Occidental’s California Spawn to Dominate Oil Drive

April 11, 2014 By

February 14, 2014

by Bradley Olson, Bloomberg

The new California crude explorer planned by Occidental (OXY) Petroleum Corp. will emerge as the leading player in the state’s drive to dominate the U.S. oil boom.

Believers in a revival of California’s former status as the nation’s biggest producer will find the ideal investment vehicle: a high-growth producer drilling the vast Monterey shale. The formation, almost the size of Delaware, is estimated to hold more than double the combined resources of the country’s two hottest oil regions in Texas and North Dakota.

Crude output in California grew for the second consecutive year – the most since 1985 – as producers used new drilling techniques in the state’s many aging oilfields. Occidental said yesterday it plans to separate its California operations by early next year, creating a $20 billion company with 8,000 employees that produces almost a fifth of the state’s oil.

“If you’re an investor interested in the California market, this is going to be the company that will carry that flag,” said Gianna Bern, a principal at risk-management adviser Brookshire Advisory & Research Inc. “This will be an interesting opportunity to see whether they can make it happen or not.”

Significant risks temper the potential. Environmental activists have begun to focus on the impact of drilling in the state, slow permit approvals from regulators may hold back growth and engineers so far are vexed by California’s complex, earthquake-prone geology. A deepening drought is adding to concern about how much water the oil industry consumes, threatening restrictions that could further slow development.

Disappointing Results

Investors who bought Occidental with hopes for a big payday from the Monterey Shale have so far been disappointed.

“No one has found the secret sauce yet to the Monterey,” said David Hackett, president of Stillwater Associates, an energy consulting firm in the state. “Occidental is working hard at it, but they don’t understand it well enough to make it perform like everybody hopes it will.”

Occidental plans to boost spending and debt at the California company, which will operate as a traditional high-growth explorer, Leo Mariani, an analyst with RBC Capital Markets in Austin, Texas, wrote today in a note to clients.

“Historically, California has been a ‘hard to grow’ asset and suffers from severe regulatory constraints,” a factor that could weigh on how investors value the new company, Mariani said. The potential of the Monterey has been questioned by executives including Chevron Corp.’s John Watson and Continental Resources Inc.‘s Harold Hamm.

Oil Legacy

California’s oil heritage dates to the 1500s, when Spanish explorers saw indigenous people using tar-like crude from natural seeps to make canoes and baskets. California became the leading oil-producing state in 1903 and vied with Oklahoma for the title through 1928, when both were surpassed by Texas. Output peaked in 1985 at 1.2 million barrels a day, according to the Historical Dictionary of the Petroleum Industry.

California experienced a record dry year in 2013, alighting fears in the agriculture industry over competition for water. The average number of drilling rigs operating in 2013 fell for the second consecutive year as permits slowed and state regulators issued new guidelines for the use of a production method known as hydraulic fracturing, or fracking.

Environmental Backlash

Environmental groups concerned about the possibility of an oil renaissance are lobbying legislators and organizing protests against development. A federal judge in April ruled that the U.S. Bureau of Land Management violated the law by failing to sufficiently study the impact of fracking on the environment.

“If we go in the direction of North Dakota, the consequences for California would be devastating,” said Patrick Sullivan, a spokesman for the Center for Biological Diversity, which sued to invalidate government lease sales for drilling. “We’re determined to protect water, wildlife and public health.”

Despite the obstacles, state oil production surged in February to the highest seasonal level in three years, according to U.S. Energy Information Administration data through November. Output climbed 13,000 barrels a day in the first 11 months of 2013 and rose 4,000 in 2012, marking the first annual rise since 1998.

Occidental plans to drill more than 1,000 wells in 2014, a 36 percent increase from 2013 that will help increase oil production by 11 percent, a growth rate that rivals some of the best onshore drillers. More than 10 percent of those wells will be in layers of shale rock, according to a Jan. 30 company presentation.

California Cash

The company expects to generate $1 billion in cash this year form California operations. The company produces the equivalent of 154,000 barrels a day in the state and the potential value of a stand-alone California operator will be as much as $19 billion, according to analysts at Tudor Pickering Holt & Co.

“If they can get growth going, it could be an attractive company,” said Brian Youngberg, an analyst at Edward Jones & Co. in St. Louis. “California has struggled to get going in the past. The potential is clearly there, but regulatory and other hurdles have been impediments.”

To contact the reporter on this story: Bradley Olson in Houston at bradleyolson@bloomberg.net

To contact the editor responsible for this story: Susan Warren at susanwarren@bloomberg.net