Occidental Petroleum Q4 2021 Earnings Call Transcript

Quartr
Provided by Quartr
February 25, 2022

There are 14 speakers on the call.

Operator

Good afternoon, and welcome to Occidental's 4th Quarter 2021 Earnings Conference Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note that 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, Rocco. Good afternoon, everyone, and thank you for participating in Occidental's 4th quarter 2021 conference call. On the call with us today are Vicki Hollub, President and Chief Executive Officer Rob Peterson, Senior Vice President and Chief Financial Officer Ken Dillon, President, International Oil and Gas Operations And Richard Jackson, President, Operations, U. S. Onshore Resources and Carbon Management.

Speaker 1

This afternoon, we will refer to that will be made on the call this afternoon. I'll now turn the call over to Vicki. Vicki, please go ahead.

Speaker 2

Thank you, Jeff, and good afternoon, everyone. The Q4 of 2021 was a fitting year fitting way to end the year where Oxy's operational and financial performance advanced from strong to stronger. Our focus on consistently delivering outstanding operational results combined with our steadfast dedication and patience in improving our balance sheet has positioned us to begin increasing the amount of capital returned to shareholders. Our new shareholder return framework, which we will detail today, includes a dividend that is sustainable in a low price environment. We are pleased to implement this new framework beginning with an increase in the quarterly common dividend to $0.13 The position of strength that we are in today stems from our team's hard work and accomplishments last year.

Speaker 2

Throughout 2021, we strived tirelessly to improve our already exceptional operational performance. We capitalized on efficiency improvements by embedding innovative techniques across our operations. Our focus on learning, implementing change where needed and maximizing opportunities for improvement enables us to accelerate time to market for our products, while generating notable capital savings. We will continue to maximize operational efficiencies in This afternoon, I will begin by covering our Q4 and full year 2021 highlights and achievements before detailing our 2022 capital budget. Rob and I will then discuss our shareholder return framework, and Rob will provide guidance for the Q1 year ahead.

Speaker 2

Before turning to Q and A at the end, I will provide a preview of the Little Carbon Ventures investor update that we have planned for next month. Now to talk about delivering cash flow priorities. Those who have followed us in Oxy's journey over the past several quarters by the end of the Q1 of 2022, which will mark a change in how excess cash flow will be allocated going forward. Before I detail our updated cash flow priorities and shareholder return framework, I would like to first touch on a few of the many operational and financial that enabled us to reach this significant turning point. 2021 was a year of continuous operational improvements, which drove record free cash flow generation, rapid debt reduction and a return to profitability.

Speaker 2

One of Oxy's core strengths is our ability to develop assets in a way that efficiently maximizes production and recovery while generating significant cash flow, and that is just what we did in 2021. Multiple drilling and completion records were set across our domestic and international 2021 was also a more conventional year in terms of commodity prices, operations and planning, all of which was helpful in providing a reserve update that reflects a more normalized price environment. Our reserves for year end 2021 increased to 3,500,000,000 Boe, representing a reserve replacement ratio of 2.41 Our reserves position means that we have a vast supply of low breakeven projects and inventory available. We have included updated inventory information for our U. S.

Speaker 2

Onshore operations in the appendix to this presentation. Over the last year, we significantly advanced our commitments toward a low carbon future. We are proud to be one of only a few oil and gas companies with net zero goals that are aligned with the Paris Agreement's 1.5 degree Celsius pathway. In December, Oxy became the 1st U. S.

Speaker 2

Upstream Oil and Gas Company to enter into a sustainability linked revolving credit facility, which includes absolute reductions in our combined Scopes 12 CO2 equivalent emissions as the key performance indicator. We set additional interim emission targets To further refine our net zero pathway, including a short term target to reduce our CO2 equivalent emissions to approximately 3,700,000 metric tons per year below our 2021 level and to accomplish that by 2024. We set a medium term target to facilitate the geologic storage or use of 25,000,000 metric tons per year of CO2 in Oxy's value chain by 2,032. We also endorsed the methane guiding principles and oil and gas methane partnership 2.0, The Climate and Clean Air Coalition initiative led by the United Nations Environment Program. This is consistent with our commitment to enhance methane emissions reporting and reducing those emissions.

Speaker 2

Our journey towards net zero is underway, and we look forward to discussing in greater detail at our Low Carbon Ventures Investor Day next month. Now to 4th quarter highlights. The strong operational and financial performance that we delivered throughout last year continued in the 4th quarter. We set our 4th consecutive record for quarterly free cash flow generation before working capital, which contributed to generating our highest ever annual level of free cash flow in 2020 Operationally, all three business segments excelled in driving our robust financial performance. OxyChem delivered record earnings for the 2nd consecutive quarter as performance throughout the year culminated in 2021 being OxyChem's strongest in over 30 years.

Speaker 2

4th quarter, which is typically lower due to seasonality, even exceeded the record 3rd quarter. And in our oil and gas segment, our Permian, Rockies and Oman teams set new operational records and efficiency benchmarks in the 4th quarter, further improving on their 3rd quarter record. Our midstream business outperformed by maximizing gas margins during the 4th quarter. While short term opportunities in the commodity markets are difficult to predict, our midstream team excels at funding and taking full advantage of such I'm pleased to say that our 4th quarter results continue to demonstrate the commitment of all of our employees, No matter their position or location, to find ways to further create value by lowering costs, improving efficiencies and maximizing recoveries. They truly are driving our strong financial results and providing a solid foundation for free cash flow generation.

Speaker 2

Now on to 2021 oil and gas operational excellence. On each of our last several calls, I've enjoyed highlighting the many operational achievements our teams continuously deliver. The magnitude of these This is striking when viewed on a combined basis over the last year. We established record drilling cycle times in the Gulf of Mexico, the Permian, Rockies and in Oman, handset new efficiency benchmarks across our portfolio in 2021. We intend to maintain our focus on continuous improvement in the year ahead as we work to maximize the value our portfolio can generate for shareholders.

Speaker 2

Now our 2022 capital plan. Our 2022 capital plan invests in cash flow longevity while building on the capital leadership we demonstrated in 2021. We have sized our capital plan to sustain production in 2022 1,155,000 BOE per day, while investing in high return projects that will provide cash flow stability throughout the cycle. We have also incorporated an expectation for inflation and a capital range to reflect the potential for fluctuations in our 3rd party operated assets and our low carbon opportunities during the year. Our sustaining capital, which we The capital required to sustain production in the $40 WTI environment over a multiyear period remains industry leading.

Speaker 2

Our multiyear sustaining capital is expected to increase from our 2021 capital budget of $2,900,000,000 The reduced inventory of drilling uncompleted wells and additional investment in our Gulf of Mexico and EOR assets to optimize the long term productivity of our reservoirs and facilities. If the macro environment requires Sending below our multiyear sustaining capital, we have the ability to reduce it further and hold production flat for shorter periods of time as we've demonstrated. We're also investing in attractive mid cycle projects that will provide cash flow stability through the cycle in future years. For example, these projects include the Alhozan expansion, which began last year, and OxyChem is in the process of completing a seed study to modernize certain Gulf Coast Our capital plan also includes investments to advance our net zero pathway, including reducing emissions, improving energy efficiency and developing our carbon sequestration initiatives. We're allocating capital in the budget to 1.5 to begin construction on the 1st direct air capture facility.

Speaker 2

We continue to make progress on both the engineering and commercial needs for direct air capture development. We're improving both of these aspects and believe Oxy's capital helps As the construction phase and technology of this new project advance, We will continue to consider strategic capital partnerships and structures to address financing. We'll provide more Comprehensive update on 1.5 and Direct Care Capture at our March 23 LCB investor update. We benefited greatly from commodity price rebound last year and appreciate how swiftly the price environment can change. The optionality that our scale and asset base provide enables us to retain a high degree of flexibility in our capital and spending plans.

Speaker 2

The majority of our capital program is comprised of short cycle investments, meaning that we have the ability to quickly adapt to changes in the macro environment. Then 6 months or less is necessary, we can reduce capital spending to sustaining levels. And if oil prices remain and no intent to invest in production growth this year. Having a flexible capital budget that includes investment and cash flow longevity provides us and puts us in a strong position to implement shareholder return framework that will benefit shareholders over the long term. With respect to cash flow priorities, our priorities for 2022 remain largely unchanged with a continuing on reducing debt while maintaining our asset base integrity and sustainability.

Speaker 2

The objective of strengthening our financial position remains the same, enabled us to confidently increase the amount of capital that we may sustainably return to shareholders throughout the cycle. As we expect net debt to fall below $25,000,000,000 by the end of the Q1, our focus has expanded to returning capital to shareholders, beginning with the increase in our common dividend of $0.13 per share and the reactivation and expansion of our share repurchase program. The increase in the dividend of $0.13 per share is consistent with our intention to initially increase the dividend to a level that approximates the yield of the S and P 500. We believe establishing framework for returning capital to shareholders through a sustainable common dividend combined with an active share repurchase program and continued debt reduction creates an attractive value proposition for shareholders while also improving the company's long term financial position. For the first phase of our shareholder return framework initiated, we have the option in future years to invest in cash flow growth.

Speaker 2

We have the ability to grow oil and gas cash flow through higher production, but also have multiple investment opportunities across our other businesses. As evidenced by our guidance for 2022, we do not intend to grow production in 2022. At the point where it is appropriate to invest in future cash flow growth, We will only do so if supported by long term demand. Any future production growth will be limited to an Average annual rate of approximately 5%. I'll now turn the call over to Rob, who will walk you through our shareholder return framework.

Speaker 3

Thank you, Vicki, and good afternoon. As Vicki mentioned, the first stage of our shareholder return framework consists of a debt reduction, an increase in the common dividend to $0.13 per share and the reactivation expansion of our share repurchase program. With net debt expected to be below $25,000,000,000 by the end of 1st quarter, we are ready to begin returning more capital to shareholders while we continue to prioritize debt reduction with a focus on our medium term goal of regaining our investment grade credit rating. We placed high importance on debt reduction for the reasons I highlighted last quarter, mainly that as debt is reduced, our company's enterprise value will rebalance to the benefit of our shareholders. We recognize that oil prices are uncertain and may remain volatile, particularly in the current environment.

Speaker 3

We intend to prioritize our time of additional $5,000,000,000 of debt drive our net debt towards our next milestone of $20,000,000,000 When this milestone is achieved, our balance sheet will improve significantly even from where we are today. We intend to provide our shareholders with a competitive common dividend, while maintaining a long cycle cash flow breakeven at $40 WTI or less. Long term sustainability dividend will be enhanced by continued deleveraging and share repurchases as well as our best in class capital efficiency and a deep low cost portfolio of assets. As Dez retired, our cash interest payments will decrease, freeing up cash that can be used to support future common dividend growth. In addition to increasing the common dividend of $0.13 per share, we intend to purchase approximately $3,000,000,000 of outstanding shares of common stock, Maintaining an active share repurchase program with the benefit of a healthy balance sheet will potentially enable us to grow the dividend on a per share basis at a faster rate.

Speaker 3

As evidenced by our progress reducing debt last year, debt retirement remains a higher cash flow priority than share repurchase program. We intend to make Substantial progress towards retiring additional $5,000,000,000 of debt before initiating share repurchases. It is our goal to reward shareholders with the triple benefit of sustainable common dividend, an active share repurchase program and a continuously strengthening financial position. We believe the shareholder term framework we have detailed this afternoon delivers these benefits in a manner that is transparent for shareholders. I'll now turn to our 4th quarter results.

Speaker 3

In the Q4, we announced an adjusted profit of $1.48 and a reported profit of $1.37 per diluted share. Our adjusted income improved significantly through 2021, With the 4th quarter being the strongest quarter of the year, the increase in earnings was primarily driven by higher commodity prices and volumes as well as OxyContin's excellent financial performance. Our domestic oil and gas expenses experienced a sizable reduction on a BOE basis in the previous quarter and reflect a more normalized environment absent any significant weather disruptions. The strong performance of our businesses, combined with the benefit of a healthy commodity prices, enable us to deliver another consecutive quarter of record free cash flow. On our Q3 call, we announced the completion of our large scale divestiture program, I reiterated our attention to continue seeking opportunities to optimize our portfolio to create shareholder value.

Speaker 3

In November, we completed a bolt on acquisition to increase our working interest your assets that we operate. And in January 2022, we divested a small package of Permian acreage that we had no immediate plans to develop. The purchase and sale prices of these transactions largely offset each other, while the EOR acquisition added approximately 5,000 BOE per day of low decline production as well as increasing our inventory of potential CCUS opportunity. We exited the 4th quarter approximately $2,800,000,000 of unrestricted cash in the balance sheet after repaying approximately $2,200,000,000 of debt in the quarter. In total last year, we paid approximately $6,700,000,000 of debt and retired $750,000,000 of notional interest rate swaps.

Speaker 3

Our debt reduction continues to drive a pronounced improvement in our credit profile. Since our last call, both Fitch and S and P upgraded our credit rates as BB plus 1 notch below investment grade, while Moody's assigned us a positive outlook on our debt. Reducing the amount of cash that is committed to interest payments today places us in a stronger position for a sustainable return of capital in the future. We estimate that the balance sheet improvements executed in 2021 will reduce interest and financing costs by almost $250,000,000 per year going forward, which will fund approximately half of the increase in our common dividend. Our business incurred a negative working capital change in the 4th quarter.

Speaker 3

It was primarily driven by higher accounts receivable balance due to higher commodity prices and to a lesser extent an increase in inventories including a higher number of barrels in the water at year end. The oil and gas hedges we had in place rolled off at the end of the Q4, and we are now positioned to take full advantage of the current commodity price environment. We recognize the possibility of a swift change in commodity prices always exists. The debt maturity profile we have today is far more manageable than it was 2 years ago and our liquidity profile remains robust. In addition to cash on hand, we have $4,400,000,000 of committed unutilized bank facilities.

Speaker 3

We continue to believe that reducing debt and maintaining maximum flexibility in our capital plans is the most effective long term solution to managing risk while providing shareholders the benefits of commodity price gains. We expect our full year production to average 1 point 1,550,000 BOE per day in 2022. Production in the Q1 of 2022 is expected to be lower than the Q4 of 2021 due to the timing impact The wells are brought online in 2021, severe winter weather in the Permian earlier this month and the impact of significant planned international turnaround activities this quarter. Algeria, Alhosin and Dolphin are all undergoing scheduled maintenance in the Q1, which is reflected in our international production guidance. Downtime associated with Alhosin is notably larger than typical years as the plant is undergoing the 1st full shutdown since its inception This substantially completes the tie ins associated with the expansion project and to enhance plant stability and reliability.

Speaker 3

Additionally, a portion of our international production is subject to production sharing contracts, where we typically receive fewer barrels in a higher price environment, the impact of which is captured in our full year and Q1 guidance. The permitting activity we added late in Q4 is expected to replace the production benefit We received in 2021 and completed our DJ Basin our inventory of DJ Basin of drill uncompleted wells in the early part of last year. Our 2022 Permian capital allocation is expected to provide benefits that will last into 2023. We anticipate that our activity this year will provide us the flexibility to either hold Permian production is flat at our 2022 exit rate for similar capital next year or spend less capital in 2023 to whole production is relatively flat to our 2022 average. We also expect that our production in 2022 will increase throughout the year to achieve our full year guidance As our international operation will resume their normal production levels, our activity in Permian brings new production online.

Speaker 3

Additionally, the trajectory of Permian production is anticipated to offset lower production in the Rockies this year as our activity at DJ Basin is tapered, reflected development, planning, timing to ensure efficient operations as new permits are obtained. RC offsetting lower Rockies production with higher Permian production, Combined with an increase in EOR activity will result in a slightly higher domestic operating expense as the DJ Basin has one of the lowest operating costs on a BOA basis in our portfolio. The increase in Permian production is expected to result in domestic cash margins improving by and beyond at our multi year sustaining capital level of $3,200,000,000 in a $40 price environment. We expect that OxyContin's 2022 earnings will exceed even 2020 OxyChem continues to benefit from continued demand improvement for caustic soda, while PVC pricing remains strong. Additionally, as I mentioned on our last call, we expect corn market remain tight as chlorophyte producers seek the highest value for their products.

Speaker 3

OxyChem's integration across multiple coin derivatives enables us to optimize our production mix to supply the products The market requires whether this is for point of the water treatment, vinyls or PVC for example. This year, we will make an incremental capital investment This would result in material energy efficiency improvements, which would also lower the carbon intensity per ton of the product produced and delivered. The project would also provide the opportunity for a significant expansion of our existing capacity to meet growing demand for our key products. We expect to reach final investment decision later this year, at which time we will be prepared to share additional details. To assist investors to reconcile our guidance with our segment earnings, We have made a change in how we guide midstream going forward.

Speaker 3

Our midstream guidance now includes income from WES, which is a change to how we've guided midstream previously. Quarterly guidance now includes Oxy's portion of WES income using the average of the previous 4 publicly available quarters. Our annual guidance now includes Oxy's portion of WES income using some of the previous 4 publicly available quarters. As you look to the year ahead, we will work to continue to improve on the numerous operational and financial success of 2021, including making additional inroads on reducing debt, implementing our shareholder return framework and advancing our low carbon aspirations. I'll now turn the call back over to Vicki.

Speaker 2

Thank you, Rob. When we established Low Carbon Ventures in 2018, we knew we were ahead of the curve in recognizing the opportunity and necessity of building a carbon management business, both to help reduce global emissions and to enhance our business. At that time, we were focused on key technologies and projects that would reduce Oxy's emissions and provide a more sustainable future business. Today, we have advanced that vision and fully appreciate the vast scope of the carbon management opportunity as well as the cross industry support and partnership in front of us. On past earnings calls, we have discussed several of the initiatives Low Carbon Ventures is developing Oxy's ambition to achieve net 0 before 2,050.

Speaker 2

We've been working on key technology developments and important commercial needs to advance LCD's projects that are now in a position to move more fully detail our low carbon business and how it positions us to realize our net zero ambition and improve our long term business. On March 23, we will host a Low Carbon Ventures investor Where we will provide a detailed update on our low carbon strategy with a focus on the technology and commercial development of carbon capture projects, specifically Direct Air Capture. The event which we expect may last up to 2.5 hours will be accessible through our website. As I've said before, we are excited about our unique position and capabilities as a company. We value our broader low carbon and business partnerships that are growing, And our workforce is energized to advance this immense opportunity before us.

Speaker 2

We'll now open the call for your questions.

Operator

Thank you. We will now begin the question and answer session. Today's first question comes from Jeanine Wai with Barclays. Please go ahead.

Speaker 4

Hi, good morning, good afternoon, everyone. Thanks for taking our questions. Thank you. Good morning or afternoon. It's been a long Our first question is on the gross debt reduction.

Speaker 4

We're assuming that the $5,000,000,000 that you're planning on getting through that And so just any idea on what the timing of that could look like for you to complete that given what you've seen in the market? And do you need to get through the full $5,000,000,000 of tenders before you begin the buybacks that we are looking back at your prior tender and you almost got the full thing done, but that was only about

Speaker 3

Yes. Good question, Jeanine. And so I guess first let me comment on the tender that we did at the end though in December. Yes, we were pretty aggressive on the premiums we put in that tender because we knew we had an additional $700,000,000 of callable debt available to us at the time. And So we were pretty happy with the ultimate outcome that came out of that.

Speaker 3

As we move forward since then, we have A lot of opportunities to reduce the debt. Last year, we were able to reduce of the $6,700,000,000 of debt we did last year, we only paid a 1.5% premium for that. And within that, 4.7 of that was actually concentrated in maturities that were 2024 newer. And so When I look at the opportunities to retire debt this year, as we indicated, we already retired the remaining January Our 2022 maturities for $101,000,000 already this month for this quarter. So we do have tenders, make whole provisions.

Speaker 3

We have the ability to build cash on a net debt basis as maturities come forward. We do have the option to settle The February 23 notes, which is the bulk of our 2023 maturities come fallible in November. But overall, when I look at the our debt, it is actually Even cheaper than it was at the end of the year largely because of interest rates have risen and the perspective of interest rates rising again. And so Certainly, the next dollar we put forward will be towards debt reduction. And with the cash we ended the year at and the cash we're adding during the quarter, it's pretty safe to say that's Probably not too far in the future that we initiate that process again.

Speaker 3

We don't need to have all that completed before we Return to buying share we've initiated the share repurchase program, but we need it to be substantially completed or have a line of sight on it being completed before we begin purchasing shares.

Speaker 4

Okay, great. That's really helpful information. Thank you. Maybe just going forward a little bit beyond that on your future cash flow priorities. Oxy has got a real high class problem.

Speaker 4

Assuming oil prices stay anywhere close to where they are today, you'll be building a significant amount of cash on the balance sheet over the Even after you do the $5,000,000,000 of debt reduction and the $3,000,000,000 of buyback. So I guess, have you started to assess the next steps And capital allocation after hitting your debt goals and the buyback. And I guess specifically, do you have any thoughts on potentially trying to tackle the preferred early And doing that versus either other debt reduction or production growth and just how you're thinking about the preferred? Thank you.

Speaker 3

We've discussed Previously, provisions with regards to the Berkshire agreement related to shareholder churn, enabling us to begin Redemption of the Berkshire to $4 per share common dividend to our shareholders. Assuming we repurchased $3,000,000,000 of shares in a 12 month period And then you combine that with $0.52 of dividend payments over 4 consecutive quarters. We still want to distribute it enough to reach the $4 per share distribution trigger. It would be about $3.72 at that point. But I want you to say that the Berkshire Common provision isn't a limit on our ability to return value to shareholders.

Speaker 3

It simply means that circumstance arrives and the macro puts us in a place where we have exceeded $4 per share On a trailing 12 month basis, we would just be in a position where we have to redeem an equal portion of Berkshire at a 10% premium as we return to shareholders above and beyond that. And so as we sit here today in February, agreeing that there's a lot of potential for elevated the well prices over an extended period of time Great constructive macro for going beyond our debt focus, but it's a little too early, I think, to speculate on what we would do in that point in time.

Operator

Thank you. Our next question today comes from Phil Gresh at JPMorgan. Please go ahead.

Speaker 5

Yes, good afternoon. I guess just to follow-up on that question around the net debt, the $20,000,000,000 Next step, so to speak, what is the ultimate goal with the balance sheet? Is it $10,000,000,000 to $15,000,000,000 I mean, how do you think about that today?

Speaker 3

Yes. So I think over we've already And notes published from the various rating agencies that their expectations would be investment grade is somewhere in the mid to high teens. And so I think getting to that point getting to a level at some point that is in that $15,000,000,000 or less net debt is an ultimate goal for the company. That would put us in a place. There it also depends sort of on their long term price horizon.

Speaker 3

If you take their $60 the getting down to a net of $20 puts us Close to a 2 multiple at that point depending on EBITDA going on a year in year out basis. So we know we've got to do a little further than that in order to get

Speaker 5

And then, Rob, you made a comment just about the Permian exit rate in 2022 and into 2023. I was just wondering, where do you stand in terms of the CapEx carry with the Echo Patrol JV? Is there any spending in 2022 that kind of moves into the full fifty-fifty split or is that a 2023 event? I'm just curious Based on your comments you're making, how you incorporated, how that could flip to the fifty-fifty and when?

Speaker 3

Based on activity level we have planned for this year, we would probably consume the balance of the carry this year, but we don't anticipate Very flipping in 2022.

Operator

Thank you. And our next question today comes from Doug Leggate with Bank of America. Please go ahead.

Speaker 6

Thanks. Good morning, everyone. Rob or Vicki, I wonder if I could Follow-up first on the buyback, just so as I understand it correctly. So $3,000,000,000 Is that an annual number that depending on when you start the buyback, would you still expect to Execute the full $3,000,000,000 in 2022, irrespective of when you hit you would get out line of sight, which I'm guessing It's a matter of months. And I guess related, you're kind of front running yourself a little bit.

Speaker 6

And one could argue taking the stock is heavily discounted because of your capital structure. Why not consider something like an ASR?

Speaker 3

So Doug, I think the first way I'd answer part of your question is Once we begin initiate the share repurchases, it will be done both in a Open market repurchase basis when the market is open and when it's closed to a 10b5 type programmatic program. The stock, as you know, is extremely liquid. I mean, we can easily purchase $1,000,000,000 of shares in less than Fourteen trading days without I mean close to 15% of the average daily trading volume. So there's a pretty safe way that over a fairly short period of time, if we wanted to, we could accomplish $3,000,000,000 goal, but that goal would certainly be dictated by our free cash flow generation that's largely related to the commodity prices. And it's We're in an environment right now where we've the hedges have rolled off.

Speaker 3

We're giving our shareholders full exposure to commodity prices, which we think over the Cycle of the commodities will deliver the most value to the company and ultimately most value to shareholders. But along with that, we realize that the macro can change There are a lot of different risk factors that can cause prices to go unconstructive for us in a rapid fashion also. And so we can't find ourselves In a position where maybe we've tackled the stock ahead of time and the price environment changed for whatever reason And we haven't addressed the debt first. That's one of the reason why we understand that over the course of the year, we may end up paying More for the stock to retire it, but in aligning risks and opportunities for shareholders, we think that the approach we're taking the most prudent way to do it.

Speaker 7

Okay. So just to be clear, so If

Speaker 6

you started the buyback in May, you'd still expect to get $3,000,000,000 done this year? That's just for clarity. That's not my follow-up.

Speaker 3

Well, The time line is going to be dependent upon the availability of cash, Doug. That's what's going to be the driver of it. But in terms Of ability to execute with the liquidity of the stock, a time frame of being completed in the second half of the year, Even if we didn't initiate the second half of the year, it would not be a challenge. Okay.

Speaker 6

Thank you. My follow-up is a resource question. Vicki, I'm guessing this was deliberate, but you've given you've kind of laid out the inventory debt for the onshore portfolio, looks at the current rate, Something around 15 years, assuming not a lot of growth. What about the Gulf of Mexico and the rest of the Can you give us a kind of an update as to how do you see the resource debt or sustainability that goes along with the sustaining capital number that you gave us?

Speaker 2

Yes. I'll let Ken answer that. He's got his team actually working on that in view of some of the challenges we've had with the recent lease sale. Actually, we

Speaker 7

completed our field architecture studies. As you know, we have 179 blocks, around 90 of those are tagged as exploration. When we look at the risked portfolio and the opportunities we have, we have substantial work, 100 of millions of risked barrels Opportunities going forward, we have a solid assembly line of projects. We've got 3 projects in flight at the moment, Cesar Tonga Expansion, the Horn Mountain expansion, A2 Subsea Pumping and our recent as Vicki alluded to our recent Lease run attempt, our goal there was to find obtain acreage close by our existing infrastructure To accelerate simple tiebacks, that doesn't inhibit us. We have a large portfolio and we feel comfortable going forward Within the plans that have been presented in the slides.

Operator

Thank you. Our next question today comes from Neil Mehta with Goldman Sachs. Please go ahead.

Speaker 8

Thanks, guys. So the first question is on the production profile. Vicki, you had made the comment that as you think about the long term, You want to see growth somewhere between 0% 5%. Is that sort of why is How do you think about the long term profile? And based on the way you view normal, that's a big range.

Speaker 8

Where do you see yourselves Planning in the context of that rate?

Speaker 2

Well, it really depends on the projects. And what we always do is we try to design our programs to deliver the best returns. And so it's always, as we develop our areas, it's always with that And mine and to build the facilities that require a pace of development that delivers the maximum return. So We could have lumpy, a little bit lumpy growth going out. Gulf of Mexico is a little bit lumpy.

Speaker 2

In the shale play, Depending on whether you're starting a new area or not, it could be a little bit lumpy. But certainly, our capital We believe is going to continue over time to be the best in the industry. And the development that we'll have And whether or not we're at 0% or 5% will depend on how the program lays out to maximize returns. So we have, as you see, inventory onshore, inventory in the Gulf of Mexico. We have the as well Some international projects that could add value.

Speaker 2

And as I mentioned in my script, we do have in our Chemicals business opportunities to grow there. And so the efficiencies and opportunities that we see really will depend on How we can put piece it together to deliver the best possible return?

Speaker 8

Yes, certainly an evolving situation. I think a lot of investors expected chemicals to be sequentially lower. Just talk about some of the moving pieces that allows for some profitability to

Speaker 9

And what

Speaker 8

are the biggest risks to actually achieving the guidance?

Speaker 3

Yes, Neal, I'll take the one on chemicals. And Now what I point to first, I know you understand the business well, is obviously we had if you look at Slide 39 in the deck, the two business Profit drivers in the business are the PVC business or the vinyls business and the caustic soda business, and both of those did materially improve throughout 2021. And when we have favorable conditions in both, the impact to earnings is pretty significant. And so what you're seeing First, let me just say that where the market is at right now is the PBC business is still quite tight, very tight supply demand balance. I think operating rates for the industry were in 8% 81% in January.

Speaker 3

Demand was slightly higher in January of 2022 relative to January 2021, less than one Producers are attempting to build inventory in PVC right now in advance of outages that are scheduled. But you've got the situation where they already had low inventories and the pull from the construction sector remains strong. And so you've got Tends to grow inventories while demand is still quite strong. We expect demand to remain strong in the PVC business throughout 2022. There's a very favorable housing starts outlook.

Speaker 3

Mortgage rates obviously remain pretty low and the remodeling sector also remains Very attractive. And so you can look at the export side of the business. So in January, it was only about £250,000,000 of export, which is about 30% less than 2021. That's reflective of the lack of product available right now. And so we certainly see you're not going to have an opportunity for inventory to really replenish itself And exports even return into probably the latter part of the second quarter when resin supply might be normalized in the wake of outages, assuming there's no unplanned outages for that period.

Speaker 3

In the case of the chlor alkali side, we're seeing a very tight supply demand market, largely because of production challenges. Operating rates, we think, in the industry are going to be somewhere in the low 80s for the Q1. There's a lot of planned outages scheduled to be now in May of 2022, But there's been a significant number of unplanned ounces still in the industry impacting product availability. And on the corn side, we think growth We'll see growth at least 3% to 4% this year. Again, all the sector markets are strong with the similar markets to PBC that draw on the AquaGuard Life side of

Speaker 7

the business. We think

Speaker 3

that will be also supplemented by improving travel and then business spending, return to office will drive pulp and paper usage for caustic soda, etcetera. So a lot of things that we think are going to be positive on that. And on the international side of the caustic business, Certainly, rising natural gas prices and availability in Europe and Asia will have already impacted operating rates of coral vinyl producers Overseas, which is driving up values of that. And so the biggest change here of year and why I think there's maybe a surprise because Conditions were so remarkable in 2021 and why would we be guiding something higher than that is that if you go back and look at the beginning of the year, Caustic soda at the beginning of 2021 was still coming out of the really low values at the post COVID drop in 2020. PVC has recovered very quickly on the construction side, but caustic was dragging its way up little by little out of the lows experienced during 2020.

Speaker 3

And so caustic prices improved sequentially quarter after quarter throughout 2021, which is why you'll see that earnings for this segment in the 4th quarter It's typically the 1st and fourth of their shoulder quarters and the strong ones are the mid year Q2, Q3, but you had almost you had Double the earnings in this Chemical segment in the Q4 compared to the Q1. And so we're coming in with so much more momentum, which is why our guide for Q1 is so strong for the Chemical business. And so it's not that we're predicting those conditions persist all the way through the entire year. We're just going to start from a higher point. How long that As conditions persist, we'll impact whether that guidance actually could increase the balance of the year potentially if it holds on longer than we're anticipating.

Speaker 3

We do anticipate that things, as I said, will start to normalize maybe the middle part of the year.

Operator

Thank you. And our next question today comes from Matt Portillo with CPH. Please go ahead.

Speaker 9

Good morning, all. Just the first question on the DJ Basin. You mentioned in the prepared remarks some timing around permits. Just curious if you could provide some context on the permitting process and it stands today. And is this a good level of development to

Speaker 10

Hi, Matt. This is Richard. I'll take that one for us. So, with respect to permits And the DJ really have had good progress over the last year is how I would describe it. Just looking at some of The permits in hand, we've had about 46 wells permitted, which takes us through really past half the year.

Speaker 10

And so what we've really put in place is optionality in our program. So if you dig into sort of our onshore plan for this year, We have plans to pick up a second rig in the year and really that's based on confidence with where we're going with our permits. So As you know, last year, some changes in terms of the process happened, and so we've been meaningfully engaged over the last year, Importantly, at the stakeholder level and communities and then now at the state, but we've seen our own PAD is approved as well as other operators. And I think the feedback that we've received and we continue to work on together is Continuing to improve technology and things that we know that can really place us in a good place for development. So I guess in short, we're optimistic.

Speaker 10

We've got a rig Planning to come in, in the second half of the year, but have optionality within the program to be able to adjust as needed.

Speaker 9

Perfect. And maybe a follow-up on the marketing side. I know as an organization, you guys have been very thoughtful about this process through the cycle. The basin, it looks like there's possibly some solutions on the horizon for incremental gas takeaway. And just curious how you all might be thinking about potentially adding to your takeaway portfolio from a gas marketing perspective and then maybe dovetailing into that On the crude oil side, could you just remind us when some of those contracts start to roll over and if there's any tailwind To the financial kind of moving forward over the next few years around crude oil marketing.

Speaker 2

Yes. Matt, we really have enough gas capacity and as much as we feel like we need at this point, and with respect to our growth profile. And for the oil side of it, the contracts are rolling off in 2025 for the oil and gas for the oil part of the contract. So we have plenty of capacity. At that time, I think it will take probably a couple of years to get us down to the point Where all the contracts are lost.

Operator

Thank you. Our next question today comes from Neal Dingmann at Truist Securities. Please go ahead.

Speaker 11

Good morning all or afternoon. Vicki, my first question, if I could, you mentioned just a couple of minutes ago here That you thought you maybe would ramp the chemicals and obviously the finance side that just continues to be I know what I I'll Rob in December and it just continues to get better and better. I guess my question is, as a financial guy, how much can you grow that And would that grow in conjunction with your low carbon emission business? I know you talked about that in the past. I'm just wondering how much could you push that business given it just continues to hit them off the park

Speaker 2

I think we'll talk about that a little bit more as we talk about the project and the capital that we're executing to convert our diaphragm to Because that's going to improve some efficiency in the areas where we're doing that conversion. So we'll actually increase We'll be able to increase our capacity. And we'll outline that and detail that a little more in the next earnings call. Because right now, we're currently in the process of doing the FEED study on that. For today, with respect to other opportunities, We will continue to consider incoming calls about potential partnerships where it makes sense To do projects with either customers or from the perspective of supporting low carbon ventures, We try to be opportunistic in chemicals and not build without a certainly the demand for the product.

Speaker 2

And so On the low carbon venture side, we're, as we go through this, finding opportunities where there are synergies and growing synergies between the chemicals business and the low So it will have some growth around that.

Speaker 11

No, that's great to hear. And then just a second, You talked just a minute ago also about the DJ. My thought is, it sounds like some of the perm This year, is that going to be the case going forward? And is that because you're talking about I know But you're talking about permits and all in shape. I'm just wondering what sort of the reason your rationale for why not just grow both of these?

Speaker 11

I mean, I'm looking at that.

Speaker 2

Yes, it just it really just depends on the permitting process because we do have really good inventory in the DJ Basin as well. And as we go forward and we work out the process, if we get ahead on the permitting, we would consider adding a rig To the or rigor to the DJ as well.

Operator

Thank you. Our next question today comes from David Deckelbaum at Cowen.

Speaker 12

I wanted to ask just on the sustaining capital. There were lots of in and outs, particularly around the Mexico and EOR catch up, some normalization of Rockies DUCs. I guess, when we think about that delta between The $2,800,000 or $2,900,000 that you guys talked about last year and the $400,000,000 increment this year, how do we think about that sustaining capital level progressing into Does it have some upwards pressure on it because of catch ups? Or should we look at this as a catch up year And that should moderate potentially decline along with base declines moderating.

Speaker 10

Maybe we'll start with onshore and speak to that a little bit. I think you've got it right. I think if you look Now over the last couple of years and what's happened, certainly 2020 had a significant reset for us in terms of Activity levels and so preserving cash, investment at that point and really dropped activity levels Almost completely. And so coming on the back half and into 2021, we had things like the DUCs And the DJ that allowed us that ability to add production and maximize cash flow for 2021 With a lot less capital investment. And so what happened last year was really, as we think about the transition, it went from transitioning from DUCs as we restored So the way that played out was really at the end of Q4, beginning of Q1, we were able to pick up our drilling And frac cores to sustain the production for this year, which did a couple of things.

Speaker 10

One, it was good because As we head into inflationary period, we were able to gain activity and create that stability within our capital program. But what it does is it did create a bit of a lump that we have most of our wells online really starting late in the Q1, Then you hit more steady state in the second and third quarter. And so as that projects into the end of the year and into 2023, you You can tell from our Q1 guide into total year that we do have an increase of production. But those type events as well as restoring Really from a cash investment perspective in EOR adding low decline production barrels Really gives us a much more sustainable production level across the cycle. And so I think we're restoring, as you said, a much more Normal steady state activity level and a much more robust or sustainable free cash flow capability.

Speaker 2

I think considering the rest of the portfolio, we don't see a lot of upward pressure for the 3.2 as a whole.

Speaker 1

And David, just to add to your point, I mean, on top of what Richard and Vicki just went through, I mean, from a decline standpoint, as you know, we improved Yes, the base declined from 25% 2 years ago to 22% last year, and it's the same this year. It's at 22% as well. Given the things Richard said, that gives potential to flatten that out a bit in the future.

Speaker 12

I appreciate all the color on that. And if I could just ask a quick Just the so I'm understanding, there was $400,000,000 I think that was attributed to the difference, the low end versus the high end of capital I wish I think you talked about low carbon venture expense that would be potential in OBO. I guess For that low carbon venture spend, would that just be accelerating some projects or is it the contingency For things that you're considering doing, but aren't sure if you want to pursue at this point, I guess, how do we think about that sort of allowance that's built into

Speaker 10

Yes, this is Richard again. I think you've got it right from the standpoint of really LCV Capital is certainly focused meaningfully on our direct air capture Plant 1. So there is a project timeline associated with that. Engineering is going great. The commercial aspects of the project continue to be supportive.

Speaker 10

And so There's a little bit of uncertainty there, but that component, we'll have more visibility and be able to talk more about even with you next month. In addition to that, what's happened is really beyond strong engineering progress, we continue to have good commercial support, whether that's global policy Recognition for carbon capture or even director capture in particular or even with strategic Net 0 Businesses. And so these things support commerciality. And so what's happened is we do see Additional opportunities for direct air capture. For example, we had an opportunity in Canada to look at with a developer Direct air capture with air to fuels.

Speaker 10

And so a bit of that money is as these projects become more opportunistic, we would Allocate some feasibility capital to be able to look at these other type projects. The final piece is really our CCUS and You've probably seen some pieces around projects that we're involved with. And so those continue moving beyond into commercial development. And so we have some capital associated to continue those. But that again, be able to share more And March around that, but look forward to these projects advancing meaningfully this year.

Operator

Thank you. And ladies and gentlemen, our final question today comes from Rafael Debois with Societe Generale. Please go ahead.

Speaker 13

Hello. Thank you very much for taking my questions. The first one is related to your EOR business. Could you maybe tell us a bit more how production in this division has trended since you stopped reporting it as a single entity. And also, I was wondering if the extra CapEx you will

Speaker 10

Maybe I'll start with the EOR just a little bit. As we think about the last couple of years, I'd say the opportunity in front of us really to address Any decline that we've seen is really, and this comes to our OpEx when we talk about that, that's really restoration of maintenance and specifically downhole maintenance. And so the ability to allocate some of that cash investment to Restored down production is some of the best cash investment we have. It's very high return, even at mid cycle prices. And so we expect to be able to and have added some well service rigs to add up to 6,000 barrels a day By year end, and that really restores the normal backlog and maintenance schedule that we had Really going back to 2019.

Speaker 10

So that's the most meaningful change in terms of the EOR business that we're approaching this year.

Speaker 13

Excellent. Thank you very much. And my follow-up will be actually on Algeria. I see that you're going to have some activity there in 2022. I was wondering if you could Tell us a bit more what you have in store for this part of the world, knowing that we in Europe are going to need much more gas from other suppliers.

Speaker 13

And it will be great if you had some projects, some gas projects in Algeria, for instance.

Speaker 7

Hi, it's Ken here. First of all, I'd say the operations team had a great year last year and achieved a 50,000 barrel a day milestone. On the contract side, we spent the time optimizing the future development plans that you're sort of alluding to. And we worked through the legal framework around the new hydrocarbon law, which is designed to encourage foreign investment in the country. This year, we'll drill 4 wells.

Speaker 7

There'll be 2 injectors, 2 producers. And we've now started negotiations with Sonatrach and we're in the early stages. As a large American company with state of the art shale capabilities, we think we have a lot to offer the country going forward and hopefully that helps in Europe also. We'll keep you updated on our progress at the next call.

Operator

Thank you. Ladies and gentlemen, this concludes our question and answer session. I'd like to turn the conference back over to Vicki Hollub for any closing remarks.

Speaker 2

Before we go, I'd like to say that we stand in firm condemnation of the insane and inhumane actions taken by Thank you all for your questions and for joining our call today.

Operator

Thank you, ma'am. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.

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Earnings Conference Call
Occidental Petroleum Q4 2021
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