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Overseas Volatility Feeds Oil Company Stock Swing

Even for investors experienced with the stock price swings of Westwood’s Occidental Petroleum Corp., the roller-coaster ride of the last three months has been stomach churning.

From a high of $108 three months ago, Occidental’s stock had plunged nearly 40 percent to $68 earlier this month as global oil prices tanked. Then, sparked by two stock analyst upgrades and news of the restarting of the company’s oil operations in Libya, shares rallied to close at $81.01 on Oct. 12.

Such volatility is more common at companies with major operational or management concerns. But nothing’s fundamentally wrong at Occidental. The company is just especially susceptible to oil price swings. Companies with refining and retail operations – such as Houston-based Exxon Mobil Corp. or San Ramon-based Chevron Corp. – have more power to set their oil prices and their stock prices have swung less.

Occidental is primarily an exploration and production company with little say over the market prices of oil and gas.

“Occidental has one of the highest earnings sensitivities to changes in the crude oil price,” said Katherine Lucas Minyard, an analyst with JP Morgan, a unit of New York-based JP Morgan Chase & Co.

Minyard is one of the analysts who recently issued upgrades to “buy,” largely because they believe Occidental’s stock fell too far in August and September, and therefore started looking like a bargain to investors.

Libyan civil war

Adding to the stock’s volatility: Occidental’s exposure to the unrest sweeping the oil-rich Middle East and North Africa this year. In February, the company withdrew personnel from operations in Libya as civil war broke out. At the time, oil from Libyan operations represented just under 4 percent of Occidental’s global daily production.

The situation in Libya has only recently calmed to the point where oil fields near deposed dictator Moammar Kadafi’s hometown of Sirte began operating again. Occidental is a minority partner with Arabian Gulf Oil Co., or Agoco, of Bengazi in the Nafoora oil field, which produced up to 70,000 barrels of oil a day before the civil war.

On Oct. 6, Occidental announced that some of its senior personnel were returning to Libya to help restart the Nafoora oil operations.

A key question analysts hope will be answered when the company releases its earnings late next week: When can the Libyan operations get back up to full operation? Some oil fields in the country were severely damaged in the months of fighting; neither Occidental nor Agoco has indicated how much damage has occurred at the Nafoora oil field.

“The focus on the upcoming earnings call will be on management’s commentary about the condition of the oil fields and how quickly they can be ramped back up,” said Pavel Molchanov, analyst with Raymond James & Associates Inc. of St. Petersburg, Fla.

Occidental also has operating partnerships in Yemen, primarily with Calgary, Alberta-based Canadian oil company Nexen Inc. So far, those operations have not been disrupted by the political unrest in that nation.

But in Occidental’s last earnings conference call with analysts on July 26, Chief Executive Stephen Chazen said there were no guarantees on production volumes in Yemen while the situation remains in flux.

“We think that there is a reasonable chance … that the government will allow us and Nexen to continue to operate the field for a while at the full rate … while it figures out what to do,” Chazen said. “No guarantees of that, obviously.”

California permits

Meanwhile, closer to home, the company faces environmental concerns and permitting issues.

Occidental is California’s largest producer of natural gas and second largest oil-producing company. Two years ago, it announced a major oil and gas discovery in the Elk Hills field near Bakersfield; last year, it said that there was likely twice as much oil and gas there than initially announced.

The crucial question is how quickly Occidental can extract that oil and gas. The company plans to rely on fracking technology to extract the natural gas; that process involves fracturing the gas-bearing rock structures with high-pressure injection of water into wells. Environmental groups have opposed fracking, citing damage caused when contaminated water is left behind. As a result, the state has been slow to grant permits for the wells.

“Permitting continues to be an issue,” said Faisel Khan, a director at Citigroup Investment Research and Analysis in New York. Khan is the other analyst who recently issued an upgrade for Occidental, to “buy” from “neutral.”

In Occidental’s July earnings conference call with analysts, Chazen described the state’s permitting process as “not exactly transparent,” and said he did not know how long it would take to get the permits.

In his Sept. 26 upgrade report, Khan said that California’s Department of Oil Gas & Geothermal Resources had recently added staff and permitting should go faster as a result.

Howard Fine
Howard Fine
Howard Fine is a 23-year veteran of the Los Angeles Business Journal. He covers stories pertaining to healthcare, biomedicine, energy, engineering, construction, and infrastructure. He has won several awards, including Best Body of Work for a single reporter from the Alliance of Area Business Publishers and Distinguished Journalist of the Year from the Society of Professional Journalists.
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