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Oxy’s Permian -- Legacy and New -- Drive Output in 4Q

Occidental Petroleum Corp.'s (Oxy) senior executives on Wednesday were whistling a familiar tune regarding production growth and efficiency gains, led by the Permian Basin, with fourth quarter output jumping year/year by a record 20,000 boe/d to 159,000 boe/d.

CEO Vicki Hollub, who led a conference call to discuss year-end results, said most of the Houston-based company’s production was from the Permian. "We achieved record initial production rates across eight benches and continued to deliver step-change well results in the Greater Sand Dunes during 4Q2017," she said.

Oxy drove up its overall reserves  in the final quarter of the year, while driving down its finding and development (F&D) costs, again led by the Permian, where the replacement ratio for reserves reached 365% and F&D costs dropped under $10/boe to $9.77. Companywide, the replacement ratio was 187% with overall F&D of $8.53/boe.

Hollub attributed the continued increased profitability to a combination of investments in "people, technology and assets," moving the Oxy breakeven plan ahead of schedule. In the short-term, at $50/bbl West Texas Intermediate (WTI) prices, Oxy is in a position to deliver continued 5-8% overall annual growth. At $60 WTI prices, it would be able to grow toward the higher end of that range, Hollub said.

Total capital spending this year is estimated at $3.3 billion, with $1.9 billion committed to the Permian. Hollub said the program there is designed to achieve the breakeven plan in 3Q2018, generating annual growth in 2018 of 8-12%.

For Permian enhanced oil recovery (EOR), Oxy plans to use capital to sustain production levels, the CEO said.

Senior Vice President Jody Elliott, who heads the U.S. oil and gas business, predicted that Oxy's ongoing efficiency improvements in both unconventional and EOR businesses would offset newly developing inflationary pressures from the oilfield services sector.

With the added resources and operating efficiencies realized last year, Oxy is in a position "where we see our ability to offset and even drive down costs in an inflationary period," Elliott said.

Elliott estimated the inflationary pressures of about 5% for drilling costs and 10-15% for completions. In the Permian, Oxy exited 2017 with operating expenses (opex) at $7.63/boe. Elliott predicted those opex should fall sharply this year.

"We'll exit 2018 below $6/boe, so that additional production growth will continue to drive down resources operating expenses," Elliott said.

More than half (55%) of Permian wells are online in southeastern New Mexico, with 45% in West Texas -- 30% in the Delaware sub-basin and 15% in the Midland sub-basin. That equates to 11 or 12 rigs, with six in New Mexico, four in the Delaware, and one or two in the Midland, Elliott said.

"I don't see that changing drastically but again, we're continuing to develop inventory, learn new things…” He said the Turkey Track leasehold in New Mexico’s Permian “is a great example.”  Oxy engineers first thought there was a single bench in the Second Bone Spring formation, but they found two.

Elliott described the new area of interest in New Mexico as a six-section modular development in the Third Bone Spring, where "all five wells online in the fourth quarter are performing above expectations." Production topped 200,000 boe during a 90-day period.

"We expect Turkey Track to deliver more than a 40% all-in rate of return at $50/bbl,” Elliott said.

For 4Q2017, Oxy earned $497 million (65 cents/share), versus a year-ago loss of $272 million (minus 36 cents). For the year, profits totaled $1.3 billion ($1.70/share), from 2016 losses of $574 million (minus 75 cents).

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