With U.S. natural gas prices still the “great uncertainty,” Los Angeles-based Occidental Petroleum Corp. (Oxy) is undertaking a cost-cutting program designed to increase margin while it continues to emphasize oil production growth over gas in its domestic U.S. plays, CEO Steve Chazen said Thursday.
In reporting that Oxy’s U.S. oil/gas division produced record volumes for a ninth consecutive quarter, Chazen said during a conference call that 4Q2012 core profits were $1.5 billion ($1.83/share), compared with $1.6 billion ($2.02) for the same period in 2011. The 4Q2012 net income results were reduced to $336 million (42 cents/share), because of a $1.1 billion ($1.41) impairment charge for the company’s gas assets in the Midcontinent.
In the face of the continuing U.S. domestic natural gas uncertainty, Occidental’s senior executives emphasized that the company is already halfway to achieving its goal of a 15% reduction in its overall drilling costs this year, and up to $450-500 million in reduced operating expenses. In California alone, Oxy expects to reduce its capital expenditures by $500 million
“Our total capital spending in 2013 is expected to decline 6% in 2013 to $9.6 billion from the $10.2 billion we spent in 2012,” said Chazen, noting that the reductions will come entirely in Oxy’s oil/gas businesses.
Oxy plans to continue to focus on its Permian Basin holdings, along with California, while it continues to hold back further work in the Bakken until prices and conditions change there. Its expansions in any of the basins are most likely to be vertical rather than horizontal drilling plays because that is what the reservoirs dictate so far, said Bill Albrecht, president of Oxy’s Americas oil/gas businesses.
In response to questions from analysts, Chazen said Oxy added “a little gas” in California in the fourth quarter. “I did sell forward the [natural] gas [reserves] that we bought at below $4/Mcf for 15 months, so we get about one-third of our money back in the 15 months we put into it, so on that basis it was reasonable cost, and that is all of that you will probably see [of that type transaction] from us,” he said.
Albrecht said in the Permian Oxy plans to average 25-27 rigs during 2013, with roughly one-third of the activity in the Wolfberry Trend area and another third in the Delaware Basin, with the rest spread around several “anchor programs.”
“We expect about a 15% weighted average capital cost reduction in our anchor programs in the Permian,” said Albrecht, noting that only about 15-20% of the Oxy wells in the Permian will be horizontal.
In response to other questions on the Bakken, Chazen said Oxy has already seen some “sizable reductions” in costs, but he still doesn’t think those costs are “where we need to be. So we are going to continue to drill at a moderate rate [in the Bakken] and see what does down. The product price is now better there than it has been, but I think we will likely hold this level of drilling this year and concentrate on lowering our costs and spend less time moving rigs around because there is a lot of money being spent on that.”
Chazen said Oxy plans to increase its activity in the Bakken in 2014 after keeping more of a lid on capital spending this year. “For this year we are trying to be conservative and only spend money on the best things we can,” he said.
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