Occidental Profit Falls on Higher Costs, Gas Price Drop

Occidental Petroleum Corp., the largest onshore crude producer in the continental U.S., said third-quarter profit fell 22 percent as a surge in output failed to make up for higher costs and declining natural gas prices.

Net income dropped to $1.38 billion, or $1.70 a share, from $1.77 billion, or $2.17, a year earlier, Los Angeles-based Occidental said today in a statement. Per-share profit was 7 cents more than the average of five analysts’ estimates compiled by Bloomberg. Sales fell 1 percent to $5.97 billion.

Chief Executive Officer Stephen I. Chazen said if the company’s stock price relative to peers doesn’t improve in the coming months, Occidental will begin to return more cash to shareholders “one way or another,” including possibly through buying back shares or boosting the company’s dividend.

Chazen, who took over as CEO in May of 2011, said he is focusing on reducing the cost of drilling programs in California and Texas in order to boost the company’s profitability and share price.

“If I don’t see real improvements in the return in the next couple quarters, the strategy will change,” he said. “The costs are how I intend to make the performance of the stock do better. The tool is bringing the costs under control and improving the profitability.”

Occidental rose 2.3 percent to $82.52 at the close in New York. The shares, which have 18 buy ratings and six holds from analysts, have fallen 12 percent this year. Exxon Mobil Corp. has risen 6 percent and Chevron Corp. has risen 3.6 percent.

New Prospects

Chazen plans to spend $5.5 billion this year developing new prospects in Texas, New Mexico and California. Production in the Permian basin in Texas and New Mexico grew 3 percent to the equivalent of 209,000 barrels a day compared with the second quarter. Output in California fell about 1 percent to the equivalent of 147,000 barrels a day, according to supplemental data posted on the company’s website.

Occidental’s California results have been “slightly disappointing” since the company announced in 2009 a discovery that could hold the equivalent of as much as 500 million barrels of crude, Matthew Portillo, an analyst at Tudor Pickering Holt & Co. in Houston, said in a telephone interview before earnings were released.

“The growth in California and the unconventional resource opportunity has not yet borne fruit,” said Portillo, who rates Occidental a buy and doesn’t own shares.

Operating Costs

Operating costs in California have doubled, and permitting in new fields is still slower than anticipated, he said. Occidental has reduced its rig count in the state from 30 earlier in the year to 20 and has begun to focus on conventional drilling rather than on shale, Chazen said.

“They can still take the costs down considerably,” he said.

Occidental’s U.S. production rose to the equivalent of 469,000 barrels a day, a record for the eighth consecutive quarter, and total production was 766,000 barrels a day, a 4 percent jump over the July-to-September period in 2011. Occidental was able to sell crude at a higher price. It sold gas, which accounted for 39 percent of production last year, for $2.48 a thousand cubic feet during the quarter, a 41 percent decline from a year earlier.

“Even though they beat expectations, you can see the effect that the decline in natural gas prices is having,” Gianna Bern, president of risk-management consultant Brookshire Advisory & Research, Inc. in Chicago, said in a telephone interview today. “Many natural gas producers are going to continue to put on the brakes.”

Natural gas prices averaged $2.893 per million British thermal units in New York during the quarter, down 29 percent from a year earlier. The futures have recovered after reaching a 10-year low on the New York Mercantile Exchange in April.

Brent crude, the global benchmark, fell 2.4 percent to $109.42 a barrel.


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