Occidental Petroleum Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
February 15, 2024

There are 14 speakers on the call.

Operator

Good afternoon, and welcome to Occidental's 4th Quarter 2023 Earnings Conference Call. All participants will be in listen only mode. Please note, this event is being recorded. I would now like to turn the conference over to Jordan Tanner, Vice President of Investor Relations. Please go ahead.

Speaker 1

Thank you, Gary. Good afternoon, everyone, and thank you for participating in Occidental's 4th quarter 2023 earnings conference call. On the call with us today are Vicki Hollub, President and Chief Executive Officer Sunil Mathew, Senior Vice President and Chief Financial Officer Richard Jackson, President, Operations, U. S. Onshore Resources and Carbon Management and Ken Dillon, Senior Vice President and President, International Oil and Gas Operations.

Speaker 1

This afternoon, we will refer to slides available on the Investors section of our website. The presentation includes a cautionary statement on Slide 2 regarding forward looking statements that will be made on the call this afternoon. We'll also reference a few non GAAP financial measures today. Reconciliations to the nearest corresponding GAAP measure can be found in the schedules through our earnings release and on our website. I'll now turn the call over to Vicki.

Speaker 2

Thank you, Jordan, and good afternoon, everyone. 2023 was a great year for us, Thanks to the performance of all of our teams in Oxy. I'm going to start by discussing our financial performance, operational excellence our strategic advancements in 2023. Then I'll review our capital plans for 2024. These continue to position us to deliver sustainable and growing returns for our shareholders through our premier asset portfolio, advanced technology robust commercial runway.

Speaker 2

First, I'll begin by reviewing our financial performance in 2023. Last year, our talented and committed teams across the company applied advanced technical expertise, operating skills, leading edge technologies and innovation to our exceptional portfolio and they delivered results, dollars 5,500,000,000 in free cash flow, which enabled us to pay $600,000,000 of common dividend, repurchase $1,800,000,000 of common shares and redeem $1,500,000,000 of preferred shares, while also investing $6,200,000,000 back into the business. Next, I'll comment on our operational excellence in 2023. Last year, our production in our global oil and gas business exceeded the midpoint of our original full year production guidance by 43,000 BOE per day. This was driven by record well productivity rates across our domestic assets in the Delaware, Midland and DJ Basins and internationally by record production from Block 9 in Oman.

Speaker 2

And in addition, we safely completed the expansion of the Al Hosan plant in the UAE, which also delivered record annual production. Despite negative price revisions, well performance across our portfolio enabled us to achieve an all in reserves replacement ratio 137% in 2023 and a 3 year average ratio of 183%. Our track record from prior years of consistently replacing produced barrels continues and at a F and D, a cost that is below our current DD and A rate. OXY's year end 2023 worldwide proved reserves increased to 4,000,000,000 BOE from $3,800,000,000 BOE in 2022. OptiQin performed exceptionally well in 2023.

Speaker 2

Exceeded guidance and achieved $1,500,000,000 in pre tax income for the 3rd time in its history due largely to lower energy cost and an efficient planned turnaround at our Ingleside plant even as product markets softened compared to 2022. In addition, construction on Stratos, our first direct air capture facility, is progressing on schedule to be commercially operational in mid-twenty 25. The Q4 of 2023 was an exciting way to conclude a successful year. In oil and gas, delivered our highest quarterly production in over 3 years and outperformed the midpoint of our production guidance despite a third party interruption in the Gulf of Mexico. Our Rockies business outperformed in the 4th quarter.

Speaker 2

That's consistent with its year long trends. Innovative artificial lift technology to maximize base production. Well design optimization in the DJ Basin that we presented in our Q2 earnings call contributed to a 32% productivity improvement from 2022. We also continued to deliver robust well performance in the Permian Basin where our Delaware teams drove results to the high end of the Permian's 4th quarter production guidance. Our top spot well, which we also discussed in our Q2 earnings call, continued its strong performance trajectory and delivered the highest 6 month cumulative production of any horizontal well ever in the New Mexico Delaware Basin.

Speaker 2

In fact, Opsea has drilled 8 of the top 10 horizontal of all time across the entire Delaware based on this production metric and 3 of those wells came online last year. Since mid-twenty 22, our teams outperformed the Delaware Basin industry average 12 month cumulative oil production by nearly 50%. Our team aims to extend our leadership in the New Mexico Delaware Basin this year. A significant portion of the 2024 Delaware will develop the same horizon as the record top spot well. Further south in the Texas Delaware Basin, Our teams continue to deliver success with a couple of notable appraisal wells in the 2nd Bone Spring and 3rd Bone Spring line.

Speaker 2

These wells drove incredibly early time volumes and accordingly secured additional capital in our 2024 Delaware program. Our appraisal programs are positioning us for success by adding horizons in the Delaware Basin and moving Tier 2 and Tier 3 wells to Tier 1. But we're also improving our current Tier 1 intervals, for example, with our TopSpot well. Outside the Delaware Basin, we're also making strides in some of the basins that we expect will begin to play a more consequential role. In the Midland Basin, technical excellence, including the basin leading Barnett Wells, drove a 1 year cumulative improvement in well productivity of over 30% compared to the prior year.

Speaker 2

In the Powder River Basin, OxyContin was booming state initial production and early cumulative production pad record of 1,500,000 barrels of oil produced in only about 7 months. As we highlighted, our unconventional technical teams continue to expand and improve inventory across all of U. S. Onshore basins. While our subsurface modeling, innovative well designs and enhanced artificial lift technology have driven improvements in well recovery, new well designs have also resulted in record drilling times for both 2 and 3 Mile Texas Delaware Basin laterals.

Speaker 2

Similarly, in the Powder River Basin, our teams drilled an average 16 50 feet per day and we drilled a 10,000 foot well in only 11 days, both achieving Oxy basin records. Our successes are not limited to our onshore U. S. Portfolio. In the deepwater Gulf of Mexico, we are continuing to leverage technology to drive even stronger production results.

Speaker 2

And our subsea pumping system on the K2 field achieved first lift 4 months ahead of schedule. This is Oxygen's first deployment of this technology in deepwater. We expect it to unlock future production enhancement opportunities and longer distance subsea tiebacks. Next, I'll shift to discussing how we advanced our strategy last year. In 2023, we high graded our oil and gas portfolio, launched the expansion of our OxyChem Battle Ground facility and announced strategic commercial transactions that we expect will deliver sustainable multiyear value to our shareholders.

Speaker 2

These steps strengthened our portfolio and make it unique in our industry. We have high quality, short cycle, high return oil and gas shale development in the U. S. Along with conventional lower decline oil and gas and Permian EOR, the Gom, Oman, Algeria and Abu Dhabi. These developments are complemented by our strong and stable cash flow from our chemicals business and the cash flow and carbon reduction we expect our low carbon ventures to provide in the future.

Speaker 2

In addition to high grading our oil and gas portfolio through organic development and appraisal work last year, we also announced the strategic acquisition of Crown Rock, which will add high margin, low breakeven inventory, while increasing free cash flow for a diluted share. The incremental cash flow will support our cash flow priority of delivering a sustainable and growing dividend along with deleveraging and share repurchases after reducing the principal debt to $15,000,000,000 We are working constructively with the FTC in its review of the transaction expect to receive regulatory approval and close in the second half of this year. The capital plan we will review in a moment excludes because we'll continue to operate as 2 separate companies until we obtain regulatory approval and close the acquisition. In our LCV business, we completed many pivotal transactions that provided technology advancement, 3rd party capital, revenue certainty and commercial optionality. We closed the acquisition of direct air capture technology innovator, Carbonstone Engineering, last quarter.

Speaker 2

This was a landmark achievement in our direct air capture development path. We're excited also about our Stratus joint venture with BlackRock, which we believe demonstrates the DAC is becoming an investable asset for world class financial institutions. In addition, our teams signed on several more 5 chip carbon dioxide removal credit customers. Now I'd like to reiterate our cash flow priorities and discuss our capital plans for 2024. On our December call, we discussed how we will focus on our cash flow and shareholder return priorities in 2024 on dividend growth, debt reduction and the capital allocation program that generates strong free cash flow throughout the commodity cycle.

Speaker 2

As we discussed regarding Crown Rock, we intend to complete at least $4,500,000,000 of debt repayments for both pro form a cash flow and proceeds from a divestiture program. We intend to prioritize debt reduction until we achieve a principal debt balance of $15,000,000,000 or below, including repaying debt as it matures. As a result of the acquisition, we expect to strengthen our balance sheet, improve our resilience in lower commodity price environments and free up cash interest payments to support future sustainable dividend growth and share repurchases. Every year, we design our capital plan to support our strategic initiatives via projects that maximize our returns and best position Oxy to deliver long term and resilient returns to our shareholders. Our 2024 capital plan continues a bifurcated investment approach that balances short cycle, high margin investments with measured longer cycle cash flow growth investments.

Speaker 2

In 2024, we plan to invest $5,800,000,000 to 6 $1,000,000,000 in our Energy and Chemicals businesses, resulting in slightly less capital for our unconventional assets this year. However, we expect our unconventional assets to return more cash to the business, and we continue to expect year over year production growth and continued success across our premier unconventional portfolio, including some of the emerging horizons. We intend to complement our unconventional exposure with increases to our mid cycle investments including lower decline conventional reservoirs which are expected to drive longer cycle cash flow resiliency. Our 2024 mid cycle capital investments will position us to continue the exciting projects that we started last year. Investments in OxyChem are expected to increase this year as progress continues on the Battle Ground expansion and the plant enhancement project.

Speaker 2

We also added a second drillship in the Gulf of Mexico to support what we believe could become a future growth asset for Oxy. Lower decline oil production from our enhanced oil recovery or EOR is an important part of our long term strategy. This year, we're investing in gas processing expansions for our Permian EOR business that support longer term growth in many of our core CO2 fields. Our ER business will continue to be a key part of our future oil and gas development as we believe that carbon dioxide captured by direct air capture facilities is a sustainable way to develop the 2,000,000,000 barrels of potentially recoverable oil remaining in our Permian EOR operations. In our emerging low carbon businesses, much of Oxy's planned $600,000,000 2024 investment will be directed to Stratos.

Speaker 2

We have also allocated capital to continue preparations for a second direct air capture and sequestration hub in South Texas along with subsurface and well permitting investments needed at our Gulf Coast sequestration hubs. Capital received from financial partners for our LCV businesses will add to our $600,000,000 investment. This includes capital contributions from our joint partner BlackRock for Stratos. BlackRock's investment totaled $100,000,000 in 2023, and we expect that figure will increase in 2024. We're making great progress towards advancing our net zero pathway as we develop direct air capture and other exciting technologies.

Speaker 2

We see tremendous potential in LCB to increase Oxy's cash flow resilience and generate solid long term returns for our shareholders. I'll now turn the call over to Sunil for a review of our Q4 financial results and 2024 guidance.

Speaker 3

Thank you, Vicki. I will begin today by reviewing our 4th quarter results. We announced an adjusted profit of $0.74 per diluted share and a reported profit of $1.08 per diluted share, with the difference between adjusted and reported profit, primarily driven by the after tax fair value gain related to the acquisition of Carbon Engineering. Our teams exceeded the midpoint of guidance across all three business segments during the Q4 and we delivered outstanding operational performance. Higher than expected production in our domestic onshore and international assets enabled us to overcome production losses caused by an unplanned third party outage in the Eastern Gulf of Mexico.

Speaker 3

This outage led to a lower than expected company wide oil cut and a higher than anticipated domestic operating costs per BOE. It is also expected to impact production into early next month and is reflected in the guidance that I will soon cover. We had a positive working capital change, primarily due to receipt of the environmental remediation settlement, timing of semi annual interest payments on debt and decreases in commodity prices. We exited the quarter with over $1,400,000,000 of unrestricted cash. Turning now to guidance.

Speaker 3

Last month, Oxy and Crown Rock each received a request from the FTC for additional information related to the acquisition. The FTC's request for additional information will impact the timing of closing, which we expect to occur in the second half of the year. Oxy will receive the benefit of GroundRock's activity between the January 1, 2024 transaction effective date and close subject to customer repurchase price adjustments. Additionally, the issuance of senior unsecured notes, Funding of the fully committed $4,700,000,000 term loans and termination of the existing bridge loan facility are expected to be aligned with the transactions closing. In 2024, we expect full year production to average 1,250,000 BOE per day, representing low single digit growth from 2023, With the Rockies and Allosan driving production growth, as Vicki mentioned, well designed and operational expertise grow production outperformance in the Rockies last year.

Speaker 3

We anticipate that these results will continue in 2024 with the steadier run rate of wells coming online compared to the Q1 of last year when we have recently ramped up rig activity. Permian production is expected to remain largely flat with Permian unconventional capital decreasing by approximately 10% compared to the prior year. Internationally, we anticipate continued higher production at Talosin following last year's plant expansion. Total company production guidance in the Q1 reflects a low point for 2024 with a significant step up expected in the remainder of the year. The expected Q1 decrease in production is primarily driven by the relatively lower activity levels and working interest in the Permian Basin in last year's Q4.

Speaker 3

January winter storm impacts of approximately 8,000 BOE per day in onshore assets, annual planned maintenance at Dolphin and the Gulf of Mexico unplanned downtime event. Domestic operating costs on a BOE basis in 2024 are expected to decrease due to reduced maintenance in the Gulf of Mexico and improved lifting costs in the DJ Basin. Moving on to chemicals. In 2023, OxyChem generated pretax income nearly matching its 2nd highest year ever. This year, we are guiding to a midpoint of 1.1 $1,000,000,000 of pretax income.

Speaker 3

This year's full year guidance is close to the 4th best year ever for the Chemicals segment Despite potential challenging market conditions, we expect that our Q1 OxyChem results will be largely flat from the prior quarter. Our guidance for Q1 reflects the combination of PVC price erosion largely associated with contract adjustments in Q4. Typical seasonal subdued demand in both PVC and caustic and export pricing pressure on caustic from China, our guidance assumes that in Q1, we have reached the bottom of the cycle with more stabilized prices. I would like to close today by looking beyond 2024 to highlight several catalysts that we expect will enhance our financial trajectory in the coming years. Our Midstream business is well positioned to benefit from a reduction in crude oil transportation rates from the Permian to the Gulf Coast by the end of the Q3 of 2025.

Speaker 3

We expect annualized savings from these rate reductions of $300,000,000 to $400,000,000 with approximately 40% of the savings starting in 2025 and the full annual savings anticipated in 2026. The Opski Cape, Battleground and Plant Enhancement Projects are expected to generate incremental benefits to EBITDA of $300,000,000 to $400,000,000 per year once complete. In combination, these improvements to Midstream and Chemicals are expected to deliver an incremental annualized run rate EBITDA of 600 to $800,000,000 As Vicki discussed, we also expect the planned mid cycle investments in our Gulf of Mexico and Permian EOR assets to provide cash flow resiliency through lower decline conventional production. As we continue to execute on high grading our premium portfolio, we are committed to meeting our deleveraging targets that I outlined in December. We believe that our strengthened balance sheet and Oxy's premium portfolio will enable future increases to our common dividend and rebalance enterprise value in favor of our common shareholders.

Speaker 3

Our teams are focused on extending Oxy's track record of operational excellence and solid execution on our path to delivering growing and sustainable shareholder returns over the long term. I will now turn the call back over to Vicki.

Speaker 2

Thank you, Sunil. 2023 was a significant year for Oxy on both operational and commercial fronts. Our teams skillfully navigated through the dynamics, and I want to recognize our employees' ingenuity and hard work. Their efforts generated the exciting achievements we covered today as well as the great progress that is underway to position us for a successful 2024. With that, we'd like to open the call for questions.

Speaker 2

Jordan mentioned earlier that Richard Jackson and Ken Dillon are also on the call and they will participate in the Q and A session.

Operator

The first question is from Neil Mehta with Goldman Sachs. Please go ahead.

Speaker 4

Thank you so much. And Vicki, great to My question is just really around deleveraging. And so you talked about this in the opening comments, but just talk about The path to getting balance sheet to where you want to be post the Crown Rock acquisition and how you've seen the asset sale market playing out here in enabling you to get that debt lower? Thank you.

Speaker 2

Well, as you noticed, by virtue of all the of all the M and A that's happening, there's a lot of appetite for companies to try to get into the Permian. And we do have properties in the Permian that are not core to us, but could be core to others. And some of it just where they're placed in the Permian, geographically and how they're not as caught up as some of our key areas. So the divestitures, I believe, will go well. What we won't do though is we've decided not to make any divestitures until we close the Crown Rock acquisition and then We'll start a proactive process more aggressively at that point.

Speaker 4

That's great, Vicki. Thank you. And then on the Gulf of Mexico, the Q1 guide of 107 to 115, but the balance of year 133 to 141, I'm guessing a lot of that's around the pipeline outage. Can you just give us a sense of what are the gating factors to get that asset back online and how we should be thinking about the cadence of production over the course of the year?

Speaker 2

Yes. We're leaving the updates on that to the operator. And so we're not making any comments on that because we're giving them room to get their business done. With respect to the rest of the year, we expect the rest of the year to continue on as normal. And we expect that when We're back up and running.

Speaker 2

We may get a little bit of flush production from that. And we'll have hopefully, Our target date for getting back up and online is pretty close to what we've said. Do you have anything to add?

Speaker 5

Hi, it's Ken here. Maybe I can add a couple of things. So we're feeling pretty good about the date. And for example, we're sending our specialist start up crews offshore tomorrow The finish lining out the facilities is for full operations. I think that gives you a feel for where we are in the process.

Speaker 5

The plants are in great shape. Our operations crews in parallel with the outage carried out our full 2024 turnarounds and also completed our enhancement projects for the year as well. So avoiding outages in 20 before it gets us a really good shot. So we're looking forward to it.

Speaker 2

Thank you. So Thank you. Appreciate it, Neil. That was time very well spent. They made use of all the time that they had to do things that we needed to do.

Operator

The next question is from Doug Leggate with Bank of America. Please go ahead.

Speaker 6

Thanks. Good morning, everyone. I guess the numbers are shrinking, Ken. It's great to hear you On the call after Conoco's latest retirement. So thanks, Vicki, for getting on as well.

Speaker 6

So I have a couple of questions, if I may. I guess the first one is, I hate to do it, but I want to come back on the disposal question. I realize you don't want to give a lot of detail, but I want to frame it like this. When you had bought Anadarko and you were trying to delever, I seem to recall you had about 25 different packages that were for sale and of course you ended up not having to do hardly any of those. I think it was about a dozen or something like that.

Speaker 6

So it seems to me that you've got a lot of things that you've already scrubbed. So my question is, can you give us some color as to whether there is significant cash flow that would come along with the range of $4,500,000,000 to $6,000,000,000 Without being specific on assets, what's the associated free cash flow number?

Speaker 2

Well, depending on what actually is divested, we can't really give you an estimate of what that is today. Some things are changing, in terms of what we're looking at. So I think that it would be very difficult to put the number out there at this point.

Speaker 6

Is it significant? Would you consider it material, Vicki?

Speaker 2

Anything that's material, we wouldn't likely do. We're trying to minimize the cash flows sold to ensure that we can maintain our cash flow. With that said, there will be some cash flow going because it's hard to sell any assets out here that we haven't already at least done appraisal work on to generate some cash flow.

Speaker 6

Okay. Thank you. My follow-up is on Sustaining capital, you stepped that up a little bit to $3,900,000,000 But the way we what we're trying to figure out is this year's growth is about 2%. You're spending $6,500,000,000 of which $1,000,000,000 is battleground and DAC,

Speaker 7

which gets you

Speaker 6

to about $5,500,000,000 So what I'm trying to figure out is the growth rate of 2% seems to correlate with growth spending of about $1,500,000,000 It seems the ratio just seems a bit off. Can you help me understand how I should think about that?

Speaker 2

So if you look at our what we said we'll spend in oil and gas is 4.8 to 5 In 2024, that part of that will be spent on, we mentioned, some of the mid cycle projects that generate oil production at a later date, like for example, the Permian EOR, Investing in that would generate the oil and gas production from that in about the 3rd year after we started. So that will be a bit delayed. Gulf of Mexico, some of those are also preparing us for the future. So the mid cycle Investments will not impact this year's production. The potentially 2.2% increase will be based on the spending of the 4.9, if you use the mid cycle price, less that 4.80 And then when you look at what's being spent in our oil and gas operations minus that amount, We still have some of that going for facilities.

Speaker 2

I think it speaks well to what the teams have done with respect to productivity and getting more out of the wells that we can actually spend, what's really, less than half that $1,000,000,000 that you mentioned on oil and gas activities and then some of that will be for facilities. So we're actually getting a 2 same growth rate from some of what we've developed in 2023, flowing over to 2024 and then the high productivity that we're getting out of our developments.

Speaker 6

That's a great answer, Vicki. You're still the most capital efficient portfolio by miles. So thank you so much for the answer.

Speaker 2

I know it's really exciting what the teams have done and thank you for the question.

Operator

The next question is from John Royall with JPMorgan. Please go ahead.

Speaker 8

Hi, good afternoon. Thanks for taking my question. So my first question is on midstream. I think one area that surprised us a bit was the Full year midstream guide. You gave some good color in the slides kind of bridging from 4Q to 1Q.

Speaker 8

But just thinking about bridging the the full year, how would you characterize the moving pieces from full year 'twenty three to full year 'twenty four? And then maybe what do you the midstream business can do structurally kind of under mid cycle conditions, ex this $300,000,000 to $400,000,000 savings you've spoken about? Yes.

Speaker 3

Hi. So one of the main drivers for the relatively lower guidance for this year is an assumption on the spread for the gas transportation contracts. So last year, we captured several gas transportation capacity optimization opportunities. Example, when the cold weather event occurred in the West Coast in the Q1. So obviously, we cannot predict these events.

Speaker 3

So our guidance assumes compressed gas transportation spreads. But when the market does present itself, we are well positioned to capture these opportunities. So that is one of the main factors. The other one is in allosin. We have assumed a lower sulfur pricing for 24 compared to last year.

Speaker 3

Now sulfur prices are at the near term low of around $70 per tonne and that is primarily due to weak Asian fertilizer demand and also sale of built up sulfur inventories by major regional producers. But based on the market trends, we think We see a potential improvement in prices during the second half from demand pickup and also unwinding of the sulfur inventory. And the last thing I would say is, we think this is sort of the low point in terms of the midstream income. We have assumed a narrow spread for the gas transportation for this year. And starting next year, we are also going to start getting the benefit of the 2 route transportation contracts expiring, like I mentioned in my up to 5 remarks.

Speaker 3

So looking forward, the next 3 or 4 years, you should see a significant uplift in our midstream income.

Speaker 8

Great. Thanks for the color, Sunil. And then maybe just hoping for a little bit of detail on the $700,000,000 BOE of additions to reserves, it's a pretty big number, especially when considering you're adding an acquisition this year. So maybe some color on the sources of those additions and where they're coming from?

Speaker 2

I think the bulk of the additions were from our Permian Resources business. I think the I think just essentially most of it was. We had some revisions from productivity improvements in other areas, but the bulk was from Permian EOR where I think, Richard, if you look at your Our reserve replacement ratio just for onshore that was pretty significant.

Speaker 7

Yes. Let me just add to that. I mean, obviously, the focus, while near term, some of these highlights that we're putting in on the primary benches We've been developing, driving the outperformance on production. But some of the highlights we've been trying to put in the call are some of these secondary ventures that are becoming more prevalent in our program. If you look at some of those highlights, so that second Bone Spring or The Bone Spring line, you look at that Delaware chart that we've got on Cune production highlighting the year on year performance in the Delaware, Those secondary benches are outperforming our 2023 average.

Speaker 7

And so those as we delineate and develop more of those, that's really driving that reserves in the unconventional. EOR continues to do well, talk in more detail if there's interest, but some of the projects they have going on there to increase capacity in some of our gas facilities like in Seminole, which I think we highlighted. These are also given us near term. We call it operability or it's really the reliability of that production. So some of that incremental investment this year is driving say a couple of 1,000 barrels a day of improved base production, but that's also providing capacity to develop some of those low development cost barrels that Vicki noted as we're able to bring on this CO2 for the future.

Speaker 7

So That's sort of how we're thinking about the reserve story and it plays out in near term outperformance, but the long term is picking it up on reserves as well.

Speaker 2

And I would add the other place where we did add significant reserves is Algeria as a result of the teams work to get all the 18 contracts merged into 1 and then extended. So that was great work done by the Algeria team to add reserves there. But The thing I'm most proud of is while the bulk of the reserves came from those two sources of the Permian and Algeria And a little bit from the DJ, every business unit we have increased reserves except for Alhosin where we had already booked a bit of reserves because of the modeling work on there to get that estimate more refined.

Speaker 3

Thank you.

Operator

The next question is from David Deckelbaum with TD Cowen. Please go ahead.

Speaker 9

Good afternoon. Thanks for taking my questions today. I just wanted to follow-up a little bit just on that prior conversation around EOR. I guess this is being built out in conjunction with some of the anticipated volumes coming from Stratos. Can you give us a sense what sort of capacity in terms of production relative to where you're at today, you're intending to build out or I guess thought another way, how large do you anticipate the growth rate to be out of the OR production base over the next 5 to 10 years?

Speaker 2

I would say that over the Next 5 to 10 years, it's going to be a significant part of our portfolio development. We have 2,000,000,000 barrels of resources remaining to be developed and We believe that as a result of our direct air capture facilities that we ultimately will build to get CO2 out of the atmosphere is going to be the most sustainable barrels in the world. It's going to be a resource that the world needs To get to leave 30% or 40% of oil in conventional reservoirs and 90% of oil in shale reservoirs It's just not acceptable. And for the United States to continue our energy independence, EOR is going to have to be a part of the equation ultimately. We're getting way ahead of the game here to be sure that we're ready, because we do believe that the climate transition would not be affordable for the world without EOR being able to produce net 0 carbon barrels of oil.

Speaker 2

So this is a huge part of our strategy and important not only to our shareholders who will add value, but to the U. S. And ultimately to other parts of the world. And for the near term, A forecast on what we can do, Richard has some data on that.

Speaker 7

Yes, perfect. I'll tie that. I mean, one of the Attributes we really like around the EOR production that we talk about a lot is the lower decline. So as we came through the last several years with especially to the downturn with lower commodity prices being able to have that flat flatter decline less than 5% was able to help us maintain a lot of free cash We really started restoration of some of that development last year. And this year as we go forward, we'll have about 60 wells that we'll bring online, which will add about 4,000 barrels a day of new well production.

Speaker 7

But the benefit of this EOR when we talk about mid cycle, That doubles next year and triples in the 3rd year. So you really hit your peak production of around 12,000 barrels a day on that investment today 3 years from now. The other thing I mentioned shortly, but just provide a little more color, the Seminole Gas Plant Expansion, that's about $85,000,000 a day that we'll add in terms of capacity for about $40,000,000 Again, this year we'll expect a couple of 1,000 barrels a day that we'll add in our base production. So if you think about Kind of a cash investment intensity or capital intensity that's just some competitiveness that we've got in the portfolio. What it does, to Vicki's point, as we're able to bring on our CO2, anthropogenic CO2 for the future, These are very good return projects.

Speaker 7

They'll be very competitive in our portfolio, especially given the lower decline. And so when we look at just that Seminole, as we look 24,000 to 28,000 that's say another 15,000 to 20,000 barrels a day type opportunity for minimal capital. And so within sort of the range of capital that we're spending this year in EOR, we're building those sort of wedges with great opportunity to do more as we bring on more CO2. So hopefully that helps tie the short and long.

Speaker 9

I appreciate the details, Richard. Maybe just sticking with the theme as a follow-up, just I think you talked a little bit about some spending is in the budget this year for the 2nd deck facility, I guess in Kleberg, is any part of that sort of progression, excuse me, still contingent on conversations with the DOE? And Are you expecting a resolution around finality of funding and grants this year?

Speaker 2

The Discussions with the DOE are continuing and going quite well. That where we the timing of the start of the Run-in engineering and design will be dependent on the completion of some of those discussions. And then the discussions will continue beyond that on getting prepared for the started construction, but there is a timeline there that we're working through.

Speaker 7

Maybe just a couple of details I'll add since you asked The question on that, I mean, a lot of that spend is continuing to build out the subsurface capability for that CO2. Obviously, direct air capture is an anchor for the King Ranch area, but we continue to work on our other Gulf Coast hubs. We submitted 8 Class 6 and are expected to submit another 10 this year. So just kind of given you scale of what those that type of work has been going there. So Going really well.

Speaker 7

I'm really pleased with the development work on that end. And then obviously, carbon engineering, We've been getting to work more and more with and really happy with the progress that is going through R and D to project work with Ken that will fulfill that development work.

Speaker 9

Thank you both.

Operator

The next question is from Roger Read with Wells Fargo Securities. Please go ahead.

Speaker 10

Yes, thanks. Good afternoon.

Speaker 2

Just wanted

Speaker 10

to come back, 2 things, please, Vicki. First one On the Crown Rock, if there's anything you can kind of offer us on what the FTC is asking you for can request and I'll just sort of preface with understand with some of the more integrated companies the concern of concentration, I'm a little more surprised in a more Upstream oriented company. So anything you can help us with there?

Speaker 2

Well, some of our teams felt like they'd ask for everything. But I can tell you, our teams are working diligently to work with the team at the FTC to give them all the answers that they need. So, it's we're progressing and hope to, as we said, be able to close in the Second half of this year.

Speaker 10

So they asked for the moon and everything else,

Speaker 2

I did well, I didn't see the moon on there, but we're not done yet.

Speaker 10

Fair enough. All right. The other question I had in terms of the Capital efficiencies are obviously coming through in the Permian, the regular, let's call it still modest growth there, But you're increasing the growth rate during 2024 for the Rockies and other part of it. When we had the follow-up calls yesterday, you said part of it was build in some mid cycle businesses, maybe somewhat lower decline businesses. I was just wondering from a corporate structure, how you make the decision on where to allocate the growth Capital here like why lean more into the Rockies and the EOR rather the Permian when we're kind of all conditioned to thinking of the Permian as among the best returns in the business and obviously the performance you've been delivering At the wellhead, it kind of says, well, why not more capital in the Permian rather than these other opportunities?

Speaker 2

So when you look at it on a corporate level, what we're really trying to do is balance our investments over time so that we can have a sustainable growing dividend. And we've got this unique balance that I think makes it For us, different than many other companies, and we want to take full advantage of it. And I want to let Richard and then Sunil chime in on their views on it because this is a critical part of what differentiates us.

Speaker 7

Yes. No, Roger, I appreciate the opportunity. Mean, obviously, we're putting together short term with long term in mind and the Crown Rock acquisition provides a lot of growth and we've talked about the positive attributes of that being a more mature unconventional development with high margin 35% decline. It immediately adds You can think about it from a growth standpoint, a really nice growth wedge this year, both from a free cash flow basis, but also decline basis. The Rockies, I'll just pick on one point there.

Speaker 7

About 40% of that capital in the Rockies this year has to do with drilled uncompleted wells that carried in from last year. The sort of the cadence of that activity levels we had Resumed activity last year, got ahead on the drilling and then this year really beginning to complete a lot of those So from a capital intensity standpoint, that's very, very low when you look at what we're spending for the amount of production that we're able to add there. Obviously, that's we have high margins in the Rockies. We have royalties. There's other things that drive very competitive returns there.

Speaker 7

And so that DUC count just as a data point will kind of go from say mid-60s kind of the Q4 last year to more like mid-30s as we balance and that's allowing us to then actually pull back about half of a net rig in the Rockies to more of a sustainable activity level. So just a little color on the Rockies, so we don't read too much into just 1 year, but maybe Sunil can then pick that up and talk kind of across the company.

Speaker 3

Yes. So when we think about capital allocation in the oil and gas segment, what we're trying to do is we're trying to balance between margin, base decline and capital flexibility. So if you start with cash margin, We start with the U. S. Unconventional with high margin, high returns and based on everything in Hertz so far, it's getting better each year.

Speaker 3

And then you have Gulf of Mexico, which has one of the highest cash margin in our portfolio. And if you look on an incremental basis, It's even higher because a large part of the operating cost is fixed. And then we have international assets, which are mostly production sharing conference, where we get a higher share of production at lower prices. And this helps mitigate some of the commodity price risk and protect the overall cash margin. That is from a margin point of view.

Speaker 3

I mean, when you think about base decline, so today our production approximately 60% of our production is unconventional and with Cromrock, it's going to get to around 65%. So what we are trying to do is balance between the short cycle, high end decline and conventional and then the mid cycle shallower decline conventional investments. And Permian EUR, like Richard said, is one of the lowest base decline in our portfolio. So if you look at the typical Permian EIWA project, we get to the peak production by the 3rd year and the peak production is almost three times the 1st year production and then after that it is a shallow decline. So what this does is it helps manage our overall corporate decline, which helps with the sustaining capital and which ultimately helps with the breakeven.

Speaker 3

And the third part of it is capital flexibility. So if you look at our CapEx even for this year, around 75% of upstream CapEx is U. S. Onshore, where we have flexibility to change activity depending on the macro conditions. So like if you look back in 2020 in U.

Speaker 3

S. Onshore, we had around 30% of the rigs that we plan to operate this year. So we were able to ramp up quickly and efficiently and we can do this if the macro demands that. So these are the 3 attributes that we look at when we look at oil and gas capital allocation. So to summarize what I would say is, We have a diverse portfolio of both conventional and unconventional assets that helps manage our base decline, while also maximizing our returns and also providing the flexibility to respond to different macro conditions.

Speaker 10

That was very thorough. Thank you.

Operator

The next question is from Neal Dingmann with Truist Securities. Please go ahead.

Speaker 11

Thanks for the time, Vicki and team. My first question, Vicki, is on the DJ. I'm just wondering, could you remind me where you all sit, I think, in good shape. I'm just wondering where you all sit on total permit pertaining to your DJ D and C plan? And then while early, are you all concerned about the I saw some latest potential proposed Colorado bills?

Speaker 2

Yes, I'll pass that to Richard.

Speaker 7

Yes, I think just from a permit standpoint, it's been very productive over the last of years. We stand today about a little over a rig year or 1.5x kind of our current activity. But in the last 6 months, we've gotten 155 through in the next 12 months, we expect another $169,000,000 So there's some big ones that we've been working through, kind of from a larger package standpoint that have gone really well. That team there and I hope this helps kind of second part of your question. We continue to drop things that are important the communities in the state around emissions, our safety programs are very good.

Speaker 7

We've worked on consolidating facilities and doing around transportation to make it easier. And so a lot of those things have been really the positive things we've been able to add into These permit or development plans around the permits that we've received very positive comments on. So we're continuing on. Again, we're sort of hitting more stable, sustainable activity up there and we feel like we're as good a position as we have been in a long time in terms of permit outlook.

Speaker 11

Very helpful, Richard. And then just a follow-up on shareholder return in M and A. I'm just wondering, I assume Melanie that the preferred redemptions would now not incur until late 2025. So Is it fair to assume that when you were looking at the Crown Rock acquisition that the fact you factored in that any that Crown Rock incremental production or free cash flow would more than offset any mitigated payments now for another year or so?

Speaker 2

Yes. That's what We figured on that. But the Crown Rock does that acquisition, once we get our debt back down to $15,000,000,000 That's going to be a key part of helping us then to start the resumption of a more robust share repurchase program of both the common and ultimately the preferred.

Speaker 11

Great point. Thanks, Vicki.

Speaker 2

Thank you.

Operator

The next question is from Josh Silverstein with UBS. Please go ahead.

Speaker 12

Yes, thanks. Good morning. I was going to ask on kind of similar topic there. The asset sales are pushed out and you don't have the term loan coming into just yet. Is the shareholder return profile just the base dividend this year and that kind of supports you get into that $15,000,000,000 debt number a bit faster?

Speaker 2

No, actually, we would we're getting accumulate cash flow as we continue to work toward closing the Crown Rock deal because a part of cash flow will be used to help pay down both the term loan and our debt maturities that are coming. So cash flow would not be used for share repurchases until we get to the point where we've achieved those goals.

Speaker 12

Got it. And then I saw that the Battle Ground project was pushed out to 2026. If you could just go through any sort of the drivers of the extra time that was needed And what the status of the other plant enhancement projects look like and maybe what the split of that $350,000,000 EBITDA uplift was like kind of between Battleground and the other projects? Thanks.

Speaker 2

I think there's The projects there were pushed out a bit just like many other things because of supply chain issues and also dealing a little bit with inflation. But those projects, we started those and those are In progress and going well at this point. So I'd like to say that though the importance of when those cash flows come on. From the planned enhancement projects, we're already starting to see cash flow from those projects. The actual cash flow that we'll see from the Battle Ground expansion won't be until the second half of twenty twenty six.

Speaker 2

But the exciting thing about all of this is that When you add the OxyChem projects, which will deliver the $300,000,000,000 to $400,000,000,000 of the full uplift By the second half of twenty twenty six, that's both the plant enhancement projects and the expansion. So we've got that and you combine that With what Sunil had talked about earlier, where we have a $400,000,000 reduction in our mid cycle contract prices In 2025, we'll see the full uplift of that in 2026 as well. And so when you combine those along with the The $1,000,000,000 that we expect assuming a WTI price of $70 That puts us in 2026 with $1,700,000,000 incremental cash at least potentially more than that. So to be able to get to a point where in just a little over 2 years where we have Through these projects and cost reduction, we are $1,700,000,000 better in terms of cash flow. That's pretty significant for us and something that we're really looking forward to and excited about.

Speaker 12

Great. Thanks, Vicky.

Operator

The next question is from Michael Scialla with Stephens. Please go ahead.

Speaker 13

Yes, hello. I appreciate all the detail you gave on the decision to direct more capital this year to mid cycle investments. I wanted to ask specifically about the Gulf of Mexico, which is part of that. Back in December, you were planning on just the 2 drill ships. So, wanted to see what changed your thinking there to add a 3rd drillship and especially given that services there seem to be tighter than they are on Sure.

Speaker 13

Was it just part of this whole mid cycle investment thesis? Or is there something else? And can you talk about specifically what you're seeing there that 3rd drillship will be targeting.

Speaker 5

And in terms of Drillships, we're only planning on 2 drillships this year. In terms GOM overall plays into the portfolio. Last time I mentioned our GOM 2.0 project. Based on that, we're carrying out detailed rest of our characterization work and can see significant upside potential in the GOM asset. I mentioned water, flood stimulation, horizontals, artificial lift and subsea pumping, which is already operational for us.

Speaker 5

If I talk a little bit about water injection, when you already operate fields with original oil in place numbers of billions of barrels, Adding water injection is a really economical way of increasing recovery factors on high margin, low development cost barrels. Typical improvements in recovery and appropriate reservoirs can be between 10% 16%, while also significantly reducing the So it plays into the things that Richard was talking about in EOR. Scale of these developments and the very low Development costs lead to good returns. Analogs have been highly successful in GOM. As you know, we're world leaders in these technologies.

Speaker 5

We that we've done since 2020. That's really helped define these targets, the scale of them and is assisting in the well planning and well locations that we're working on at the moment. I think we see GOM as a portfolio now with great optionality to grow using the existing infrastructure that we have in place, But also the technology skills that we have across the entire company. Hope that That answers your question.

Speaker 13

Yes, it does. Appreciate that, Ken. And I know on your Crown Rock acquisition call, you mentioned I think Richard mentioned your pilot that you've been working on the Midland Basin for a couple of years. Just wonder if there's any plans to expand EOR in the Midland in the near term and did that have any bearing on your decision with the Crown Rock acquisition?

Speaker 2

The Crown Rock acquisition stood on its own in terms of quality and how it fit within our portfolio in the Midland Basin and made that asset stronger. But the 4 that we conducted in the Midland Basin were on South Curtis Ranch, which was not too far from some of those assets. So we do believe that the Midland Basin is going to be One of the areas that we would target in a big way with an enhanced oil recovery development that's choosing anthropogenic or atmospheric. But we're also doing the same thing in the Delaware Basin. Now we have a pilot going on there That will help us to potentially look at that as another place to develop ultimately.

Speaker 2

So we have both options.

Operator

In the interest of time, this concludes our question and answer session. I would like to turn the conference back over to Vicki Hollub for any closing remarks.

Speaker 2

Just like to say thank you all for participating in our call today. Have a good day.

Operator

The conference is now concluded.

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Earnings Conference Call
Occidental Petroleum Q4 2023
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