Oxy Bulks Up on Low-Cost U.S. Oil Production

Permian Basin
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HOUSTON (Dow Jones Newswires), Jul. 21, 2009

For nearly two decades, Occidental Petroleum Corp. (OXY) has been bulking up in producing oil in the U.S., exploiting low-cost opportunities while its competitors look abroad.

While Occidental, the fourth-largest U.S. oil and gas company by market value, has also made significant investments in the Middle East and in Latin America, the company has remained committed to keeping most of its reserves inside U.S. borders.

That's a marked change from 1990 when Occidental produced little oil and gas from U.S. sources. Now, production in the U.S. accounts for 70% of Occidental's reserves of about three billion barrels of oil equivalent -- the largest percentage of any major oil company. Occidental has built up those reserves by finding opportunities onshore and away from headline-grabbing -- and often expensive -- new oil and gas finds in the U.S.

This year, the company will drill 20 exploratory oil wells to tap neglected reservoirs in California, where it has 1.1 million acres. That's the largest position in the state and one that may eventually add more than 5% to Occidental's reserves.

The company's efforts in California and the U.S. underscore how even large multi-national oil companies, which have increasingly looked overseas for oil, can grow production and reserves at home.

Phil Weiss, an analyst with Argus Research Co. in New York, said Occidental has a knack for finding projects and fields that other companies disregard.

"They are interested in things they can get at a low cost and under the radar," he said.

While some analysts point to the U.S. as a less-risky place to find and produce oil, Occidental's domestic growth wasn't motivated by geopolitical calculations; instead it was motivated by strict rates of return. The company demands that U.S. projects offer a return of 15% return on investment.

During its first-quarter conference call, Occidental executives said the company's production costs in California are less than $10 a barrel, making its projects there economic even at low commodity prices.

"If it is worth the risk, we will drill the wells," Occidental President Steve Chazen said in an interview. "We are just opportunistic."

Ignored oil fields

Occidental shies away from big-ticket drilling projects in favor of projects in more mature or ignored oil fields, where it can boost production.

For example, it is the largest producer in the Permian Basin, a heavily exploited oil field in Texas and New Mexico where the first commercial oil well was completed in 1921. Occidental is the largest producer in the Permian, where it is using enhanced oil-recovery techniques, such as C02 flooding, to extract hard-to-reach oil from the field.

In California, the company is developing fields that were abandoned by some oil companies in the 1970s in favor of international projects. Occidental quietly acquired most of its California acreage over the last few years.

"They are focused on returns and Wall Street likes that," said Stephen Davis, an associate portfolio manager at Alpine Funds, who added that the company looks for low-cost projects that provide steady production.

Shares of Occidental have outperformed those of its larger peers, attracting investors that want exposure to oil without the risk of refining. Companies such as Exxon Mobil Corp., ConocoPhillips and Chevron Corp. all have refining segments which have suffered as the economic downturn cut into demand for gasoline.

Occidental's stock, now trading at $70, has posted a year-to-date return of about 12%. In contrast, ConocoPhillips is down about 18% this year. Occidental, which is in the Standard & Poor's 500 index, sports a forward price-earnings ratio of 16.6, according to FactSet, compared with the industry average of 14.0.

Although Occidental shares have been lifted by crude-oil prices, which have nearly doubled since February, Chazen said his company's commitment not to sacrifice returns and to keep costs low will help it persevere through the rough-and-tumble energy markets.

"If we wanted to speculate on commodity prices, we could do so without the hassle of production," Chazen said.  

Copyright (c) 2009 Dow Jones & Company, Inc.

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