In the dynamic oil and gas production world, Occidental Petroleum (OXY, Financial) stands as a beacon of operational excellence and pioneering advancements.
The exploration into Occidental's operational prowess and strategic initiatives offers a comprehensive view of a company at the forefront of transforming the oil and gas industry, balancing ambitious production goals with environmental responsibility and navigating the complex market landscapes with agility and foresight.
Pioneering Operational Excellence: Superior Performance in Oil and Gas Production
To begin with, Permian, at Delaware Basin, Occidental's Meridian State well achieved a noteworthy 30-day initial production (IP) of 8,250 barrels of oil equivalent per day (boed) and a cumulative 90-day production of 553 thousand barrels of oil equivalent (Mboe), setting an industry record for the Wolfcamp B formation.
Notably, the Delaware Completions Team achieved a remarkable continuous pumping time record of >88 hours, surpassing the previous record by 116%, showcasing operational prowess in continuous efficiency (Well-based) improvements.
Additionally, Delaware Basin has achieved 96% operability year-to-date (YTD), reflecting operational resilience and efficiency through optimized gas storage, infrastructure, and take-away strategies. The introduction of next-generation tankless facility designs in the Permian Basin reflects a focus on sustained high operability.
For instance, in the Delaware Basin from 2015 to 2023, Occidental displayed superiority in productivity improvements of 205%; it added a further 9% from 2022 to 2023. Fundamentally, based on its performance efficiency, Occidental is in a dominant position, behind Exxon-Pioneer (XOM, Financial), in the Permian basin with production of 588 Mboed (Q3 2023) has reached the high end of guidance.
Source: bloomberg
Looking at DJ Basin, the 2023 wells outperformed the 2022 program by an impressive 36%, signifying a notable enhancement in operational performance. In detail, it drilled a 3-mile lateral DJ Basin well in 5.3 days, exceeding Occidental's previous record by 8%, illustrating the company's focus on expedited and efficient drilling operations. For instance, Occidental's data-driven well design and operational efficiency contributed to significant improvements in healthy productivity related to the DJ basin, +56% from 2015-2016 to 2022 and an additional 36% from 2022 to 2023.
Based on this superior operational efficiency, Occidental reported a substantial cash flow from operations (CFFO) before working capital of $3.3 billion, showcasing strong financial performance. Meanwhile, it maintained a robust, unrestricted cash balance of $0.6 billion as of Q3 2023, demonstrating financial stability and agility for further strategic investments.
Analysis of cash flow sensitivities and cost efficiencies demonstrate Occidental's astute risk management, enabling effective management of fluctuations in oil and gas prices. For instance, its domestic operating costs are approximately $10.50 per boe, and its transportation costs are around $3.80 per boe, allowing it much room to absorb oil price shocks easily.
In detail, Occidental experiences an annualized cash flow change of nearly $205 million for every $1.00 per barrel change in WTI oil prices. Similarly, it experiences an annualized cash flow change of approximately $170 million for every $0.50 change per metric million British thermal units (MMBtu) in natural gas prices.
Source: Earnings Presentation
Finally, looking at Occidental's strategic outlook, there is an upward revision of full-year production guidance, supported by exceptional performance, which signifies a positive trajectory for growth. It is taking on a competitive edge through advanced technologies like the natural gas hybrid frac pump. The use of advanced technology also demonstrates the company's proactive stance toward reducing costs and emissions, positioning itself advantageously in a business environment with highly volatile prices for both oil and gas.
DAC Revolution: Occidental's Strategic Pursuit in Direct Air Capture Initiatives
Occidental's strategic partnership with Carbon Engineering (CE) serves as a cornerstone of its Direct Air Capture (DAC) initiatives. The company's incremental investment in CE, from an initial 16.5% to acquiring 100% ownership, highlights Occidental's commitment to scaling DAC technology. Numerically, this progression demonstrates the company's strategic vision and financial commitment to CE's technological potential.
Notably, establishing the CE Innovation Center focused on technological improvements showcases Occidental's targeted approach to DAC. The center's identification of enhancements for DAC technology, coupled with synergies across CE, Occidental Major Projects, and OxyChem, indicates a deliberate strategy to hit scalability and efficiency.
Specific technological advancements such as improvements in capture efficiency, power consumption reduction, shared infrastructure, and next-gen chemical processes provide measurable indicators of Occidental's dedication to enhancing DAC technology.
Fundamentally, Occidental's ability to forge strategic partnerships with industry giants signifies its strength in securing financial backing and consumer interest across diverse sectors. For instance, the company's collaboration with BlackRock (BLK) as an investment partner in STRATOS and a substantial $550 million investment showcases the credibility and confidence Occidental garners in the sector.
In the same context, Occidental's strategic alignment with market demand and evolving policies is evidenced through numerous agreements that serve as tangible indicators of the increasing demand for DAC-generated carbon dioxide removal credits (CDRs). The Key Purchase Agreements include All Nippon Airways, Amazon (AMZN) (250K metric tons of CDRs), Houston Texans, Houston Astros, etc.
Source: Earnings Presentation
Moreover, Occidental's alignment with policy frameworks such as the Inflation Reduction Act (IRA) and participation in compliance markets like UN ICAO CORSIA exhibit its proactive approach to regulatory frameworks. The company's engagement with these policies aims to catalyze commercial development while maintaining compliance with emerging regulations.
Technically, Occidental's ability to execute plans into tangible progress is evident through its project milestones in DAC infrastructure. The progress in STRATOS construction, reaching approximately 30% completion, showcases the company's capability to translate strategic plans into actionable developments.
The commencement of front-end engineering design and ongoing stratigraphic well testing for the South Texas DAC Hub reflect Occidental's dedication to project efficiency and scalability. The company's successful selection for a grant from the US Department of Energy underscores external validation and support for its DAC initiatives.
Finally, Occidental's orientation towards accelerating cost reductions in the field highlights its dedication to maintaining a competitive edge in the DAC market. The focus is reducing costs to make DAC-generated CDRs cost-effective for hard-to-abate industries that may drive positive environmental change while offering viable commercial solutions. For instance, it emphasizes air contactor geometry improvements, power-efficient fan motors, and chemical reaction rate enhancements.
Overall, Occidental's pursuit of reducing costs aligns with its vision to provide essential low-carbon products and contribute to corporate emissions reduction strategies to establish a strong foothold in the expanding DAC market.
Technical Take And Downsides
Occidental's stock price remains confined, unable to breach the pivotal resistance threshold around $66–$67 within its current consolidation range. Instead, it continues its descent below the 52-week Exponential Moving Average (EMA), gravitating toward the synthetic support level established by Berkshire Hathaway (BRK.A, BRK.B), positioned approximately between $56 and $58.
This downward trajectory aligns with its return on equity (ROE), which has yet to exhibit improvement. The persisting absence of ROE enhancement suggests a potential stock price adjustment in the upcoming weeks, possibly reaching the support zone near $56.
For those adopting a bullish stance, this juncture presents an opportune moment for initiating or accumulating positions to lower the average cost. Optimal ranges for establishing moderate long positions are projected between $56 and $49.75, while more aggressive long positions could be considered within the $49.75–$39.70 price bracket (based on the Fibonacci Extension).
Concluding Thoughts
Finally, there is additional downside risk due to the downward pressure on WTI crude oil futures prices, attributed to the National Oceanic and Atmospheric Administration's forecast of a warmer-than-anticipated winter. This projection could contribute to additional downside for Occidental's stock price.
Nevertheless, a critical downside risk to the bullish perspective revolves around the potential reduction or complete exit of Berkshire Hathaway's position. Such a move carries the substantial threat of causing significant damage to the stock's market valuation.
