Tickers in this Article: NFG, OXY, IVAN, RDS, XOM
While National Fuel Gas (NYSE:NFG) is known mostly for its exposure to the Marcellus Shale, the company also has oil and gas assets in California. Although these are mature and developed assets, there is some exploration potential on these properties that might be unrecognized by the market. California Assets
National Fuel Gas was the seventh-largest oil and gas producer in 2010, with production of 9,655 barrels of oil equivalent (BOE) per day in California.

Although the company is most active in Pennsylvania, where it is developing the Marcellus Shale, the company still has 50% of its proved reserves here in California. The company reported proved reserves of 333 Bcfe in California at September 30, 2010, compared to a company total of 666 Bcfe.

National Fuel Gas has more than 1,300 wells scattered among six fields in the Southern and Central part of the state. These are stable, long-lived assets that provide steady cash flow with relatively small capital expenditures required. In fiscal 2011, National Fuel Gas reported net income margins of 42% from its California operations.

Midway Sunset Field
The company's largest operation in California is at the Midway Sunset Field, where it has more than 700 wells in a steam flood operation in the northern part of the field. The company also has another 100 wells in the southern part of the Midway Sunset Field.

Although the Midway Sunset Field is not well known in the modern era, it is one of the most storied oil fields in the United States. Oil was first discovered here in 1894 and the field has produced nearly 3 billion barrels of oil through the end of 2009. Midway Sunset Field still has estimated reserves of approximately 500 million barrels of oil.

National Fuel Gas is even increasing its presence here, and in July 2009 the company purchased the United States oil and gas assets of Ivanhoe Energy (Nasdaq:IVAN) for $40 million. These assets were located near the company's own operations in California.

The largest oil producer at the Midway Sunset Field and in California is Aera Energy LLC, which is a partnership jointly owned by Exxon Mobil (NYSE:XOM) and Royal Dutch Shell (NYSE:RDS). In 2009, Aera Energy LLC reported average daily production of approximately 158,000 barrels of oil and condensate per day in California.

Exploration Potential
Although National Fuel Gas acquired the California operations of Ivanhoe Energy primarily for the producing developed assets, the company also picked up exploration potential in the deal. Ivanhoe Energy was a party to the Aera Exploration Agreement which gave the company access to technical and exploration data on hundreds of thousands of acres in the San Joaquin Basin of California. Ivanhoe Energy reported an interest in 10 prospects in the company's 10-K filing, and presumably, these interests have passed to National Fuel Gas.

While California exploration is typically not that exciting, Occidental Petroleum (NYSE:OXY) has made some recent discoveries in the Kern County area that have the potential to get production growth moving higher for that company. Occidental Petroleum expects to drill 20 exploration wells in 2011.

The Bottom Line
The California oil and gas assets of National Fuel Gas can't match the growth that is occuring for the company back east in the Marcellus Shale, but its value lies in its free cash flow and potential exploratory upside. (For additional reading, take a look at A Guide To Investing In Oil Markets.)

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