Production from the Permian Basin has become the centerpiece of plans for many U.S. producers, but it might be especially important to Occidental Petroleum Corp., which is depending on low-cost production from the play to lead its return to consistent profitability.
During the company's second-quarter earnings call Aug. 3, CEO Vicki Hollub said Occidental now has its best asset base in its nearly 100-year history. Its holdings in the Permian top that list, and Hollub said it will be the engine that drives the company into positive territory.
"Over the past few years, we executed a strategic initiative to divest our lower-margin, lower-return oil and gas production with a plan to replace it with higher-margin, higher-return production from our Permian resources business. This was a returns-focused strategy with the objective of ensuring that every dollar we invest delivers the highest possible returns," she said. "To reach the cash flow needed to be break-even at $50 WTI [West Texas Intermediate crude oil] and cash-flow-neutral at $40 WTI, we determine we would need incremental production of 80,000 [barrels of oil equivalent] per day from Permian resources, along with the additional cash flow that was expected from our chemicals and midstream businesses."
After making a number of acreage swaps over the past year, Occidental now has more than 300,000 net acres in the Permian. Senior Vice President Joseph Elliott said that through a combination of buying acreage bordering core areas and selling off noncore assets in the Permian, the company has developed an extensive list of inexpensive drilling spots.
"We've achieved our 2017 target of adding 400 locations to our less-than-$50 WTI break-even inventory. We now have approximately 16 years of inventory at a 10-rig pace with the less-than-$50 break-even," Elliott said. "Improved capital efficiency and well performance added 255 locations and are based on repeated performance improvements from well design and technology that are sustainable and have further room for improvement. We've traded approximately 7,000 total net acres this year, enabling us to convert shorter wells into higher-value extended laterals, bringing our less-than-$50 break-even average lateral length to 8,600 feet. We've also evaluated approximately 15,000 new net acres, which added 100 locations to our less-than-$50 break-even inventory."
Elliott said Occidental had increased its rig count in the Permian to 11 by the end of the second quarter, a level it will maintain through the end of 2017.
Occidental reported core income of 15 cents per share for the second quarter. That topped the S&P Capital IQ consensus normalized EPS estimate of 12 cents.