By most accounts Occidental Petroleum Corp. has been on a tear.

The L.A.-based oil and gas company’s profits doubled last year to $5.3 billion as prices rose, the company made key acquisitions around the globe and trimmed operating expenses.

Meanwhile, Occidental’s stock price has outpaced many of its larger competitors, soaring 50 percent since last May to close at $97 a share last week.

“We’ve had a great run,” is how Occidental chairman and chief executive Ray Irani recently put it to investors.

But could the party be coming to an end?

At least one analyst firm seems to think so. Friedman Billings Ramsey late last month downgraded Occidental from “market outperform” to “market perform,” saying that Occidental’s stock price is nearing its target of $104 a share and that the company is exposed to moderating crude oil prices. In addition, it noted the company’s profits in Ecuador could become tied up in a dispute with the government.

“While we like OXY’s growth profile and low cost structure, we recommend that investors take a more cautious stance given the potential for the company’s dispute with the Ecuadorian government to escalate and our expectations for crude oil prices to moderate,” stated the report by research analyst Jacques Rousseau. Occidental’s ticker symbol is OXY.

Given these risks, Rousseau said he expected some of the other two dozen analysts following Occidental nearly all of whom have “buy” recommendations to re-evaluate their ratings.

While Friedman Billings is in the minority, it’s the first note of caution in what has been a love-fest between Wall Street and Occidental given the company’s stellar performance in 2005.

While virtually every oil company saw revenues and profits rise with oil prices last year, Occidental managed to outperform many in the industry. In their presentation in late February to investors, Occidental executives said this was due in large part to the company’s ability to keep operating costs on the oil and gas side relatively stable while oil prices shot up.

Unlike some other oil companies, Occidental did not put more of its windfall revenues into oil exploration, choosing instead to focus on improving oil recovery operations from its existing holdings through new technology.

“Our main business is improving our recovery business,” Occidental chief financial officer Stephen Chazen said in the presentation to investors.

Much of the extra cash is then put towards acquisitions of companies with existing oil field operations.

Last year, for example, Occidental announced it was acquiring Tulsa, Okla.-based Vintage Petroleum for about $3.5 billion in cash and stock. The deal, which closed this past January, helped consolidate Occidental’s position as one of the leading oil producers in the Texas-New Mexico-Oklahoma region, a mature oil-producing basin that some other companies with less sophisticated extraction know-how are pulling out of.

While Chazen said other acquisitions may be in the offing, especially in the Southwest and Western U.S., he stressed Occidental is not about to go on a buying spree given its desire to keep its long-term debt under control to maintain high financial ratings.

Middle East projects


On the international front, Occidental has been busy, boosting its position in Libya, Oman, the United Arab Emirates and several other Middle Eastern countries, a strategy assisted by Irani’s extensive ties in the region. Irani, who is of Lebanese descent, has long cultivated relationships with the rulers in the notoriously volatile area.

“We will continue to hold regular meetings with the leadership in each of the countries in which we operate,” Irani told investors.

Those meetings have borne considerable fruit.

Last summer, Occidental resumed operations in Libya, where it had extensive holdings that were essentially frozen in 1986 when the U.S. government barred American companies from doing business in Libya. Almost simultaneously, a partnership including Occidental reached a deal with Oman to develop the Mukhaizna oil field, one of that oil-rich country’s largest. The partnership immediately launched a $3 billion effort to increase production from 8,500 barrels per day to 150,000. (Occidental’s share of that is expected to be around 30,000 barrels per day.)

Occidental and another set of partners also are focusing on developing a major natural gas project on the borders of Qatar and the United Arab Emirates. This $4 billion project involves extracting up to two billion cubic feet a day of natural gas from north Qatar and transporting it to the United Arab Emirates, where it can then be exported to global markets.

Outside the Middle East and North Africa, Occidental’s main overseas focus is on Latin America, with long-running operations in Colombia and Ecuador. The regional presence was boosted by the acquisition of Vintage, which had substantial operations in Argentina and some in Bolivia.

But right now, it’s the operations in Ecuador that have the attention and concern of Wall Street.

Occidental produces 75,000 barrels of oil per day from both Ecuador and Colombia, with the latter’s output expected to increase with the announcement last year of a recovery-improvement project in one of Colombia’s oldest oil fields.

Last year, the Ecuadorian government announced its intention to impose a windfall profits tax of 60 percent on all foreign oil companies with holdings and operations in the country. That tax has the potential to raise up to $500 million a year for the cash-strapped government.

In addition, according to Friedman Billings, the government has threatened to terminate Occidental’s license to operate in the country because of allegations that Occidental violated a production-sharing agreement with the government when it transferred some of the operations to the Calagary, Alberta-based oil and gas firm EnCana Corp.

Occidental has offered to pay up to $1 billion in disputed taxes, investments and revenues to the government to settle the dispute. But a settlement is complicated by recent protests against Occidental and other American companies by indigenous groups.

Friedman Billing’s Rousseau said a breakdown in settlement talks might put up to $1 billion in returns from Occidental’s operations in Ecuador at risk. That in turn could cause some skittishness among investors.

However, Occidental Petroleum spokesman Lawrence Meriage said that the Ecuadorian operations comprise only 7 percent of 2005 production and 4 percent of the firm’s overall reserves.

Broader risk


On a broader scale, Occidental, like the entire oil industry, is at risk if oil prices fall substantially from current levels of about $67 per barrel. But just how much risk is under debate.

Steve Enger, research analyst with the Denver office of Houston-based Petrie Parkman & Co., maintains in his February report on Occidental that the company is better poised than its peers to withstand a drop in oil prices because of its extensive use of cushioning, production-sharing contracts with foreign governments that allocate more production to the company as prices fall.

On the other hand, Friedman Billing’s Rousseau said that Occidental is more exposed than its peers to a drop in oil prices because it has no refining capability. That gives Occidental no way to offset a drop in crude oil prices with increases in the sale of refined oil products.

That’s a shortcoming Occidental is aware of. Late last month, the company announced it was considering building its first-ever refinery: a $6 billion plant in Panama that would convert cheaper heavy crude from its Ecuador and Colombia operations into lighter gasoline and jet fuel for export.

But Occidental executives stressed the plan was “conceptual,” and analyst Enger said the company likely would drop the plan. “It’s outside their core business,” he said.

Meanwhile, Occidental does have one lucrative area not sensitive to oil price fluctuations: a small-but-growing presence in chemicals. Occidental’s chemical plants produce chlorovinyls and polyvinyl chloride that are used in the pipe and construction industries. Because of tight supplies in the building materials industry and the decision to close some of its less productive plants, Occidental’s chemical profits have soared.

“The chemicals business has become a real cash generator for us,” Chazen told investors.

Some of that extra cash has gone to repurchase some shares. The company announced last year it was repurchasing 10 million of its outstanding shares, representing the first step in a multi-year plan to reduce the number of outstanding shares to increase their value.

Another chunk of Occidental’s cash has gone to reward Irani, making him one of the highest paid executives in L.A. County. Last year, Irani raked in $49 million in annual and long-term compensation, up from $30.9 million in 2004, according to Occidental’s proxy. The compensation included $30.9 million in restricted stock awards and a $10.5 million “long term incentive plan” payout. (But the $49 million did not include 750,000 securities underlying options.)

While that level of compensation might raise some eyebrows, it has not caused concern among those who track executive compensation.

“All of the top executives at oil companies have been paid extremely well this past year,” said Paul Hodgeson, senior research associate with the Corporate Library in Portland, Maine, a corporate governance consulting firm.

In Occidental’s case, Hodgeson said, the soaring stock price has “made everybody happy,” especially shareholders. “As long as the shareholders are seeing some of the profits, there’s not really cause for concern here. It’s when the company’s performance is not doing well that such a figure might be out of line.”

That could become an issue if Occidental’s stock price hits the targets set by analysts and starts to plateau or even drop. Already, Occidental’s stock is in close striking range of Enger’s $100 a share target, with Rousseau’s $104 target not far off.

But Irani himself is not concerned about any potential shareholder pressure. In answer to an investor analyst question, the 70-year-old chairman said he has no immediate plans to retire. And he remained very bullish on the company’s short-term and long-term prospects.

“We believe we have a lot more running room ahead of us,” he said.