Occidental Petroleum Q2 2021 Earnings Call Transcript

Quartr
Provided by Quartr
August 4, 2021

There are 11 speakers on the call.

Operator

Welcome to the Occidental's Second Quarter 2021 Earnings Conference Call. All participants will be in a listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Jeff Alvarez, Vice President of Investor Relations.

Operator

Please go ahead.

Speaker 1

Thank you, Chad. Good afternoon, everyone, and thank you for participating in Occidental's Q2 2021 conference call. On the call with us today are Vicki Hollub, President and Chief Executive Officer and Rob Peterson, Senior Vice President and Chief Financial Officer. 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.

Speaker 1

I'll now turn the call over to Vicki. Vicki, please go ahead.

Speaker 2

Thank you, Jeff, and good afternoon, everyone. Our strong operational Performance in the Q2 continued to drive robust financial performance as we marked our 2nd consecutive quarter of generating the highest level of free cash flow in over a decade. As was the case last quarter, our cost structure and capital intensity leadership were catalysts for our strong results and continue to provide a solid foundation for free cash flow generation in the future. We're especially pleased to have been in a position at the end of the second quarter Launch a tender process to retire over $3,000,000,000 of debt using excess cash generated from operations as well as proceeds from divestitures. While we made incremental progress in reducing debt throughout 2020 and the first half of twenty twenty one, the completion of this tender represents a sizable step forward in our deleveraging efforts.

Speaker 2

This morning, I'll cover our 2nd quarter operational performance and divestiture progress, And Rob will cover our financial results and balance sheet improvement as well as our updated guidance, which includes an improvement to our DD and A rate And an increase in guidance for our full year production and for Midstream and OxyChem's 2021 earnings. In the Q2, our business All of our businesses outperformed. Our capital discipline and efficiency combined with a supportive and improving commodity price environment Positioned us to generate the highest level of free cash flow before and after working capital since the Q3 of 2,008 When WTI hit $145 a barrel. We are proud of our teams for this accomplishment and we appreciate that they are continuing to improve our capital execution And operating efficiencies to further expand our margins. We exited the quarter with approximately $4,600,000,000 of unrestricted cash, Which does not include cash received in July from the recently closed divestiture or the cash used for the debt tender, which closed in July.

Speaker 2

Rob will touch on the tender in a little more detail, but I'd like to reiterate how pleased we are to be once again making notable progress in reducing debt and strengthening our balance sheet. Turning to our operational results. Our oil and gas business delivered 2nd quarter production from continuing operations of over 1 point 2,000,000 BOE per day. The total company wide capital spending of almost 698,000,000 Our domestic oil and gas operating cost of $6 per BOE came in substantially below our full year guidance as our teams continue to demonstrate Their innovative operations expertise are finding new ways to safely reduce costs in our field operations. In the second quarter, OxyChem continued to benefit from robust PVC demand and pricing as well as gradual strengthening in the caustic soda market.

Speaker 2

We believe the fundamentals for these markets will remain supportive through the second half of twenty twenty one and we are confident in increasing our full year guidance To a midpoint of $1,250,000,000 representing an almost 60% increase over our original guidance for the year. The ability of our oil and gas business to overcome challenges while increasing efficiencies has been transformational. Looking back over the 1st 6 months of this year, We overcame the impacts of a major weather event and divested a producing asset. We were able to make up the loss and divested production And have increased our full year production guidance for continuing operations to 1,150,000 BOE per day. We continue to be highly encouraged by well performance across our portfolio.

Speaker 2

For example, in the Texas Delaware, We recently brought online a new Silvertip development that is producing approximately 20% more oil compared to a prior development in this area. Additionally, in an area roughly 10 miles southeast of Silvertip, we brought online a 5 well development with average As I mentioned, operationally, our teams continue to set new efficiency records, while constantly pursuing We set new quarterly records across our portfolio on feet drilled and hours pumped in a single day. In the Midland Basin, we set a new drilling record with over 9,500 feet drilled in 24 hours, contributing to a new Oxy Permian spud to rig release record, Drilling a 10,000 foot horizontal well in only 8 days. In the DJ Basin, we set a new company wide frac record Pumping over 23 hours in a single day. Utilizing Oxy Drilling Dynamics in the Gulf of Mexico, we have significantly lower drilling cost And duration as the wells drilled in 2021 have cost 15% less than the average for 2019.

Speaker 2

As I mentioned on last quarter's call, we've had excellent results leveraging remote operations. Our innovative mindset And ability to leverage technological breakthroughs have allowed us to continue pushing the performance envelope, giving me confidence that our best in class capital efficiency will continue. Our divestiture plan advanced in the Q2 with the recent closing of a non core Permian acreage sale for approximately $510,000,000 Given our industry leading inventory depth, we welcome the opportunity to monetize these assets at an attractive price as it is unlikely that we would have developed the Sacreage in the near future. We expect to close at least $2,000,000,000 of divestitures post Columbia. And as we've said previously, we'll always prioritize obtaining value for our shareholders over meeting a deadline.

Speaker 2

I want to take a few minutes to talk about our Chemical business and how we plan to leverage its leadership and expertise into our low carbon ventures business. OptiChem's success is demonstrated by its financial performance and track record of consistent free cash flow generation. OxyChem has been a consistent generator of free cash flow during past downturns. And with the macro environment improving, OxyChem is on track to deliver record earnings this year, Even surpassing 20 eighteen's results. The business may also continue to strengthen in future years as caustic soda, one of the key profit drivers for the business, As experienced only a moderate price recovery to date.

Speaker 2

Last quarter, I spoke about how OxyChem's integration across multiple chlorine derivatives provides us with the ability to optimize our caustic soda production, while opportunistically adjusting our production mix to maximize margins. There are many opportunities for us to apply the same approach to integration as we develop opportunities between OxyChem And our Low Carbon Ventures business. As a major producer of PVC and caustic potash, OptiChem has The engineering, R and D and process technology expertise as well as the production capability necessary to build our low carbon business. OxyChem is a world leader in the customization, handling and usage of PVC, which will be a major component in the construction and ongoing operation of the direct air capture facility. We're also one of the world's largest leading producers of caustic potash, the key chemical utilized in the direct Our best knowledge of equipment design And our experience with operating and handling the caustic potash will be key to helping us quickly optimize our direct air capture facilities.

Speaker 2

In addition to being a market leader and consistent free cash flow generator, OxyChem is integral to our business of today and of tomorrow. It's also worth noting that OxyChem is a market leader in health, safety and environmental performance. OxyChem recently earned a remarkable 31 Responsible Care Awards. These are from the American Chemistry Council and are the U. S.

Speaker 2

Chemical Manufacturing Industries' leading performance awards. The awards recognize OxyChem's achievements in safety, waste reduction and improving energy efficiency. Several of the award winning initiatives focused on waste minimization, reuse, recycling and energy efficiency, which will all contribute to our 2025 sustainability goals. I'll now hand the call over to Rob, who will walk you through our financial results

Speaker 3

Thank you, Vicki. Our businesses continue to perform well in the 2nd quarter As our free cash flow generation affirmed our confidence in OXY's ability to generate cash in a healthy price environment. The strong performance contributed to a quarter end unrestricted cash balance $4,600,000,000 On our last call, I mentioned the potential for a partial reversal of the working capital change As expected, we benefited from a positive working capital change this quarter of approximately $600,000,000 further contributing to our cash build during the quarter. As Vicki mentioned, we lost a tender late in the quarter enabling us to repay over $3,000,000,000 of debt in July. Subsequent to successful execution The debt tender in July, we received proceeds from the non strategic Permian acreage, partially refreshing our post tender cash position early in the quarter.

Speaker 3

In the Q2, we announced an adjusted profit of $0.32 and a reported loss of $0.10 per diluted share. While we place a greater importance on cash flow generation, especially as we are focused on deleveraging, we are pleased to be generating income on an adjusted basis And view this as a positive indication that our financial position continues to improve. Our reported results were less than our adjusted results primarily due to mark to market impact of derivatives. We delivered outstanding production results year to date while having deployed less than half of our full year capital budget of $2,900,000,000 We expect capital spending to remain within budget, demonstrating our commitment to capital discipline and our capital intensity leadership, even as capital spending is going to be higher in the second half of the In the first half of the year, the positive working capital change realized in the quarter was driven by lower cash payments for items that are accrued throughout the year Lower crude inventory from fewer barrels in the water, partially offset by higher accounts receivable balance due to the increase in commodity prices. As the interest payments on our bonds are made semiannually, our cash interest payments are still going to be lower in the second and fourth quarters than they are in the 1st and third quarters.

Speaker 3

During the downturn last year, we received approximately $1,000,000,000 of additional cash flow from our oil hedges. To obtain a costless structure, We sold a 2021 call position of 350,000 barrels a day with an average strike price of 74.16 percent Brent. As the commodity prices rose in the second quarter, we made payments of $5,700,000 under the sold call position And $1,000,000 under our gas hedges in July. Asset allowance paid to date under hedges have been minimal and are certainly worth the benefit we received last year. We We continue to maintain opportunistic approach towards hedging and the Q4 is supportive, but not added any hedges past the end of this year.

Speaker 3

We believe creating a manageable debt maturity profile and reducing debt is a more effective long term solution to derisking the balance sheet While providing shareholders with exposure to commodity price gains. We raised our full year production guidance following our strong second quarter results And have increased our earnings guidance for OxyChem and Midstream for the 2nd time this year, reflecting strong first half performance and improved market conditions. We expect that 2021 will be a record year for OxyChem even surpassing our earnings in 2018, we benefit from exceptionally strong caustic soda prices in the middle part of that year. This year is expected to benefit in the second half of the year from continued higher sulfur prices at Ahuizen as well as an uplift in the Q3 related to the timing of export sales. We also lowered our DD and A guidance for 2021, like in the mid year reserves update.

Speaker 3

This update takes into account More supportive trailing 12 month commodity prices at mid year compared to year end 2020 as well as our activity plans and recent success in lowering operating costs. The combination of these factors increased our proved reserves, which we expect to result in a lower DD and A rate going forward. Our production in the second half of twenty twenty one is expected to average 1,140,000 BOE per day. Production in the second quarter benefited from time to market acceleration in the Rockies and Permian, Paper weather conditions and optimization of planned maintenance schedules to better sequence shutdown activities resulted in lower than expected downtime in Gulf of Mexico, contributing to higher than expected production. Our expected Q3 production of 1,145,000 BOE per day includes an allowance for seasonal weather and maintenance in the Gulf of Mexico, The divestiture of approximately 10,000 BOE per day in the Permian, the timing impact of our Rockies capital program, which was front loaded in 2021, As well as PSC and back to Peter Price.

Speaker 3

Even as production in the second half of the year is going to be lower than the impressive second quarter production result, We remain confident our production trajectory leveling out as we enter 2022 where we anticipate a production pattern similar to 2021. We have updated our activity slide to include 2 additional New Mexico rigs. New Mexico activity change we fully funded through the cost savings and optimization of our capital projects gained through efficiency improvements and will not increase our capital budget. Adding activity to 1 of our highest return to assets will place us in a strong position as we transition into 2022. With the successful completion of our debt tender, we paid over $3,000,000,000 of 2022 through 2026 maturities and I have clear runway over the next few years.

Speaker 3

As we generate cash from organic free cash flow, we continue to evaluate the options available for additional debt reduction We'll seek to further our debt maturity profile, so that we left we're not exposed to any significant amount of maturities in any single year. The The options available to us for debt reduction include potentially calling the 2020 floating rate notes prior to maturity, executing additional tenders, Exercising attractive make whole provisions, pursuing over market debt repurchases or you may choose in some cases to build a cash position, which may be applied towards retire maturities as they come due. We also plan to retire $750,000,000 of notional interest rate swaps in the Q3 for the fair value amount, which will improve cash flow by almost $50,000,000 per annum We ended the second half of twenty twenty one in a strong position in the beginning of the year and happy to look forward to being focused on maintaining a strong liquidity position, Deleveraging or regain investment grade metrics and preserving financial policies and cash flow priorities and embed capital discipline. I will now turn the call back over to Vicki.

Speaker 2

Thank you, Rob. We are proud of the substantial progress in delivering our near term cash flow priorities. We have significantly de risked our balance sheet with the successful completion of our recent debt tender. And this marks the next stage of our deleveraging effort as we work While we still have work to do before transitioning to the next stage of our cash flow priorities, including Returning additional capital to shareholders, we're confident that the steps we have completed to date and the strong operational performance that we continue to deliver will accelerate our progress. We'll now open the call to your questions.

Operator

Thank you. We will now begin the question and answer session. Please limit your questions to one primary question and one follow-up. If you have further questions, you may reenter the question And the first question will be from Neil Mehta with Goldman Sachs. Please go ahead.

Speaker 4

Thanks so much. And really strong results here on chemicals, and that's where I want to start. Can you talk to your views on caustic Exota and PVC pricing for the remainder of the year and next year and the sustainability of the margins that we see out there.

Speaker 3

Yes, Neal. We continue to see very strong conditions in both our Vinyl business And steady improvements in the caustic soda business as Vicki indicated. As you can see on Slide 7 of the deck, these two businesses are the major profit drivers For our Chemical business, and it's unusual, but we do have conditions where both businesses are seeing favorable market conditions. The earnings impact that you're seeing is significant. So on the PVC business, the business remains extremely strong due to a tight supply demand balance.

Speaker 3

On a year to date basis, we're seeing domestic And as an industry about 16% higher compared to the same period in 2020. But more importantly, it's up 13% for where it was in 20 And so strong demand is also attributed to really Low levels of inventory and supply chain combined with the construction sector, which you're seeing in obviously a lot of their construction materials. And we expect demand remains strong with a very favorable housing start outlook, mortgage rates remaining low, which tends to also drive historically the business And a lot of investment remodeling. And so we're seeing those kind of factors are all pointing towards sustained improvement in the PVC business. The other thing I would say is that when the export business is soft like it is now, where we're seeing year to date exports are down 33%, which tends to be the last Our location of PVC production, that's indicative of a strong market.

Speaker 3

And so when there's not enough product to go around, we shouldn't see margins remain favorable for us. On the chlor alkali side, chlorine molecule itself is very tight and so producers are seeking the highest value outlets for chlorine molecules. And as Vicki mentioned, our very diverse portfolio of coin derivatives allows us to really maximize the bags of coin molecules Through our chain of opportunities. And so chlor alkali production itself has been under pressure for the year simply because of a lot of Both unplanned and planned outages, if you look at chlor alkali rates are actually lower in 2021 than they were in 2020 year to date, running about 75% year to date versus 80% over the same period Last year, resulting in about 6% less caustic production available this year versus last year. So caustic It is quite tight, which is helping to improve prices.

Speaker 3

And with plan out of the schedule in Q3, we would anticipate that Further support for additional price increases in the caustic soda business. And then as you see caustic for us tends to be something that moves with the global economy. And Certainly as economies open up and eventually travel restrictions ease globally, We should see additional demand in underlying sectors. And so as far as the key demand sectors in the second half, we see better demand in the alumina sector, the pulp and paper sector, Water treatment and certainly bleach sectors all improving in the Q3. So both sides Of the ECU are looking strong headed into the second half of the year and the underlying factors certainly are bullish for both of them as we move into 2022 and beyond.

Speaker 5

Thanks. And the follow-up is one

Speaker 4

of the key takeaways from earnings season is the emphasis investors continue to place On cash returns, at this point, Occidental is more focused on deleveraging the business, which makes a lot of sense. Can you just remind us what your absolute debt target is? And then at what point or what milestone should we be thinking about The company is shifting from a deleveraging approach to one of where you can reintroduce something like a dividend.

Speaker 3

Yes. So certainly a topic du jour. So anyway, we depicted on the 13th slide of the deck, which was a new way included that we're essentially on a journey When it comes to cash flow priorities and after a lot of risk in 2020, the de risk the company and what I call post COVID world between the stabilization of Production, the slashing of our costs and refinancing near term maturities, now we're making headway as Vicki detailed on our deleveraging process. We took a significant step forward with FSI's tender in July through both the combination of cash available from strong production performance, The continued capital execution and diligent cost management and really the remarkable turnaround in chemicals all contributed to the success of that. So now we've retired about $12,700,000,000 of principal since the middle of 2019 through that combination of our granted cash generation and investor program.

Speaker 3

And I think we'll continue to work towards the $2,000,000,000 to $3,000,000,000 post Columbia divestiture target that we've established. But as we look forward, it's anticipated that the majority of free cash flow from the business will be the source of future cash for debt retirement. And it's critical that as we take advantage of these elevated prices, If you leverage the balance sheet because we don't need time to be changed in the macro environment that could affect or alter commodity prices that would inhibit our ability to do that. So when I look at the time it takes, our path does remain focused right now on the 2 top priorities being that we're focused on in our list. And how long we're on that path is certainly dependent upon future commodity prices because that certainly impacts The rate at which we're able to move down the path, but I do think that the steps we've taken since March of 2020 are all part of a long term Strategy around increasing value to our shareholders.

Speaker 3

For example, look at last year on the de risking side, we could have saved a little interest in our refinance process by using more owners and dentures. But We see today with a much less risky maturity profile and a much in the same simple capital structure we started with. And we do believe ultimately deleveraging the company is going to be the benefit of equity holders in All equity appreciation. And we also understand that that leverage to oil price remains attractive and is determined at the pace of that process. And our EBITDA does fluctuate obviously a lot with commodity prices.

Speaker 3

And while some agencies modestly increase their models, their prices are still well below the So that's why we keep saying it to get to a more sustainable debt level in the mid-twenty range, it's likely necessary to achieve those ID like financial metrics. In addition to debt ratio, we understand that obviously financial policies matter and invest great decisions. So Use of cash or dividends growth etcetera also reviewed in the near term unfavorably. So that's why we remain focused on deleveraging process. And Once we reach that more sustainable debt level, we will start resuming a greater amount of cash to shareholders.

Operator

Thank you. And the next question will come from Doug Leggate with Bank of America, please go ahead.

Speaker 3

Thank you. Good morning, everybody. Good afternoon, everybody, I

Speaker 6

should say. Got it. It's amazing to me how folks continue to look for cash returns, Vicki, when you've got the potential of moving 40% of your market Chat between debt and equity over the next year. And I guess that's really the rub of my question. It's disposals and how you can accelerate that.

Speaker 6

I'd like to frame it like Yes. When you announced the $2,000,000,000 to $3,000,000,000 target post Columbia, rent was $42 for the $2,000,000,000 to $3,000,000,000 target. Obviously, it's not there Today, so can you just give us an update as to do you expect to do more than the 2.3 on a pari pass through basis for the oil price? Are you moving or are you targeting 2 to 3, albeit I'm guessing you can do that with fewer assets given the oil prices. So Just wondering how you risk the $2,000,000,000 to $3,000,000,000 It seems to me you can probably do a lot more in absolute terms given the oil price is $30,000,000 higher.

Speaker 2

So at this point, we're not really prepared to change the goals that we've set out, although we feel very comfortable we will achieve the lower end of that goal. But Doug, you're exactly right. Given our portfolio, there could be other opportunities available to us To continue to optimize what we have today and optimization to us is not just ensuring that you have the best quality assets in your portfolio And that you're putting your dollars where they generate the most value. It's also looking at the opportunities to do as we just did and that is to monetize Where you see that the monetization of that is going to be so far out into the future, it's not meaningful value for our shareholders today. So we're constantly looking at and updating, optimizing our plans and looking at those opportunities Where could there be additional situations where we have the same thing that we just did with this Permian acreage, monetize it today And have the opportunity to create better value today than to keep it in the portfolio when we know we can't get to it.

Speaker 2

So We're still looking at all those things, not prepared yet to change our guidance, but I can say that opportunistically, we do want to Create value sooner rather than later, so we'll continue to keep that in mind as we review the portfolio and optimize as we go along.

Speaker 6

Vicki, I apologize for asking for clarification on this. But if you have the same number of assets, Are you ahead of schedule then in terms of the absolute proceeds again, you're flat to the oil price is higher?

Speaker 2

We are on schedule with what we need to do. But with that said, given where oil price Today, we're quite comfortable looking at opportunities as they come in. And by that, I mean, we're still getting opportunities coming in the door for various parts of our portfolio. And we look at all those very critically. And I think that there's going to be situations that come up over the next 12 to 18 months that would provide us more opportunity To raise additional funds, but I don't want to commit to that because where we are now and with respect to our cash flow generation and our deleveraging Progress.

Speaker 2

We're in a position to be, I would say, much more Careful. And careful is not the right word, but much more, I guess, Opportunistic is the only way I can think of to ensure that we get maximum prices for what we would sell because We started out the divestiture program by cutting off the very tail end of what we felt like fit within our portfolio that could fit within others' Folio in a higher level, but for us, the things we've sold just could not compete and could not add the value that other things in our portfolio could. So now as we have divested of those assets, we're now getting to the assets where We expect to get more value from a divestiture than those that were at the lower end, I guess is the best way to say it. So but we're open to looking at opportunities as we see them.

Operator

Thank you. And the next question will come from Roger Read with Wells Fargo. Please go ahead.

Speaker 7

Yes. Thank you. And Yes, good afternoon and congratulations on the quarter. It's nice to see everything clicking for the first time in a while. I guess what I'd like to maybe address, some of the metrics you're using That underpin the decision to move away from any sort of a hedging strategy And maybe getting back to thinking about from a debt to EBITDA, debt to cap, Maybe a long term debt number you're more comfortable with.

Speaker 7

Just maybe all the pieces that have gone into it that kind of speaks to where you are now

Speaker 3

Yes, fair question, Roger. So Certainly, historically, the company has not been one with the hedging philosophy and felt like the combination of our exposure to commodities, Exposure to price of the long haul would ultimately deliver the most value to our shareholders versus attempting to Use hedges to try and create value. And that certainly changed in 2020 because we were in a position where our leverage was such that It was necessary for us to create some protection in the event we were in a negative price environment like what ultimately worked out that way. And Certainly, the $1,000,000,000 that we were able to create in value last year from the hedge was something that was critical to our success last year. And we'll continue to maintain that opportunistic approach.

Speaker 3

But as we evaluate hedges, we're considering a lot of factors. Number 1 is the cost to execute the hedge. Certainly, as we're the cost of hedge that we did last year came with a call provision this year, which hasn't been very expensive, but they can be. And the implications that the hedge is going to have on the upside to leverage our oil price such as a collar. And A pure hedge is pretty expensive.

Speaker 3

I think collars are introducing upside that limitation that we would like to put on our shareholders. And If you look at the we think that creating that manageable debt profile as I discussed in the comments, particularly knocking down the taller towers Beyond just the near term stuff that we focused on, if you look at the recent tender, 80% of the bonds that we addressed were in that 2022 to 2024 timeframe. And it's a more effective long term solution by tend to provide that. And so I do think that you can use Trailing prices were to continue with the current strip values and use a trailing EBITDA by the end of the year. You can certainly and we're able to continue on as we've been doing with debt retirement.

Speaker 3

We could easily put you below a 3 times multiple. Certainly, as we discussed, and that's not necessarily that's what the script value that's much higher than the what's being used by the rating agencies. And so I do think it's important to us to maintain those ratios, but it's also why I mentioned in my comments, it's important for us to really go after the maturities while we have The wind at our back in terms of commodity prices, which is exactly what we're doing. And so taking that out and continue to move forward. And then you can look at the way that we structured the tender And strategy approach on that, we left aside a significant amount of debt that's easily available to us, dollars 2,000,000,000 worth that's either Going to be mature at the end of the year, as callable for the end of the year or we have attractive make whole payments in addition to the floating interest rate notes.

Speaker 3

And so That gives us access to very cheaply continue to retire debt moving forward over the balance of the year, which will go further and further towards that. And so we've just got work to do. We made a giant step forward with the debt tender in the last quarter. We still have a little more work to do, but I do feel like that the work we've done, particularly between the deleveraging and the clean out runway It has made us give us a lot more selectivity around hedging strategies moving forward. Not to say that we would never do them again, But it certainly is going to our certainly our preference is to create value for shareholders and given the exposure to oil price, which is something that Oxy has to offer right now that many others don't.

Speaker 7

I appreciate that. That's a good answer. It just sort of gets to the reduced risk profile overall. Appreciate that. Maybe just changing directions With my other question a little bit here, the comment about being able to add the 2 rigs in New Mexico, no impact On CapEx, I was just curious though, does is that a function or reflection of improved Efficiency and productivity, some of the other things mentioned like the uptime on the pumping jobs.

Speaker 7

Maybe Vicki, just a question overall as you're seeing the evolution and continued productivity and efficiency gains out of the field?

Speaker 2

Yes, it was a combination of the efficiencies of the current drilling program and also the utilization of existing facilities To ensure that we could shift our capital to 2 additional rigs without needing Any incremental infrastructure expenditures. So it create this has created a really good opportunity, the fact that our teams are continuing to improve what they're doing.

Speaker 1

And Roger, on top of what Vicki just said, I think it's important to note, I mean, if you look at our activity profile, I mean, we were ramping down through the year. So it's not that we necessarily Our ramping up activity, it's not the case. We're just not ramping down. We still went from 12 rigs down to 10. Today, we're at 11.

Speaker 1

Yes, we're just kind of flattening out that activity profile, while still keeping the capital budget exactly the same. So We're not adding to that as you pointed out. And the impact is really more about next year. If you look at that activity set, Yes, there's one rig start up, another one will start up soon. That it'll add approximately 20,000 barrels a day

Operator

And the next question will be from Phil Gresh with JPMorgan. Please go ahead.

Speaker 5

Yes. Jeff, just to follow-up on what you were talking about, with the activity As you look at the second half spending, you annualize that second half spending is around $3,200,000,000 or so. Any initial thoughts around the 2022 CapEx levels? Would you just be looking to kind of keep it where it is?

Speaker 6

Yes, I'll stop there.

Speaker 1

Yes, it's a good question. And as you know, Phil, it's a little early for us Forecast what 2022 looks like. We usually do that on our Q4 call. But to your point about cadence, because I think That's relevant and you can kind of read some things into that. When you look at our capital profile, it's $29,000,000 for the year.

Speaker 1

As you mentioned, we spent $1,300,000 in the first half. And there's a couple of things that drive that and you can see it. Like for example, our Ken's business, we forecasted about $300,000,000 They've spent a little over $100,000,000 so a lot of those activities are back end weighted. On our Permian activity slide, you can see Of our $1,200,000,000 we've only spent $500,000,000 of that. And the reason for that is a lot of our Midland Basin wells were front end loaded.

Speaker 1

So much lower working interest with the carry. Now we're getting to some of our higher working interest wells that go with that. So it's really more about Where we're spending capital and how it is more than a cadence of an activity set drastically changing. So I wouldn't read into Like a 800 quarter type number being what we need for next year. So as you look to 2022, I Obviously, we'd give a lot more color on this going forward, but I think the same narrative we've talked about in previous calls, We continue to see great improvements from an operational standpoint.

Speaker 1

I think when you look at what our teams have done this year, it's exceeded all of our expectations From an efficiency standpoint, I mean, we every time we look to put the slides together and we ask for new records have been set, We're blown away by the new things that come up again and again and again that our teams are doing. And so I don't think that's going to stop. I mean, we Even after we put the slides together for this, we got noticed last night where our Rockies team set a record for the month of July for pumping efficiency of like 6:30 hours pumped. So you start doing the math on that and that's 10% better And our previous record in the best Western Hemisphere record for the service provider that did that And Halliburton, so I think we're going to continue to see those improvements that are going to help with capital efficiency going forward. And we do know there's takes against that, that we'll need to build in that we've talked about.

Speaker 1

Gaum was especially low this year and we That probably takes a little more capital to run the type of business we want to run there. We've got other projects going on that could push that up, but those will be offset By some improvements. So more to come on that in the future, but I do think as we kind of roll that out, We will talk about some of the benefits and then some of the things that may cause us to spend a little more capital in the short term, But we definitely don't want to underestimate all the great things that teams are doing to get more efficient and get better results from the money that they spend. And I think that's what you saw in the first half of this year is that rolling through and hence why we could add activity compared to what we thought without increasing the capital budget.

Speaker 5

That makes sense. My next question, I guess, would be for Vicki. As you think about the EOR business moving forward, where would you say you are in terms of the opportunity to process anthropogenic CO2? And How should we think about the timing of potential updates from the company as we look ahead, say, the next 6 to 12 months around CCUS?

Speaker 2

Yes. As you may remember, we have 2,000,000,000 barrels of resources yet to be developed in the Enhanced Oil Recovery business in the Permian and the commissional reservoirs. And so we're really excited about the fact that the low carbon business will provide us either very low cost or net zero cost CO2, so for those projects. But we see that the incremental for enhanced oil recovery, It will probably come closer to the time of the getting the 1st direct air capture facility online. We still have access to organic CO2 and we'll have minor increases as we continue to expand phases within Permian EOR business, but significant improvement in escalation will come as a part of our low carbon strategy.

Speaker 2

And that will help to provide the low decline assets and production that we've been used to having in the past, which will help to offset some of the Resources decline. So it's a key part of our low carbon strategy and it will be a key contributor and growth Engine for us as we go forward beyond the implementation of the first few DACs.

Operator

Thank you. And the next question will come from Paul Cheng with Scotiabank. Please go ahead.

Speaker 8

Hi, good afternoon. Two questions, please. First, Ricky, just curious, you guys are definitely one of the very efficient operator in Permian, you have done a great job. And in the past that you have formed some joint venture essentially, Sort of like trying to pull the value forward by having someone get from you. But going forward, with your balance sheet Started getting in shape and cash flow getting better.

Speaker 8

If you look at opportunity that you talk to some of your peers like Shell That to maybe pull the Permian asset together into a giant joint venture and you guys are expanding it, not going to extract Cash up front, but just drive really great efficiency gain going forward that leverage your technical expertise here?

Speaker 2

I think that's what you've said is a great idea. We always look at opportunities to do that. For us, it's not a matter of How you do it? We just look for ways to create value. In any way that we can create value for our shareholders, we're open to doing it.

Speaker 2

And so we've the JV with Ecopetrol in the Midland Basin has been very successful for us. We actually may look at additional JVs in the Delaware Basin to continue to accelerate what we're doing there And partnering with others where we can join forces and find ways to obtain synergies and to utilize Our team to for the execution part of it and the evaluation part, I think is a really good idea because I'm so proud of our teams. As Jeff said, I can't reiterate enough how they've blown us away with the work that they've done that It's not just at steady state today, it's continuing to improve, as Jeff mentioned. The subsurface work goes beyond what I ever expected to see in the Shell play and they're now really pushing the technology envelope on how to model How to first evaluate, do the data analytics and then model the surface production in the shale reservoirs and to know exactly Where to land and how to frac and how to complete, you combine that with the fact that our drilling and completion guides are continuing to set records. And I tell you, 3 years ago, we would not have predicted where we are today.

Speaker 2

And even last year, we wouldn't have predicted some of the things that are happening this year. That's why when we talk about capital in the future, it's really hard to say what our sustaining capital would be because we didn't expect it to be 2.9 this year, back when we looked at it 18 months ago. So the progress made and pushing the envelope, Being innovative and really developing the leading edge part of the industry with respect to this kind of technology It's been amazing. I'm so proud of the team, so I'll say again. I don't know of any other group that I've ever seen That could do this kind of work and continue to progress it.

Speaker 8

I just curious that, Ricky, have you talked to any of your peers, Yes, the CEO, I mean, because everyone seems to have a big ego and think their team is the best. But I mean, is that Something that the industry is ready to do something like that because it could be great for you and great for everyone actually for the whole industry if Someone willing to say put aside their ego and do something like that.

Speaker 2

I think there has been some Yes. I don't want to mention names, but there has been some discussion around that. And I think that, that is something that the industry is opening up to because We as an industry, we want to create value. We want to do business differently than we've done in the past. We have to do that As an industry to attract investors back to the oil and gas industry, it's going to be important that we change our paradigm about how business should be done.

Speaker 2

And I have had some conversations with other CEOs about exactly what you've said. And there are some open to it, some are not, but there are some open to that. And I This sort of thing needs to happen and has to happen for us to maximize the value of the assets that we and others have today.

Speaker 1

Hey, Paul. And if I can add, I think a lot of people forget, I mean, our Permian position was built on one of those JVs. Basically, We bought the joint venture between what was Amaco Shell and then BP and then Arco, which was exactly that. So a lot of the people in the company are very well versed in the benefits that come from that and continually look for those opportunities. But that is the heart of our Permian operation.

Operator

Thank you. And the next question comes from Neal Dingmann with Truist. Please go ahead.

Speaker 9

Good afternoon. Vicki, I want to just sort of pile on what you said earlier. I want to make sure I'm clear on this. You mentioned, I think, the proposed remarks that there could be some coordination you said between OxyChem and your decarbonization business, I'm just wondering what how you're thinking about that or how quickly you could something like this could occur?

Speaker 2

Well, OxyChem is already involved in the design of the direct air capture facility. So they will be a key part of the front In engineering and design that's happening today, we're doing the FEED study. So OxyChem participants are a part of that. They're helping to drive that. And we really want to leverage their expertise around the use of caustic potash and we need to Use PVC products in the direct air capture facility, that's going to be a key part of some of the components going into it.

Speaker 2

So They will not only in this, but in potential other kinds of processes in the future with respect to how to use the product. So it's not just in the first Direct air capture facility, we believe also they have an R and D mindset and they have a group that's been very innovative in the past Around developing new ways to do things. And Rob could speak more to that history if we had time. Maybe in the future, we'll have him do that. But right now, they are a key part of the low carbon strategy and give us a strength that others don't have in this regard.

Speaker 9

Got it. And then just my follow-up is just more on upstream activity. It appears despite your kind of indication for Stable U. S. Activity going forward.

Speaker 9

It looks like you've slowed in that DJ from first to second half. I'm just wondering is this more of a function of Slower permitting or shift of interest, I'm just wondering then as you see 'twenty two, would 'twenty two be more like first half with More than 50 kills or more like second half this year with less than 25 kills?

Speaker 1

Yes. I think what you're seeing there when you look at wells online, it's Heavily influenced by the amount of DUCs we brought on early in the year. So if you look at activity sets relatively flat, we're basically running 2 rigs up there, 1 in the powder, 1 in the DJ and a frac core. That activity sets pretty consistent. You're right, Neil.

Speaker 1

And let you point out, I think we brought on 70% of the wells, but that was heavily influenced. We brought on About 100 DUCs late last year into the early part of this year. So that's what's heavily influencing The wells online number. The activity set is pretty constant. The teams are continue to build inventory, so We can keep that activity ongoing.

Operator

Thank you. And the next question is from Leo Mariani with KeyBanc, please go ahead.

Speaker 10

Hey, guys. Wanted to just jump in a little bit more on the kind of direct air capture So correct me if I'm wrong, but my understanding you have like a pilot project coming on in the Permian sometime early next year. I was just hoping to get A little bit more information about that. In terms of like what type of capacity, in terms of tons of CO2 or whatever it might be able to Kind of pull out of the air and maybe just a little bit more about what you're kind of hoping to achieve with that pilot?

Speaker 2

We're using the technology that was developed by Carbon Engineering, of which we're an equity owner, and Carbon Engineering has a pilot facility already in operation in Canada. So the pilot is already working and so we'll be designing the facility that we build on the basis of that pilot. And that's where OxyChem also comes into play because OxyChem has done this in the past. They've done pilots and then scaled up those pilots and They've done that very successfully. So they have experience doing this.

Speaker 2

So the one that we're going to build will be the largest Direct air capture facility in the world. Currently, there are a couple of other different technologies That can capture CO2 from the air. Those other technologies, the largest one that's built today Captures about 4,000 tons per year. The facility that we intend to build in the Permian will capture 1,000,000 tons per year. So it's on the basis of taking that pilot, upscaling it.

Speaker 2

And in the process, what we're also doing is we're working on the FEED study There is a separate group kind of working together to optimize the facility. So we're not wasting Time to get it in operation and then see how it works. We're actually innovating as we build and as we look at The study for the engineering as we're doing that, we're innovating too. So we expect that when we get it And operation is going to be, we think, certainly a better product than it would have been had we not involved both Kim and the innovation process is simultaneous to the FEED study.

Speaker 10

Okay. That's definitely helpful. And I guess, Just can you remind us a little bit on the kind of rough timeline to get that first project in place? And then additionally, is there I think there was a plan to maybe fund that sort of off balance sheet or maybe looking kind of more creative financing. Can you maybe update us on where you are there?

Speaker 2

Well, the FEED study should be done and we should have final investment decision the early part of next year and we hope to Begin construction by the end of 2022 or beginning of 2023. So and it should be then online Toward the end of 2023 or end of 2024. So it will be up and running certainly by 2024. The process around what we're doing to ensure that we get the right funding for it is we I've been talking with partners and so we have multiple opportunities to bring in others who want to be a part of this. United Airlines has announced that they will be a part of our direct air capture facility.

Speaker 2

So they'll be not only Contributing to the capital needed to build it, but they'll be taking the fuel from the facility. So they are committing to an offtake Of the low carbon fuel that will be provided by the CO2 that's captured from the air. So there are multiple ways to fund it. So there's one is to Make an investment in the facility itself. 2nd is to commit to taking the CO2 credits.

Speaker 2

3rd is to commit to purchasing the Oil that's generated from the CO2 that goes into enhanced oil recovery. So we have several ways of financing the facility. And so it's we haven't finalized how we'll do that. We're working through that now and talking to a lot of interested parties. We should have more information on how we're going to do that by early next year.

Speaker 2

But it's there's definitely a lot of interest in making this happen. It's For the U. S. And for the world, direct air capture needs to happen successfully and happen in a big way. And so that's generating the interest in the parties that want to be contributing to it and then get to participate in the results of it.

Operator

Thank you. 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

I just want to thank you all for your questions and for joining our call today.

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Earnings Conference Call
Occidental Petroleum Q2 2021
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