It's been quite a roller-coaster ride for L.A.-based Occidental Petroleum Corp.
The independent oil giant rode the oil price boom on the way up, recording quarter after quarter of record revenues and profits, and seeing its share price soar to nearly $100. Now, as oil prices have plunged 70 percent over the past four months, Occidental's stock price has been slashed by more than half, analysts have downgraded earnings estimates and the company is cutting back production.
However, thanks to a strong balance sheet and "production sharing contracts" that enable it to earn a greater chunk of revenue at its foreign fields as oil prices slide, Occidental is generally regarded as well situated to ride out the downturn.
"Occidental is one of the best-positioned companies to thrive in a low oil price environment," said Pavel Molchanov, research analyst with the Houston office of St. Petersburg, Fla.-based Raymond James & Associates. "It's a low-cost producer that has performed better of late than most of its peer exploration and production companies."
That may be small consolation for those who bought Occidental stock when it was more than $90 a share and are not likely to see the stock return to that level anytime soon. At that time, Occidental, like most oil companies during the price boom, was signing production deals and acquiring assets both in the U.S. and across the globe. It was also pouring capital into efforts to boost production from old fields and wells.
Those efforts had been paying off with record revenues and profits. Revenue for the first nine months ending Sept. 30 increased 52 percent to $20.2 billion, while net income was up 62 percent to $6.4 billion. But most of that took place before prices started plunging four months ago. Since reaching a peak of $147 a barrel in July, prices have fallen nearly $100 dipping below $50 last week as recession concerns have driven down demand.
That has prompted a massive sell-off of all oil stocks, with Occidental's shares closing Nov. 20 at $40.72 per share. While that's a steeper drop than at major integrated oil companies like Exxon Mobil Corp. or Chevron Corp., it is in line with the declines at somewhat smaller peers like Marathon Oil Corp. and Murphy Oil Corp. (Unlike some of its big competitors Occidental does not operate refineries, nor retail gas outlets. )
In response, Occidental is scaling back its efforts to coax more oil out of old fields and wells, particularly in California and at its holdings in the Permian Basin of west Texas, according to Chief Financial Officer Steve Chazen.
"When the price topped $100 per barrel, we did some maintenance work on our older wells, taking them from, say, two barrels per day to six barrels per day. It made sense to do that at those prices," Chazen said. "Going forward, though, some of that may slow up."
If prices fall further, Occidental also may pare back some of its larger-scale capital-intensive efforts to extract more oil, principally by injecting water or carbon dioxide into the earth to force the oil out from deep pockets and toward existing wells.
But so far, its largest project in this area is going "full-steam ahead," according to company spokesman Richard Kline. In July, Occidental inked a $1.1 billion deal with Oklahoma City-based SandRidge Energy Inc. to build a pipeline and a plant to remove carbon dioxide from SandRidge's natural gas and inject that carbon dioxide into Occidental's Permian Basin holdings.
Meanwhile, Occidental has been helped by the terms of many overseas contracts it has signed in recent years, especially with state-run oil companies in the Middle East, including Libya and Abu Dhabi. Mostly at the insistence of the host governments, these production-sharing contracts give the governments a greater share of the oil money when prices are high to satisfy domestic political concerns and oil-producing companies a greater share of the money when prices are low.
"It acts as a natural hedge," Molchanov said. "When there's a precipitous drop in oil prices like we've seen in recent months, the impact on a company like Occidental is not as severe as one might expect because they get a greater share of the pie."
Of course, with oil prices one-third where they were four months ago, the pie is now orders of magnitude smaller, so there's still a net drop in revenues. And these types of contracts are not common in the United States, which accounts for more than half of Occidental's total oil and natural gas production.
As a result, analysts have been busy revising downward their earnings estimates for Occidental in the fourth quarter and into 2009. For example, JPMorgan Chase & Co. analyst Michael LaMotte recently cut his estimate of 2009 earnings 36 percent "to reflect the new oil price outlook."
LaMotte added that "a sustained drop in crude oil prices could cause Occidental to underperform its peers" an assertion made when prices stood at roughly $60 per share.
That's where other cost-cutting measures may help. Chief Financial Officer Chazen said the company is trying to renegotiate contracts it has with field service providers.
As demand for oil rose over the past four or five years, drilling rigs and workers became scarce, allowing oil field service companies to raise their prices.
As a result of all these trends, Occidental's capital costs rose 30 percent during the first nine months of 2008 compared with the same period in 2007, taking up a good chunk of the additional revenues brought in by higher oil prices.
In the last several weeks, Chazen said the company has begun "putting pressure on our oil field service suppliers to reduce the cost of their services." With other oil companies now beginning to do the same thing, that job should be a little easier than it was a month or two ago.
The company also has tried to find cheaper prices for steel and energy used in the drilling and extraction process. Chazen noted that it takes a tremendous amount of electricity to power the drilling equipment, as well as fuel to transport the oil.
"It may be hard to believe, but fully 50 percent of our cost increases have been directly tied to the cost of oil," he said. "Now that oil prices have fallen, those costs should fall, too."
But renegotiating these contracts takes time. As a result, he said much of the cost savings may not be realized until next year.
Still, analysts say Occidental has a long history of keeping a lid on costs, which should serve it well in coming months.
"The company has one of the lowest unit costs of any oil company in the U.S.," said Fadel Gheit, analyst with Oppenheimer & Co. in New York. "It has been very well disciplined under the leadership of (Chief Executive) Ray Irani."
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