Occidental Petroleum buys major U.S. assets, unloads Argentina operations
Occidental Petroleum Corp. was buying American on Friday, announcing major acquisitions of more than $3.2 billion in crude and natural gas assets in North Dakota and southern Texas, in what may signal heightened energy-company interest in building up domestic production.
The Westwood company, the nation’s fourth-largest oil and gas exploration outfit, also said it had sold its operations in Argentina for $2.5 billion and would increase holdings in pipelines while boosting dividends to shareholders. And it said it would buy out Sempra Generation’s 50% of the Elk Hills power plant near Bakersfield, bringing its ownership to 100%.
Occidental President Stephen I. Chazen, who will take over as chief executive from Ray R. Irani next year, said in an interview that the company had kept to “our core areas in California and Texas” while taking advantage of a rare chance to buy a large parcel in the sprawling Bakken oil shale field in North Dakota, a formation believed to hold between 3.5 billion and 5 billion barrels of oil. Occidental is purchasing about 180,000 acres in North Dakota from a private seller for $1.4 billion.
“We made a toehold investment there a few years ago,” Chazen said. “This was an opportunity to acquire a large block of contiguous acreage where we can control our own destiny.”
Irani said in a statement that after the transactions close in the first quarter, they would add to earnings immediately and make it “more certain” that average annual production growth reaches the previously announced range of 5% to 8%.
To industry experts, the Occidental deal was a sign of several things, including the increasing attractiveness of U.S. land-based oil and gas assets far from the whims of foreign governments and the risks of deepwater offshore drilling. In June, Exxon Mobil Corp. bought independent XTO Energy Inc. for $40 billion, and last month, Chevron Corp. said it would acquire oil-shale firm Atlas Energy Inc. for $4.3 billion.
“There are some good domestic oil reserves out there, but some companies and private parties already involved can’t exploit them as much as they would like because they don’t have the cash,” said Brian Youngberg, an oil analyst with Edward Jones & Co. in St. Louis. “Occidental was well positioned to acquire some of that acreage to accelerate development and speed up production.”
Phil Weiss of Argus Research said that a seemingly minor part of Friday’s announcement — Occidental signed an agreement to increase its ownership in Plains All-American to approximately 35% — was another shrewd component of maximizing control and minimizing costs involved with exploiting the new acquisitions.
Plains is one of the largest operators of oil pipelines in North America, with operations in Texas, California, North Dakota and other areas.
“These pipelines are like toll roads,” Weiss said. “You have to pay to move your product through them, so they just bought some of the toll road. When they own a bigger piece of it, it reduces their costs.”
The Texas site Occidental is purchasing will be acquired from Shell, which has owned and operated the property for several years, for about $1.8 billion. The south Texas assets produce approximately 200 million cubic feet a day of natural gas equivalent. Analysts described it as a typical play by Occidental, which has a reputation for taking over older oil and gas fields that look to be long past their prime and managing to extract far more from them than their history would suggest.
“Occidental is very good at exploitation,” said Fadel Gheit, senior energy analyst for Oppenheimer & Co. “Occidental and Apache Corp. are just about the only two companies that can take out assets and breathe new life into them. They have already done that at their Elk Hills site in California.”
The purchase from Shell — in the geologic formation known as the Permian Basin, in western Texas and New Mexico — adds to one of Occidental’s most productive assets.
“It’s already a key area for them,” Weiss said. “They get 30% of their production from the Permian Basin, and it’s typical of what Occidental can do. They acquire fields with an upside that they can exploit, and they bring additional efficiencies to production to make them operate better.”
Analysts said that it was only a matter of time before Occidental announced a major acquisition of some kind. It had already achieved one of the industry’s most impressive cash flows and low debt ratios, giving it the flexibility of oil companies that are much larger.
Even before the company decided to sell its Argentine assets to Sinopec, a subsidiary of China Petrochemical Corp., for after-tax proceeds of about $2.5 billion, Occidental’s cash flow exceeded $7 billion, with $2 billion in cash on hand, analysts said.
The company also announced that it would be increasing its common dividend by 21% to 46 cents a quarter, effective April 15. Occidental said it would finance the acquisitions from cash and debt.
Occidental’s shares rose $1.97, or 2.2%, to $93.04.
Chazen said the proposed acquisitions were a sign of the company’s belief that the global and U.S. economies were on the rebound.
“We think the economy is getting better slowly,” Chazen said, “and it’s a good time to go after reasonably priced assets.”
