From The Wall Street Journal
Occidental Petroleum isn’t alone.
The Houston-based oil driller dug deep to outbid Chevron for rival Anadarko Petroleum by taking an expensive check from Warren Buffett’s Berkshire Hathaway. Others are on the hunt for assets in the area as a way to boost returns. That competition speaks to why Occidental has come out so strong.
West Texas has become a big focus for drillers from ConocoPhillips to EOG Resources . The U.S. Energy Information Administration estimates the region should pump more than 4 million barrels a day in May, helping make the U.S. the world’s largest producer of crude oil.
But returns are under pressure despite technologically driven efficiency gains in recent years. According to a report from the Federal Reserve Bank of Dallas, the average Permian Basin well still needs oil at nearly $50 a barrel to be profitable. The range varies wildly, though, going above $70 for some drillers. West Texas Intermediate crude is trading around $61 a barrel.
Companies looking to the Permian for growth also must assuage shareholders increasingly clamoring for better cash returns. As a result, many aren’t investing as aggressively.
Mergers can help as companies can enhance profits through efficiency. Some are in a better position to be acquirers than others.
Conoco’s return on invested capital last year was over 13%, according to FactSet, a swing from negative territory, versus a roughly 2% return for Anadarko. Conoco’s quarterly results this week showed strong and growing cash flow. It has a ratio of debt to earnings before interest, taxes, depreciation and amortization less than one.
One analyst posited on its earnings call that Conoco itself could become a takeover target unless it becomes more aggressive. Chief Executive Ryan Lance replied “The best defense is a good offense.”
