Occidental Petroleum Corp. said Tuesday that net income rose 28 percent in the third quarter as it set production records and sold oil and gas for higher prices than last year.
The Los Angeles company said production will grow again in the final three months of the year, although the focus will be on oil, which can generate higher profits with its current price above $80.
Stephen Chazen, who was tapped to replace outgoing CEO Ray Irani next year, told analysts that natural gas production would be flat in the fourth quarter. Natural gas is trading around $3.50 per 1,000 cubic feet, a price Chazen referred to as "not very exciting."
New techniques in drilling in shale formations have allowed companies to access decades worth of natural gas in fields in Appalachia, Texas and other parts of the U.S. This has led to overproduction, which has kept a lid on prices.
Still, Occidental's oil and gas business saw profit rise by 19 percent in the third quarter because prices for both fuels were higher than a year ago.
Oppenheimer & Co. analyst Fadel Gheit said he thinks Occidental is doing the right thing by slowing natural gas production. Some companies have pressed ahead with natural gas projects because of contract rules that force them to keep producing or lose their lease. Occidental doesn't have that problem, Gheit said.
"They're not going to drill just to get that gas out of the ground, and they don't have the room to process it anyway," he said. The company also said problems with a natural gas processing plant in California will hurt production.
Occidental shares dropped 5 percent, or $4.25, to $81.20. Shares fell across the petroleum industry as crude, heating oil and gasoline futures prices tumbled.
Occidental's net income rose to $1.19 billion, or $1.46 per share, for the third quarter. That compares with $927 million, or $1.14 per share, in the same period last year. Revenue rose 19.3 percent to $4.9 billion. Analysts had expected earnings of $1.34 per share on revenue of $4.75 billion.
The company said its petroleum fields produced the equivalent of 751,000 barrels of oil per day in the third quarter, a company record and an increase of 6.5 percent from the prior year. Occidental took in about $8 more per barrel of oil and $1.16 more per 1,000 cubic feet of gas than a year ago, and the company's production business reported profit of $1.75 billion, compared with $1.46 billion a year earlier.
The company said it plans to spend about $300 million on oil and gas acquisitions in the first part of the fourth quarter and add another 480,000 acres of acreage in California and other areas.
Unlike other large oil companies, Occidental doesn't own refineries, which have struggled recently to pass higher oil costs along to customers. Occidental also doesn't operate offshore wells in the Gulf of Mexico, where new regulations have slowed drilling projects considerably.
Occidental instead relies on onshore fields in the U.S., the Middle East, North Africa and Latin America. The company said that quarterly production increases were primarily due to better yields from the Middle East and North Africa.
Last week, Occidental announced that CEO Ray Irani would relinquish his position as CEO in May and take a pay cut. The move was made in consultation with investors, who had criticized lavish compensation packages that paid Irani nearly $150 million from 2006 to 2009.