For the last several years, Occidental Petroleum Corp. has been pursuing a full-throttle strategy for growing its California production.
But that appears to be changing. Beset by a stock performance that has lagged competitors for the last year, Occidental Chief Executive Stephen Chazen is focused now on cutting operating costs to improve profitability. The Westwood oil giant’s California operations, where costs have soared beyond expectations due to expensive shale drilling, are ground zero for that battle.
“The operating costs … running in California don’t make any sense to me,” Chazen told analysts recently during the company’s earnings teleconference call. “They were running at a lot less – half actually – two years ago and they need to get back to that.”
To achieve this, Chazen said, Occidental will scale back its drilling in shale areas and other unconventional oil-containing formations in California to focus more on traditional drilling. Shale drilling, which often involves the controversial practice of fracking, can be very expensive.
Another factor: Several shale wells in Elk Hills west of Bakersfield – Occidental’s largest California drilling operation – have experienced faster than expected production declines, meaning much more capital has to be poured in just to maintain existing production levels.
What’s more, permitting new drilling sites in California has proved slower than expected, stretching out the time before drilling can begin.
Occidental, which used to be known for its production overseas, several years ago began concentrating on domestic drilling.
Companywide, production costs for the first three quarters jumped 12 percent compared with the same period last year. Under the new strategy that Chazen outlined, capital spending over the next two years would be reduced, with much of the new spending on drilling rigs going to divisions that achieve the most savings in operating costs.
The goal is to boost profitability, which would restore investor confidence. In the past year, Occidental’s stock has fallen 15 percent, 50 percent more than the average of 16 publicly traded oil exploration and production companies. Occidental’s one-year total return is down 13 percent, versus an industry average decline of 8 percent.
The stock closed Oct. 31 at $78.96, its lowest point since June.
Occidental’s stock performance has been so subpar that Chazen himself called the stock a “dog” in the teleconference call.
“The tool to make the performance of the stock do better is bringing costs under control,” he told analysts.
The slowdown in drilling new wells in California will not impact Occidental’s plans for restarting drilling in an abandoned oil field in Carson, a company spokeswoman said.
The plans, first reported by the Business Journal in May, call for up to 200 new wells capable of extracting up to 6,000 barrels and 3 million cubic feet of natural gas each day for 15 years. Occidental started the entitlement process in the summer and it was expected to last at least a year, with drilling possibly beginning in late 2013.
One industry analyst who follows Occidental called the new strategy to cut costs laudable, though he believed it could prove difficult to execute. With much of the easily accessible oil and gas in California and the United States long gone, reaching and extracting additional oil and gas is inherently more expensive. There are also permitting delays over which Occidental has little control.
“We think Oxy will be able to generate some incremental cost savings through this plan,” RBC Capital Markets analyst Leo Mariani in Austin, Texas, said in a company update note Oct. 25. “But we think it will be very challenging as it is a daunting task.”
Mariani said the focus on cutting costs could sacrifice production next year and possibly beyond. With fewer new wells being drilled or expanded, he projected domestic oil and gas production will grow about 1 percent next year, well below the company’s domestic production growth rate over the past year of 8 percent.
If cutting costs to improve profitability doesn’t boost the stock price, Chazen told analysts he’ll soon be ready to try other strategies, including raising the dividend payout and repurchasing shares.
“If the profitability improves and the stock continues to be a dog, then we’ll have to rethink the whole thing,” he said.
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