospects make it a more attractive long-term investment.
