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California Droughts Pose Major Threat to OXY Stock

The California drought could hinder OXY stock and its fracking plans

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People tend to think of California as a bit “hippy-like” when it comes energy. It’s no secret that the state is hotbed of renewable energy, green technologies, and a favorite stomping ground for solar stocks like SolarCity (SCTY).

california-drought-oxy-stockBut the truth is California has a long history of pumping out old-fashioned hydrocarbon. And the hope is that the state can once again become a serious contender in terms of growing U.S. production. Plans are in the works to begin fracking in California’s various shale fields and off its coast.

However, there is a potentially big issue that was exacerbated by the recent weather problems in the state. This issue could throw a huge wrench into California’s plans to regain its energy mojo and could spell trouble for the firms planning on tapping that potential — especially Occidental Petroleum (OXY).

Vast Potential

The vast Monterey shale is being seen as the solution to helping California once again regain its crown as the leading energy producer in the United States. The field — which is roughly the size of Delaware — is estimated to be twice as big in terms of reserves as both the Eagle Ford and Bakken.

According to analysts at IHS CERA, the Monterey holds more than 400 billion barrels of oil. That’s enough to meet the United States’ complete energy needs for the next 57 years. Meanwhile, the Santa Barbara Channel is once again seeing activity. That’s a big deal as new oil leases in the region have been prohibited since the 1980s.

All of these recent moves are designed to help California reclaim its former status as the nation’s biggest oil producer. Oil production in state peaked back in 1985 at roughly 1.2 million barrels per day. In practice, fracking should be the state’s savior in terms of rising productions and potential tax and royalty receipts.

In particular, that’s big news for OXY stock.

The firm is California’s largest producers of oil — around 154,000 barrels per day — and is the largest stake-holder in the Monterey with 1.2 million acres. In fact, OXY so confident in its California operations that it recently made plans to split itself in two distinct firms.

The OXY stock spinoff will be an independent E&P firm solely focusing on its vast California operations. OXY expects that business will generate about $1 billion in free cash flow this year and be worth around $19 billion.

Naturally, investors cheered the potential split and shares of OXY stock have surged over the last few months.

A Major “Liquidity Issue”

However, there is a big “liquidity” issue to contend with.

Article printed from InvestorPlace Media,

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