Occidental Petroleum (NYSE:OXY) is one of the largest oil and gas companies in the U.S. with operations spread across geographies. At present, it has operations in three main regions, i.e., the U.S, the Middle East and Latin America. It is planning to expand its operations further through acquisitions and new contracts in countries, such as Oman and Libya. However, Occidental is only involved in exploration and production of oil and gas reserves, while large players such as ConocoPhillips are involved in refining oil and selling it through retail gas stations in addition to exploration and production of oil and gas reserves.
International operations of the company provide it with access to more oil and gas reserves as well as new markets. For example, as the global demand for oil and gas increases, the reserves available in the Middle East are becoming more valuable, especially considering the fact that the Middle East accounts for 61 percent of the world’s proven recoverable oil reserves and 41 percent of world’s gas reserves. Further, with the Middle East now consuming one-fifth of the oil it produces, it is also emerging as a potential market.
Occidental owns huge reserves of crude oil which are further enhanced due to company’s expertise in techniques to recover oil from old oil fields. The company is an industry leader in these techniques (also known as enhanced oil recovery), which enable it to extract oil from old oil fields where traditional methods of extracting oil are no longer useful. As a result, the company is now focussing on acquiring large and old oil fields in its primary markets to enhance production.
Occidental has a significant share of its operations in countries, such as Bolivia and Ecuador, which are experiencing political and social unrest, thus exposing the company to the risk of political instability. In 2006, the government of Ecuador seized Occidental’s assets in Ecuador as part of the government’s drive towards nationalization. International operations also expose the company to the risk of currency fluctuations.
Moreover, with the consolidation of the industry, large integrated oil and gas producing companies are being formed, which have the financial power to outbid their rivals in a competitive bid for new exploration blocks. As a result, Occidental is facing continually increasing competition from its rivals. Occidental is striving to maintain a competitive edge by expanding operations in international markets as well as using improved technology to enable enhanced oil recovery and reduce cost of finding and developing new reserves.
Occidental Petroleum primarily operates in the U.S. and has operations in countries such as Qatar, Libya, Colombia, Yemen, Ecuador, Oman, Canada, Pakistan and United Arab Emirates (U.A.E).
Occidental Petroleum was a relatively small company until the discovery of oil fields in California in the early 1960s. The company became a more focused oil and petroleum company in 1997, acquiring several companies in the U.S, the Middle East and Latin America. In 1998, the acquisition of the U.S. government’s 78 percent stake in California’s Elk Hills field helped Occidental become the largest gas producer and the third largest oil producer in the state. In 2003, Occidental agreed to supply gas to the Oman government. It also discovered two oil wells in Ecuador and added seven more production wells in the U.S at Horn Mountain field, which increased its capacity by 20,000 barrels. In early 2005, Occidental marked its return to the Libyan market. After the lifting of the U.S. sanctions, it was awarded the rights to operate nine exploration blocks in Libya.
Fiscal Year 2010 Summary
In 2010, Occidental's net income was $4.6 billion, a 56% increase from the previous year, with revenues of $19.2 billion, a 28% increase from the previous year. These increases were due to higher volume and higher average crude oil and natural gas prices worldwide, despite higher operating expenses. Daily production increased 5% to 753,000 BOE, an increase of 5% from the previous year, primarily due to new production in Bahrain and higher production in the Mukhaizna field in Oman.
As a general rule, the relationship between demand and price is inversely proportional, i.e., the demand declines with an increase in price. The oil and gas industry has witnessed a similar trend. However, in 2006, despite the higher price of crude oil, the demand continued to rise due to sustained economic growth in various countries. After the economic crash, oil prices bottomed out quickly, before rebounding to trade in the $70-$80 range in late 2009 and early 2010. Since Occidental Petroleum depends on enhanced recovery for a larger part of its production than most companies, it is more susceptible to the price swings. Occidental Petroleum spends $10.37 per barrel of oil to extract it since enhanced recovery costs more, and so a quick bottoming out of prices could have a large negative effect on its bottom line .
Over the years, the company’s growth has been sustained by the continuous increase in oil and gas reserves as well as the growing access to international markets through acquisitions and agreements. The company’s ability to recover oil from old wells (also known as enhanced oil recovery techniques) is also facilitating its growth. Occidental’s oil reserves stood at 1,678 million barrels in the U.S. and 556 million barrels in international locations such as Argentina, Bolivia, Colombia, Libya, Oman, Pakistan, Qatar, Russia, UAE and Yemen. At the end of 2006, Occidental’s natural gas reserves stood at 2,442 billion cubic feet in the U.S and 1,368 billion cubic feet in international locations.
The global demand for crude oil has increased (from 84 million barrels of oil per day (mb/d) in 2005 to 85.2 mb/d in 2006) and Occidental is strengthening its oil reserves and production base to take advantage of this trend. The acquisition of Vintage Petroleum in 2006 increased the company’s oil reserves and production capacity by 53,000 barrels of oil equivalent (BOE) per day in addition to providing a better foothold in Latin America, California and the Middle East. The signing of a new production sharing contract with an area of 5,620 square kilometers in Southeastern Oman is another step in this direction. By expanding into the international markets, Occidental is able to tap the demand across the globe instead of relying only on the U.S. market for growth.
Occidental has expertise in enhanced oil recovery techniques, which are used to recover additional oil reserves or prolong production in mature oil fields where traditional methods to recover oil are no longer useful. These techniques increase the life of old oil fields by as much as 30 years, thereby increasing the oil reserves available as well as production efficiency of the company.
Natural calamities and political instability represent threats to the oil and gas industry. Companies operating in this sector face a major threat during hurricanes as the risk of damage to their oil exploration and production infrastructure increases. However, during the hurricanes Katrina and Rita, Occidental’s operations in the Gulf Coast suffered only minor damages.
In December 2010, Occidental purchased 180,000 acres of prime oil acreage in the North Dakota Bakken for $1.4 billion, around $7,800 per acre. With this purchase, the company intends to become a significant shale player, as it previously stated in its May 2010 press release that it now derives over one-fourth of its California production from shales. Occidental's willingness to invest further in shale, despite the crowded market, is a sign that the company is confident in its ability to produce strong returns on its investment.
The company operates through two major segments – oil & gas and chemicals. Oil and gas is the main business segment for the company in terms of revenue and is primarily involved in crude oil and gas exploration as well as production. This segment accounted for 72 percent of the company’s revenue in 2006.
However, Occidental is only involved in exploration and production of oil and gas reserves, while large players, such as ConocoPhillips is involved in refining oil and selling it through retail gas stations in addition to exploration and production of oil and gas reserves.
The company also owns and operates chemical manufacturing plants at 24 sites in the U.S. through its subsidiary Oxychem. This segment accounted for 28 percent of Occidental’s revenues in 2006. Oxychem is a leading North American manufacturer of basic chemicals (chlorine, caustic soda, potassium chemicals and ethylene dichloride, vinyl (Vinyl Chloride Monomer – VCM, Polyvinyl chloride – PVC) and performance chemicals (chlorinated iscyanurates, resorcinol and sodium silicates). It is also involved in the production of chemical products in Mexico and is the largest marketer of chlorine and caustic soda in the U.S.
The main competitors of Occidental Petroleum are Exxon Mobil (XOM), Noble Energy (NBL), Newfield Exploration Company (NFX), Royal Dutch Shell and Burlington Resources Inc. These companies are involved in oil and gas exploration, production, refining, trading and marketing of various energy resources worldwide.
The table provided below compares the operational metrics for Occidental Petroleum vis-à-vis its competitors in 2008.
|CONOCOPHILLIPS||ROYAL DUTCH SHELL||EXXONMOBIL||CHEVRON||BP||LUKOIL(1)||Eni S.p.A(1)||Total S.A.|
|Oil and Gas Liquids|
(Millions of barrels)
(Billions of cubic feet)
|Oil and Gas Liquids|
(1) Latest data is for 2007 (2) Does not include reserves of equity affiliates