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Domestic oil boom: Occidental could buy Yates Petroleum for $3 billion

Occidental Petroleum could be a buyer for Yates Petroleum, a family owned oil company that owns fields in New Mexico.
Occidental Petroleum could be a buyer for Yates Petroleum, a family owned oil company that owns fields in New Mexico.
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Los-Angeles based Occidental Petroleum is looking for more growth. It's coming off a weaker 2012 third quarter than the prior year, with profits down over 20 percent, and has a new CEO, Stephen Chazen, who wants to prevent a further slide. But rather than do as some analysts have suggested and buy back stock — a reliable way to boost a flagging share price — Chazen could be going shopping. And Yates Petroleum, a family-owned company, could be the prize.

Things are rough in the oil business right now, with refineries catching fire in California and superstorms ravaging the supply infrastructure in the Northeast. In this context, Occidental's third quarter slide is understandable. But the word on the street is that Chazen wants to move the needle on the company's stock price, which is well off its high of $115, achieved in 2011. 

Yates — a small piece of which Occidental bought two years ago, according to the Wall Street Journal — is a good fit with Chazen's ambitions. But it's also an expensive fit. The company has hired JP Morgan as its investment bank to line up bidders, and could sell for as much as $3 billion. Occidental has a substantial market capitalization — more than $62 billion — but Yates would still be a big bite.

Chazen is ready, however. Bloomberg reported that the company has pegged $5.5 billion to "develop new prospects" this year — and conveniently, Yates wants to sell by the end of 2012, for tax reasons. That doesn't mean Chazen will spend half his money on Yates; with a debt-to-equity ration of less than 20 percent, the company is in a position to take on additional debt, even though its current borrowing is approaching $8 billion.

Occidental doesn't want to lose out on a chance to gobble up more of the Permian Basin in New Mexico. The company is already the largest operator in New Mexico's section of the basin — a vast, very old cluster of oil fields that extends into West Texas. New drilling technology has enabled companies to get at previously inaccessible reserves, so by purchasing Yates — which has fields in the region — is a way for Occidental increase its footprint and capitalize on the boom in domestic U.S. energy production. Since 2011, the company has raised production by 6,800 percent — to 138,00 barrels a day from a mere 2,000.

This is also a way for Occidental to make up for the difficulties of drilling in California, where the company continues to have a substantial presence in a state that makes things tough for the oil industry. For what it's worth, it's also a way for the Yates family, which has been in the oil business since the early twentieth century, to cash out and end what the New York Times characterized in 2004 as a dynamic that sounds like something out of "Dallas" at best and the Civil War at worst.

There's a black gold rush in the Permian these days. Both Chevron and Shell have spent billions on fields there. Occidental is in a position to outdo them both.

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