Colombia Operations Make This A Lucrative Oil Pick
Jordo is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
It is becoming evident that Occidental Petroleum (NYSE: OXY) produces lesser crude oil than it used to a decade ago, in Colombia. The company states that it has so far drilled more than 1 billion barrels of oil and that it will continue to keep its oil fields in Cano Limon operational. In fact, it was this oil field that helped Colombia to appear on the world oil map, and compete with its neighbors like Venezuela, Ecuador, and Brazil. The rebel attacks on national pipelines that carry oil to its ports have largely diminished Colombia's reputation as a serious oil producer.
However, I believe Occidental is not the kind of company that would let go of its position in Colombia very easily. Though production has declined, we must remember that Occidental has strength in Colombia. The government is pro-foreign investment and continues to regard Occidental as an important entity of the Colombian investment group. Secondly, Occidental already has infrastructure in place, including the Cano Limon pipeline that is connected to the larger Bicentennial Pipeline, which is still being built. Third, having a presence in Colombia is strategically important to Occidental as it ensures that it is close to Ecuador, from where it was forced out illegally by radicals.
These three advantages ensure that Occidental will get to have its way in Latin America, in spite of pockets of resistance and resentment towards foreign oil companies. Such pockets are normally found in countries like Venezuela, Ecuador, and other radical states that have sought to keep closer ties with countries like Iran and North Korea than the international community. The advantage of governmental support ensures a continued presence of security forces, when rebels attack and destroy pipelines.
The Colombian government has been particularly effective in dealing with drug lords who usually use terrorist activities to steal crude oil directly from pipeline, sell it in the black market and then use that money to buy illegal weapons in the international marker. Secondly, Occidental has a serious future in Colombia, thanks to the Bicentennial Pipeline. Ecopetrol (NYSE: EC) is the majority-stake owner of the project and is a state oil company, thus ensuring Occidental of a special treatment in the years to come. As this pipeline is connected to Occidental's Caño Limón pipeline, the matter is of utmost importance.
It is quite possible that in the near future, the Colombian government will invite Occidental over other companies in order to explore and drill in territories that have so far been inaccessible. Occidental possesses very sophisticated infrastructure and drilling equipment that the Colombian government is in need of. Such a mutually beneficial relationship will result in Occidental's success in Colombia.
Moreover, the governments in Ecuador and Venezuela are not stable. Both are ruled by dictators who are anti-American and both support several organizations and governments that are blacklisted by the international community. As it happens with most dictators, the days are not far away when they will eventually be deposed and a new & transparent government will be elected in Venezuela and Ecuador. When that day arrives, Occidental will have strategic, infrastructural, and social advantage over its competitors who are not in the scene in Colombia.
Though Ecopetrol is Colombia's state owned oil company, it hasn't had an easy history in its own country. The company has fought legal battles against many tribes including the U'wa people, who believe that petroleum is the “blood of the earth.” The company may stand to gain if it works with Occidental in the long term, as Occidental possesses both the technology and infrastructure to help Ecopetrol develop Colombian oil industry.
Royal Dutch Shell (NYSE: RDS-A) was one of the few companies that recently won oil and natural gas blocks in Colombia's first government auction in two years. Shell expects to invest millions of dollars into building a neat profile for itself in the Latin American country. Exxon Mobil (NYSE: XOM) won the auction too and may seek to enter shale explorations. However, Exxon seems to be more worried about the rebels than anyone else. This is one area which Occidental knows how to handle in Colombia, or rather, has got used to. Anadarko (APC), which won the auction held by the Colombian government, has not divulged more information about the amount of money that it plans to invest or the location it plans to explore and drill. It is going to get very interesting in Colombia, as the country is desperately looking for foreign investment.
Occidental announced its third quarter 2012 income just a couple of days ago and its production was a record for the eighth consecutive quarter. With almost 469,000 barrels of oil, Occidental may be below what it really wanted to produce, but it still broke records. With a market cap of $65 billion and an enterprise value of $70 billion, the company is the 4th largest oil and gas company in the U.S. It has a profit margin of 26% and an operating margin of 41%, which ensure that investors stand to gain. With a gross profit of $16.55 billion and a total cash of $4.41 billion, Occidental is in a strong position.
Occidental also does not have a lot of debt; total debt is $7.62 billion. Occidental has an operating cash flow of $12.68 billion and that will help the company to make smaller purchases and endure miscellaneous expenses. In both short and long terms, the company looks strong enough to invest in, and the returns might be surprisingly good. I feel the company’s presence in Colombia, no matter how small, is very important. This presence will ensure Occidental’s success in fighting competition, which has now begun to creep into Colombia.
jordobivona has no positions in the stocks mentioned above. The Motley Fool owns shares of ExxonMobil. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.