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Oxy to Increase Permian Rigs, ‘Drill Through’ Downturn

While reporting quarterly losses in its U.S. oil and natural gas operations, Houston-based Occidental Petroleum Corp. (Oxy) is focusing big on the Permian Basin and plans to increase its working rigs there later this year.

Overall, Oxy reported a 1Q2015 loss of $218 million (negative 28 cents/share), compared to income of $1.4 billion ($1.75) for the same period last year. U.S. oil/gas operations showed an $89 million loss in the first quarter, compared with profits of $412 million in the first quarter 2014. But, Oxy’s top executives concentrated their 1Q2015 earnings conference call on its growing activities in the Permian.

The company expects the Permian focus is going to result in sharp increases in oil production even in a $60/bbl environment, management said Wednesday.

Oxy's large holdings in the Permian have become a "sustainable, profitable growth engine," said CEO Stephen Chazen. He credited his newly named successor, Vicki Hollub, now president of worldwide oil operations, for making the Permian Oxy's "most attractive asset."

First quarter Permian production hit 98,000 boe/d, a 46% increase year/year. Oil production growth saw a 25,000 b/d increase year over year, prompting Oxy to raise its growth estimates for the Permian this year to 105-108,000 b/d from 100,000 b/d set earlier. Overall, the company expects U.S. oil production growth of 8% this year, partially offset by expected declines in gas and liquids production.

The management team emphasized that the Permian results are exceeding expectations with unconventional plays offering strong returns even in the depressed commodity price environment, and the overall portfolio is "unmatched in the industry."

The sharp overall production upswing in the Permian included 62,000 b/d of oil, a 68% increase from a year earlier, Hollub said. "We would have produced even more but were negatively impacted by about 4,000 b/d in January due to severe winter weather.”

Oxy spent $728 million in capital expenditures in 1Q2015 in the Permian, operating 25 rigs drilling 86 wells, of which 61 were horizontal; 126 wells were brought into production, including 67 horizontals. Hollub the company has moved from "an appraisal" mode in the Permian to a "targeted development program," applying a manufactured approach with more integrated planning and engineering work.

Oxy plans to keep an average of 13 drilling rigs busy this year, drilling 150 wells in the Permian, which Hollub characterized as a higher activity level than was previously planned. "We think investing our efficiency gains is a prudent action to take," she said.

Drilling in the Permian is to be concentrated about equally between the Delaware and Midland subbasins, according to Hollub. Oxy plans no new drilling in the Central Basin.

Chazen said the Permian is the best play Oxy has "in any pricing environment," and thus any excess capital expenditure funds would go there. "We have a lot of locations that work in a $60-65/bbl environment, and if we start a well today we won't see the production until the late third quarter, but we have gotten a lot better at bringing the stuff to market a lot faster.

"So, we may put even more rigs to work depending on the environment; our view [of the current environment] is perhaps different than others. If you put these wells on production they work and there is no concern about returns. If oil prices go up, we can get 90-95% of that price change in that well."

Chazen said if there is a boost in oil prices, completion prices would also go up, so it is more advantageous to complete more wells in today's lower cost environment. "Our view is that you drill through today's environment.”

Hollub said Oxy is keeping its teams in place and keeping them busy, and as a result she thinks they may be better able to efficiently ramp up production when prices get higher.

Oxy reported profits in 1Q2015 of $200 million in its international oil/gas activities and $139 million for its chemical business, compared with $553 million and $136 million, respectively, for the same quarter last year.

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