Occidental Petroleum is Making a High Upside Bet With ExxonMobil. Here's What it Could Mean for Investors.

Occidental Petroleum (NYSE: OXY) is acquiring a stake in a deepwater exploration block offshore Trinidad and Tobago from ExxonMobil (NYSE: XOM). The deal gives it access to an area with high upside potential, given its proximity to another Exxon-operated block that has proven to be very prolific.

Here's a look at the deal and what it could mean for investors in the oil stock.

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Drilling down into Occidental's latest deal

Occidental Petroleum is acquiring a 10% interest in a large deepwater exploration block offshore Trinidad and Tobago from ExxonMobil. The oil giant previously held a 100% stake in the Ultra Deep 1 or UD(1) block. Exxon initially acquired the position last year in a deal with the government of Trinidad and Tobago.

UD(1) borders Exxon's Stabroek block in Guyana. The oil giant and its partners, Chevron and Chinese oil company CNOOC, have made 30 discoveries in the Stabroek block totaling 11 billion barrels of recoverable oil and gas. The Exxon-led consortium currently produces 900,000 barrels per day (BPD) from the Stabroek block and aims to increase its output to 1.7 million BPD by 2030. It's a major contributor to the five-year growth plans of both Exxon and Chevron.

Exxon sees similar potential in UD(1). The oil giant is currently conducting seismic surveys of the area, which it hopes to complete by the end of this year. It currently plans to invest $42 million for the seismic data and up to two exploration wells, which it could start drilling six months after completing its seismic studies. Exxon sees the potential to invest $21.7 billion to fully develop the block in the future, if it proves as prolific as Stabroek. Selling an interest in the block to Occidental will help reduce Exxon's exploration and development costs and risks.

What this deal could mean for Occidental Petroleum

Exploration is the lifeblood of an oil and gas company. They need to routinely replenish their resources to offset production declines and depletions across their portfolio. Adding a 10% stake in UD(1) provides Occidental with a high upside exploration play. If UD(1) proves to be as prolific as Stabroek, it could be a major long-term growth catalyst for the oil giant. It also further diversifies the oil and gas company's global portfolio, which currently features operations in the U.S., Africa, and the Middle East.

Occidental has a large portfolio of exploration prospects. Last year, the oil giant signed an agreement with the government of Oman to extend its operations in Block 53. That deal provided it with the potential to grow its resources in the country by more than 800 million barrels. Meanwhile, earlier this year, Occidental and its partners, Chevron and Woodside Energy, made an oil discovery at the Bandit prospect in the Gulf of Mexico (also known as the Gulf of America in the U.S.). These and other areas will help fuel Occidental's growth in the coming years.

Adding a potentially meaningful growth catalyst

Occidental is buying a small stake in an Exxon-operated exploration block. It has massive resource potential, given its proximity to the prolific Stabroek block. While there's also a high risk of coming up dry, it's a very smart deal for Occidental as it adds a potentially meaningful long-term growth catalyst to its portfolio.

Matt DiLallo has positions in Chevron. The Motley Fool has positions in and recommends Chevron. The Motley Fool recommends Occidental Petroleum. The Motley Fool has a disclosure policy.