Occidental Petroleum (NYSE: OXY)

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Occidental Petroleum (NYSE: OXY): The Industry-Changing Oil And Gas Company You Haven’t Heard Of

by Tony Daltorio, Investment U Research
Monday, January 18, 2010

While the financial world gushes about oil and gas on practically a daily basis, it seems to have completely forgotten about California-based Occidental Petroleum (NYSE: OXY), despite how the company made the biggest oil find in California in 35 years last July.

Then again, Occidental kept most of the details to itself, saying only that it had discovered 150 – 250 million gross barrels of oil equivalent reserves in Kern County, California. It wouldn’t even specify the techniques it used.

Despite its puzzling shyness on the subject, this quiet company might hold more significance than outsiders know.

Some analysts believe the field might hold between 1 – 2 billion barrels of oil equivalent… and that Occidental could usher in the start of a new era of oil exploration in the United States.

Occidental Petroleum’s Uniqueness

Anybody who follows the oil industry closely knows about Occidental Petroleum’s discovery last year, even if they don’t dwell on it much these days.

That’s because of the company’s unique focus on enhanced oil recovery.

Though experts estimate that two-thirds of the world’s oil remains in the ground, big oil corporations largely ignore those resources due to the technical and financial difficulty involved in extracting them.

Occidental, on the other hand, has a policy of actually acquiring those oil fields that require extra work. By using every available technique – from steam to carbon dioxide forced down into wells – the company has quietly grown into the fourth largest oil and gas company in the U.S. based on market capitalization, with operations in California, Texas, Colorado and New Mexico.

Of course, Occidental has much more in its portfolio than just U.S. energy assets. More than a quarter of its production comes from the Middle East and North Africa, two areas it has focused on for more than forty years. And it has a significant presence in Oman, Qatar, Bahrain, Libya and Yemen. Combined, that gives it the sixth-largest position in the region.

In addition, Occidental has operations in Argentina, Bolivia and Columbia.

And while all of those bolster the company and its investors, it’s the newly discovered California field that holds the biggest chance of propelling Occidental forward.

Occidental Petroleum… a Value Investment?

Even before discovering the California field last year, analysts classed Occidental Petroleum as a top-quality firm. Fortune Magazine even ranked it number 1 in the mining and crude oil production sector in 2009, and in the world’s top 10 for corporate assets, management quality, financial soundness and long-term investments.

But when it comes down to details, Occidental stands out all by itself, in large part because of its size. On the one hand, it’s several times larger than the typical independent oil firm, but it’s significantly smaller than the major oil companies. And yet, it retains qualities of both.

Like some of the more significant players, Occidental has little exploration risk because it buys already proven fields from other businesses that don’t have the technology or expertise to work the area any further.

As Bernstein Research analyst, Ben Dell, noted in a recent report on exploration and production companies, Occidental breaks away from the pack with consistently lower-than-average search and development costs.

Yet like many independent oil companies, it has no refining or marketing business and a focused international scope, with approximately 40% of its production coming from outside the U.S.

Occidental stands out again since it devotes nearly 75% of its portfolio to oil despite the rising trend towards natural gas. And another unique characteristic is that the company moves very quickly to snap up assets that it likes. That’s partially because it targets small fields from individuals rather than big businesses, therefore avoiding the hassle of disclosure.

This allows Occidental to average between 40 – 45 acquisitions a year, quietly bulking up on assets that promise positive production potential with the right technology.

Thanks in part to that technique, the company is forecasting 5 – 8% annual production growth through 2012, making it perfect for buying up now. And it has a few other factors going for it, including how it:

Pays an annually raised dividend.
Boasts an “A” credit rating by all the major rating agencies.
Has a debt to capital ration of only 9%, one of the lowest in the industry.

Given its leading returns and low debt – not to mention the Californian oil discovery that could still prove to be significant – Occidental Petroleum shares stand to rise much higher in the long term.

Good Investing,

Tony Daltorio