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Occidental Petroleum Corporation's Huge Opportunity in the Permian Basin

By Arjun Sreekumar – Feb 27, 2014 at 2:00PM

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After it spins off its California oil and gas assets, Occidental Petroleum Corporation can zero in on its most profitable asset: Texas' Permian Basin.

Occidental Petroleum Corporation (OXY -0.86%) announced that it will spin off its California operations into a separate publicly traded company, as the oil and gas producer aims to streamline its operations and improve shareholder returns.

The announcement came just a day after the company said it would increase its dividend by $0.08 to $0.72 per quarter, or an annual rate of $2.88 per share, up from a previous $2.56 per share, and authorized the repurchase of an additional 30 million shares of its common stock.

Not only will the spinoff of its California assets allow Oxy to further ramp up its repurchase program and boost its dividend, but it will also allow it to focus more intensely on its most prized and profitable asset -- West Texas' Permian Basin.

Permian Basin focus
With California out of the picture, Oxy can now devote more of its resources and attention to the Permian Basin, where it controls roughly 1.9 million net acres and is the play's single largest producer. Despite having drilled in the basin for decades, the company continues to make commendable progress in driving down costs and improving returns.

As of the fourth quarter, Oxy's capital efficiency in the Permian improved by 25% year over year, while operating expenses fell by 17%, or $3.22 per BOE. As a result of these cost reductions, the company's returns from the Permian have improved dramatically, with a typical well in one of its core Permian areas now generating a 48% internal rate of return (IRR), twice the return before cost reduction measures were implemented.

With such a marked improvement in its operations, it should come as no surprise that the company plans to spend about $450 million more in the Permian this year than it did last year. All of that increased capital spending will go toward drilling more horizontal wells as part of its Permian Resources business, which is tasked with identifying and developing unconventional opportunities.

Oxy plans to drill approximately 345 total wells in the Permian this year, of which half will be horizontal, as compared to 330 wells drilled last year, of which only 15% were horizontal. It expects basinwide oil production to grow by more than 6% this year, generating $1.8 billion of cash flow after capital.

Upside from emerging plays
Some of Oxy's biggest opportunities in the Permian lie in the Midland and Delaware Basins, especially in the Wolfcamp shale, where it has tested Wolfcamp A and B benches and will test the remaining benches this year.

Given other operators' success in these emerging plays, Occidental could be sitting on some really profitable acreage. Devon Energy (DVN 0.26%), for instance, reported encouraging production results from Wolfcamp wells brought online recently, and it plans to aggressively develop its 300,000 net prospective Wolfcamp acreage over the next few years.

Similarly, Concho Resources (CXO) reported a 111% year-over-year increase in net Delaware Basin production, which averaged roughly 33,700 BOE per day in the third quarter. With the majority of its rigs deployed in the Delaware Basin, Concho plans to allocate approximately 60% of its $2.3 billion capital budget for the year toward developing the play.

But perhaps the company seeing the greatest success in the Wolfcamp so far is Pioneer Natural Resources (PXD 0.14%), whose CEO, Scott Sheffield, believes the Spraberry/Wolfcamp shale could be the largest oilfield in the US. With one of its third-quarter wells yielding the highest 24-hour peak IP rate for any interval in the Midland Basin so far, the company is eager to develop its 700,000 net acreage position in the play and plans to allocate roughly a quarter of this year's budget toward Wolfcamp development.

The bottom line
By spinning off its California business, Occidental can further increase its share repurchases and narrow its operational focus to concentrate on the Permian Basin, where it has advantages of depth and scale. With its highly profitable carbon dioxide enhanced oil recovery (EOR) method in the Permian providing a stable production base, and with new emerging plays such as the Wolfcamp offering much additional upside, Occidental shareholders can expect continued dividend growth in the years ahead.

Arjun Sreekumar owns shares of Devon Energy. The Motley Fool owns shares of Devon Energy. 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.

Stocks Mentioned

Devon Energy Stock Quote
Devon Energy
$68.46 (0.26%) $0.18
Pioneer Natural Resources Stock Quote
Pioneer Natural Resources
$239.41 (0.14%) $0.34
Occidental Petroleum Stock Quote
Occidental Petroleum
$68.21 (-0.86%) $0.59
Concho Resources Stock Quote
Concho Resources

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