Occidental Petroleum (NR): E&P portfolio positioned to resume multi-year growth at industry-leading ROCE - Goldman Sachs - November 01, 2005
We continue to believe Occidental Petroleum is well positioned to deliver organic E&P production growth of 5%-6% per annum for 2006-2010 at industry- leading absolute and risk-adjusted returns on capital employed (ROCE). Consistent with its strategy of adding long-lived oil exploitation/development-oriented assets, Oxy has announced several major enhanced oil recovery (EOR) projects this year--in the Middle East, Latin America, and US Permian Basin--that could extend the company's above- average growth and returns combination it has enjoyed over the past several years. As management indicated on its 3Q earnings conference call, additional growth projects could surface particularly in Libya where the company has interests in both exploration acreage and legacy producing fields.
Occidental Petroleum is Not Rated. (Goldman Sachs & Co., and or one of its affiliates, is acting as financial advisor to Occidental Petroleum Corporation in the proposed acquisition of Vintage Petroleum Inc. Goldman Sachs & Co., and or one of its affiliates, will receive a fee for its financial advisor role.)
E&P PRODUCTION GROWTH TO ACCELERATE OVER THE COMING YEARS...
2005 has largely been a transition year for Oxy, with E&P production reaching a plateau after achieving a 6% CAGR from 1999-2004. With its E&P portfolio now reloaded with projects in Oman, Qatar, Libya, Latin America, and the US Permian Basin, we see a re-acceleration in E&P production growth similar to its historical rate for 2006-2010. Management's guidance of a 2005 production exit rate of around 595,000 BOE/d is slightly lower than its original guidance of 600,000 BOE/d, although given production sharing contracts (PSCs) that reduced reported volumes by roughly 13,000 BOE/d and above normal hurricane activity in the Gulf of Mexico, we do not view it as material.
... WITH OXY LIKELY MAINTAINING ITS ROCE ADVANTAGE
We expect Oxy's Middle East projects and acquisitions of Permian Basin assets from Exxon Mobil and Vintage Petroleum (VPI; NC) to continue Oxy's trend of industry-leading long-term ROCE. In our view, Oxy's continued focus on adding long-lived assets with exploitation/development-oriented opportunities is consistent with its historical strategy that has ultimately led to Oxy's current returns advantage. In terms of Oxy's recently announced acquisition of Vintage Petroleum, we estimate an 11% IRR and 12% long-term average ROCE under our base-case WTI spot oil assumption of $68 per barrel for 2006/2007 and a normalized $35 per barrel for 2008 and thereafter. Assuming current WTI oil strip prices of roughly $57 per barrel through 2010, we estimate a 16% IRR and 19% average ROCE. Our modeling assumes roughly 580 million BOE of recoverable reserves, net of roughly 71 million BOE of expected asset sales at $9 per BOE. Specific to the Middle East, management has repeatedly indicated that profitability from new projects such as Dolphin and Mukhaizna would be consistent with the company's historical results in the Middle East. If Oxy management is proven correct, our estimated 14% normalized ROCE for 2008 will prove to be too conservative. Note, Middle East projects even during a sub-$30 WTI oil environment historically have generated 25%+ ROCE.
KEY COMPANY-SPECIFIC CATALYSTS
(1) Street confidence in Oxy's E&P production profile. We believe as Oxy begins to provide more detailed guidance on expected future E&P production--either on its next conference call or any potential analyst meeting in 2006--investors could gradually gain confidence in Oxy's ability to deliver 5%-6% CAGR.
(2) Additional EOR projects and exploration in Libya. On the 3Q earnings conference call, management indicated that it is in talks with Libya to potentially add a number of EOR projects. In our view, additional projects in Libya would not only raise investor confidence in Oxy's production profile but also indicate a strengthening of Oxy-Libya and US-Libya relations. Oxy is also in the process of gathering seismic data on its Libya exploration blocks with a first well expected to spud in mid-2006. In our view, given investor concerns about the seemingly high government take in Libya, the burden of proving the economic prospectivity of the blocks to the Street is on Oxy.
(3) Closing of the Vintage Petroleum acquisition. Management expects to close the transaction in 1Q 2006, subject to regulatory and shareholder approvals.
3Q 2005 RESULTS IN-LINE WITH EXPECTATIONS
Oxy reported adjusted 3Q 2005 EPS of $2.65, broadly in-line with the $2.63 First Call consensus estimate although slightly below our $2.70 forecast. The negative variance between reported results and our expectations was primarily due to lower international realized prices relative to benchmark indicators.
UPDATED ESTIMATES
We have lowered our 4Q 2005 and full-year 2005 EPS estimates to $3.25 ($3.37 previously) and $10.14 ($10.30 previously) to reflect actual 3Q 2005 results, lower assumed chemicals earnings, higher assumed exploration expense, and minor other adjustments. We have also lowered our respective 2006 and 2007 EPS estimates to $14.35 ($14.55 previously) and $15.45 ($15.60 previously) to reflect a slightly weaker outlook for chemicals than previously assumed. There is no change to our normalized 2008-2010 EPS forecasts. See Exhibit 1 for a summary model of Occidental Petroleum.
I, Arjun Murti, hereby certify that all of the views expressed in this report accurately reflect my personal views about the subject company or companies and its or their securities. I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this report. |
