Occidental Petroleum Corporation (NYSE:OXY) recently reported sharply higher fourth-quarter earnings, fueled by the sale of a part of its stake in the general partner of Plains All American Pipeline (NYSE:PAA). As the company seeks to shrink its market cap and streamline its operations, it's honing in on a few key assets to drive production growth over the next few years. Let's take a closer look at each of them.
The Permian Basin
Occidental's most prized asset is undoubtedly Texas' Permian Basin, where it commands roughly 1.9 million net acres and is the play's largest oil producer, accounting for nearly a fifth of basinwide production. Over the years, the company has seen strong success in growing Permian production through the use of carbon dioxide enhanced oil recovery, or EOR, techniques, which accounts for roughly 60% of its Permian production and is its most profitable business.
Crucially, EOR techniques don't result in rapid decline rates, as compared with horizontal drilling techniques in the Eagle Ford or Bakken, which means Occidental's Permian wells generate relatively stable production for very long periods of time. Other companies that have seen success through EOR include LINN Energy (NASDAQOTH:LINEQ), which expects water flooding to significantly boost its proven reserves in the Permian's East Goldsmith Field, and Denbury Resources (NYSE:DNR), whose use of carbon dioxide flooding in the Gulf Coast and Rocky Mountain regions is yielding increasing cash flow.
While Permian EOR production will continue to provide a stable base of output for Occidental, new growth will come primarily from the company's Permian Resources business, which seeks to identify new unconventional opportunities. The company expects to spend an additional $450 million in the Permian this year to drill more horizontal wells.
Having reduced Permian operating expenses by 17%, or $3.22 per BOE, over the past year, the company will use the additional capital to deploy four additional rigs in the emerging Wolfcamp shale, while also continuing to delineate additional opportunities in the Permian's established plays. With roughly 4,500 remaining drilling locations, Occidental's runway for growth in the Permian is huge.
The other main driver of Occidental's growth will be California, where the company currently boasts 2.1 million net acres, making it the largest oil and gas acreage holder in the state. Like the Permian, it has reduced operating costs in California by about 20%, or $4.70 per BOE, which has significantly boosted returns.
For instance, at its Elk Hills operations, the company's typical well now generates a 50% IRR, compared with 30% previously. This year, the company will continue to focus on low decline projects in California as it aims to boost production growth while keeping costs low. It expects to spend $1.9 billion in California this year to drill roughly 1,050 wells with a 27-rig program, up from 770 wells in 2013 using 20 rigs. Total production from its California operations is expected to grow by 4% this year.
Lastly, three major projects -- the Al Hosn Gas project, the BridgeTex pipeline, and a new chlor-alkali project -- should also generate strong earnings and cash flow once they come online in 2014 and 2015. Roughly a quarter of Occidental's capital budget last year went toward these projects.
For instance, the Al Hosn Gas project in the United Arab Emirates will significantly boost the company's output of natural gas and natural gas liquids when it goes into service later this year. The project is expected to produce more than 200 million cubic feet of gas per day and roughly 20,000 barrels of natural gas liquids and condensate per day net to the company, generating roughly $600 million in annual cash flow.
The bottom line
Occidental's decision to divest non-core assets and focus on higher-return, lower-risk opportunities in North America has yielded encouraging initial results, with significant improvements in capital efficiency and sharply higher returns in the Permian and in California. Investors may want to keep an eye out to see that these improvements continue, as well as track the success of the company's various pilot programs in the Permian that could lead to additional cost savings and improvements in recovery rates.
Arjun Sreekumar has no position in any stocks mentioned. The Motley Fool owns shares of Denbury Resources. Try any of our Foolish newsletter services free for 30 days. 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.