Occidental Petroleum Q4 2022 Earnings Call Transcript

Quartr
Provided by Quartr
February 28, 2023

There are 13 speakers on the call.

Operator

Good afternoon, and welcome to Occidental's 4th Quarter 2022 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, today's event is being recorded. I would now like to turn the conference over to Neil Backhouse, Vice President of Investor Relations, please go ahead.

Speaker 1

Thank you, Rocco. Good afternoon, everyone, and thank you for participating in Occidental's Q4 2022 conference call. On the call with us today are Vicki Holla, President and Chief Executive Officer Rob Peterson, Senior Vice President and Chief Financial Officer and Richard Jackson, President, Operations, U. S. Onshore Resources and Carbon Management.

Speaker 1

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

Speaker 2

Thank you, Neil, and good afternoon, everyone. On today's call, I'll begin with highlights of our 2022 achievements, including an oil and gas update followed by our 4th quarter performance. Next, I'll discuss our 2023 cash flow priorities, our enhanced shareholder return framework and our 2023 capital plan. Rob will then provide an update on the status and mechanics In 2022, our record net income of $12,500,000,000 generated a return on capital employed of 28%, which is the highest return we have achieved since before 2,005. We also delivered record free cash flow before working capital of $13,600,000,000 which enabled us to retire more than $10,500,000,000 of debt and to repurchase 3 $1,000,000,000 of common shares.

Speaker 2

Our return on capital employed was enhanced by exceptional performance as our team set multiple operational and productivity records across our U. S. Onshore, Gulf of Mexico and International businesses. OxyChem generated record earnings and our midstream business approximated guidance. Also in 2022, Our high return Permian production grew by 90,000 BOE per day propelled by outstanding well results.

Speaker 2

We delivered our best year ever in Delaware new well productivity making 2022 the 7th year in a row that we were able to increase our average well productivity as shown in our presentation's appendix On Slide 29. Our teams accomplished this by applying our proprietary service modeling and completion designs to our high quality reservoirs. Well performance along with our Oxy Drilling dynamics and logistics efficiencies enabled us to achieve reserves replacement ratio Driven by our capital programs of over 140 percent at a cost of $6.50 per BOE, which is less than half of our current DD and A per barrel. With price revisions included, the total reserves replacement ratio is 172%, which increased our year end Collapse in 2015 and the pandemic in 2020, we have replaced more than 100% of our production for at least the last 20 years. The depth and quality of our shale well inventory and 2,000,000,000 barrels of remaining potential in our Permian Enhanced Oil Recovery business, We have the scale to continue our history of reserves replacement.

Speaker 2

A deep inventory along with our unique portfolio of short cycle, High return unconventional assets paired with low decline conventional assets, OxyChem and our midstream businesses, We have the capability for long term sustainability and the flexibility to allocate capital to maximize returns for our shareholders. In 2022, we also made significant progress in developing the capabilities and assets needed to secure a low carbon future, which is the other key to our sustainability. We started site preparation on our 1st direct air capture plant and executed several exciting agreements to sell carbon dioxide removal credits to prospective purchasers in diverse industry sectors. We also secured over a quarter 1000000 acres of land or was a fitting way to wrap up a year of continued operational and financial success. We generated over $2,600,000,000 of free cash flow, which supported nearly 1 point $6,000,000,000 of balance sheet improvements.

Speaker 2

We also repurchased $562,000,000 of common shares in the quarter, Completing our 2022 share repurchase program. In our business segments, oil and gas approximated the midpoint of guidance Despite winter storm Elias impact, outperformance from the Gulf of Mexico and outflows and partially offset storm impacts experienced in the Permian and Rockies. OxyChem exceeded guidance driven by stronger than expected market dynamics, While midstream and marketing earnings were within guidance, in December, Oxy participated in the recapitalization of NetPower. This is a technology that generates emission free power generation and has the potential to accelerate emissions reduction efforts in our existing operations and to supply electricity to our direct air capture plants and sequestration hubs. Ultimately, net power could be an important emission free power generator And most notably in the Midland Basin where our well Lulu 3641 DP exceeded 18,000 seats to become our longest Laterals on record.

Speaker 2

Remarkably, this well was drilled in slightly over 12 days. Milestones like this showcase our team's focus on Safely and efficiently expanding the boundaries of drilling technology. Our teams also achieved an Oxy Delaware Basin record for wedge productivity, Averaging a 30 day initial production rate of over 3,000 BOE per day from all wells that came online in 2022. We believe that 2 of our wells in the First Bone Springs in New Mexico and 6 of our wells in the Barnett formation of the Midland Basin achieved initial 30 day production amongst all operators in their respective formations. In addition, we are continuing to consolidate acreage via trades that enable more capital efficient Longer laterals, which help to optimize the required infrastructure.

Speaker 2

The longer laterals exceptional well productivity and optimized infrastructure Partially offset inflation impacts in 2022 and we expect similar benefits as we progress through 2023. After highlighting 2 of our Gulf of Mexico assets, Horn Mountain and Caesar Tonga, on previous earnings calls, I'm pleased to announce another Oxy record in our offshore operations. Our Lucius platform surpassed 150,000,000 BOE of gross production in less than 8 years from first oil, Internationally, we along with our partner ADNOC achieved record quarterly production at Alhosin with 85,500 BOE per day net to Oxy. The Alhosin expansion project is progressing well and remains on track for mid-twenty 23 completion. We expect Oxy's Alhozan net production to ultimately reach approximately 94,000 BOE per day.

Speaker 2

We are pleased with the total value we've created for shareholders in 2022, including the debt reduction of $10,500,000,000 Outstanding bonds down to less than $18,000,000,000 and consistent with our shareholder framework, we will shift our focus to share repurchases, dividend growth and a capital program that further strengthens our sustainability. Over the long term, we intend to repay maturities and opportunistically retire debt to further reduce our cost structure and strengthen our balance sheet. In future years, we will seek to grow our cash flow and earnings to support increases of our dividend and the continuation of our share repurchase program. While we do intend to grow the absolute value of the company as part of our value proposition, we also want to increase value per share for our shareholders through dividend growth and the reduction of outstanding shares. Accordingly, our Board of Directors authorized an over 38% increase in our common dividend and a new $3,000,000,000 share repurchase authorization, which will trigger redemption of a portion of the preferred equity.

Speaker 2

Future cash and earnings growth opportunities could come from our shale and conventional oil and gas assets as well as our chemicals business and ultimately our low carbon ventures business. Turning now to 2023, our business plan is designed to maximize return on capital and return off capital to our shareholders, while also strengthening our future sustainability by prioritizing asset enhancing investments to support the resilience of Oxy's future cash flows. These investments include $500,000,000 for low decline mid cycle projects, including the previously announced modernization of OxyChem's battleground chlor alkali plant and a new OxyChem plant enhancement along with Permian EOR and the Gulf of Mexico. Of the $500,000,000 that I just mentioned, we plan to spend $350,000,000 on OxyChem projects, which expect the Battle Ground project to be online in early 2026. The other OxyChem plant enhancement will deliver Our production volumes, enhanced operational efficiency and improved logistics costs.

Speaker 2

We look forward to providing more detail about this project on a future call. The remainder of the $500,000,000 will be spent in EOR in the Gulf of Mexico. EOR remains a core component of Oxy's asset portfolio and will be essential for our future strategy, so we are glad to return to sustaining capital investment This year, in the Gulf of Mexico, infrastructure projects including subsea pumping initiatives to increase the tieback radius and productivity of existing platforms will drive high capital spending compared to recent years. We're also focused on our high return short cycle businesses. Our return to a 2 rig program in the DJ Basin late last year requires additional investment, but should begin to moderate production decline by the middle of 2023.

Speaker 2

In our Permian unconventional business, we intend to run an activity program similar to the second half of last year. Our Permian unconventional assets are best placed to deliver production growth to offset marginal declines elsewhere in our portfolio. Overall, 2023 Permian unconventional capital is expected to decline slightly from 2022 due to the initial capital inflow from the Delaware Basin JV. We anticipate that inflation will continue to be a challenge for our industry this year. In 2023, we expect Approximately 15% inflation impact on our domestic oil and gas business compared to 2022.

Speaker 2

As always, we will continue our efforts to reduce inflation by leveraging our supply chain competencies and focusing on continued capital efficiency. Another important aspect of sustainability is the carbon intensity of our operations and what we're doing to address it. We focus on reducing emissions every day as we progress our pathway to net 0, and we've made significant progress over the past few years. Since 2020, our emissions reductions projects have focused on capturing methane and reducing venting and flaring. These projects resulted in a 33% decrease in our estimated company wide methane emissions from 2020 to 2021 and a 24% decrease in methane emissions intensity of our marketed gas production.

Speaker 2

We were the 1st U. S. Oil and gas company to endorse the World Bank's 0 routine flaring by 2,030 initiatives. And I'm pleased to announce that our U. S.

Speaker 2

Oil and gas operations achieved 0 routine flaring 8 years ahead of that target. That was a major achievement. Our international operations have implemented projects to significantly reduce routine flaring and we're on track to meet the World Bank's target well ahead of 2,030. In 2023, we also intend to invest in several unique and compelling low carbon business opportunities to advance our net zero pathway. Ongoing construction of our direct air capture facility in the Permian and the development of our large Gulf Coast sequestration hubs, including force based certification, will be among our expected investments.

Speaker 2

We anticipate that our 1st Direct Air Capture or DAC plant We'll complete commissioning and begin to capture carbon in late 2024 and be commercially operational in mid-twenty 25. This timing is a few months later than our original target as we navigate the current supply chain environment and focus on construction sequencing to support faster optimization and the application of new technologies and innovations. Our 2023 capital investment in these low carbon This is expected to total $200,000,000 to $600,000,000 subject to third party funding optionality for the DAC and the timing of projects. We mentioned on our prior call that our net zero ambitions will require funding outside of historical capital allocation program. However, we are prepared to fund our first stack ourselves if utilizing our capital preserves the most value for our Our capital plan includes investments in our carbon sequestration business, both through the development of the Gulf Coast hubs We previously announced entry drilling appraisal wells.

Speaker 2

Investments in other projects that reduce OxyScope 1 and 2 emissions will also continue. As part of our strategy to develop Gulf Coast sequestration hubs, we're pleased to announce that we will be working with Energy Transfer Low Carbon Development To build a pipeline network from point source emitters in the Lake Charles area through our Magnolia sequestration site in Allen Parish, Louisiana. This pipeline will support our point source carbon capture and sequestration business, which we intend to develop along with our DACs to help meet medium and long term greenhouse gas emission reduction goals for Oxy and our customers. Before turning over to Rob, I want to reiterate that our 2023 capital plan focuses on projects that best position Oxy for long term success. As in past years, we retained a high degree of flexibility, which allows us to adapt to commodity price fluctuations and reduce spending if necessary.

Speaker 2

Now I'll turn the call over to Rob.

Speaker 3

Thank you, Vicki, and good afternoon, everyone. Last year, we repaid over $10,500,000,000 of debt and retired all remaining interest rate swaps, Our balance sheet and improving our credit metrics as we seek to regain investment grade ratings. The completion of our $3,000,000,000 share repurchase program We've just closer returning over $4 per share to our common shareholders, which will begin to trigger redemption of the preferred equity. Our fast and improved financial position even compared to 1 year ago enables us to begin allocating a greater proportion of excess free cash flow to our shareholders in 2023. Today, I'll begin by explaining where we are in terms of partially redeeming the preferred equity.

Speaker 3

I'll then detail the redemption mechanics in a scenario where the $4 trigger is met. A mandatory addition of referred equity is triggered with the rolling 12 month common sharehold distributions, which are cumulative $4 per share. This trigger is evaluated daily based on shares outstanding on the day capital is returned. As of today, we have distributed $3.78 per share An additional $0.22 per share is required to reach the $4 trigger. In our presentation, we have included an illustrative example of a $100,000,000 to common shareholders after the $4 share trigger is reached.

Speaker 3

In conjunction with the common distribution, a $100,000,000 mandatory matching distribution Berkshire Hathaway will be made of which $91,000,000 will redeem preferred equity principal with a $9,000,000 or 10% premium. In this example, OXY would incur a $200,000,000 total cash outlay. This process of mandatory redemption repeats As long as the trailing per share trailing 12 month distribution to common shareholders is greater than $4 there is no limit to exceeding the $4 per share trigger with additional distributions to common shareholders. Subsequently, even if the trailing 12 month distribution decline, additional distribution Common shareholders will still trigger partial preferred equity redemption. We expect our refresh share repurchase program to combine with our $0.18 per share quarterly dividend to enable us to exceed the $4 per share trigger to begin redeeming the preferred equity.

Speaker 3

While the magnitude and pace of the partial preferred redemption And resulting enterprise value rebalancing will ultimately be driven by commodity prices, we expect our shareholders benefit in a similar way to the value created in 2022 through debt reduction. I'll now turn to our 4th quarter results. We posted an adjusted profit of $1.61 per diluted share and a reported profit of $1.74 per diluted share. The difference between adjusted and reported profit was largely driven by a non cash tax benefit Related to the organization of legal entities. As Vicki mentioned, our Board recently authorized a renewed $3,000,000,000 share repurchase program Fawney repurchased approximately 47,700,000 shares last year for a weighted average cost of below $63 per share.

Speaker 3

We exited the quarter with approximately $1,000,000,000 of unrestricted cash after paying $1,100,000,000 of debt and retiring $450,000,000 in notional interest rate swaps. For the year, we completed over $10,500,000,000 of debt repayments, which eliminated 37% of outstanding principal resulted in a sizable reduction in interest rate interest burden. We estimate that the balance sheet improvements executed in 2022 will reduce interest and financing cost by over $400,000,000 per year. Our proactive debt reduction efforts leveled the company's profile of future maturities So that we now so we have less than $2,000,000,000 of debt maturing in any single year for the remainder of this decade. Going forward, we intend to repay debt as it matures It may also reduce debt opportunistically.

Speaker 3

We repaid approximately $22,000,000 in January and do not have additional maturities until the Q3 of 2024, providing us with a clear runway to focus on returning cash to shareholders and partially redeeming the preferred. In the Q4, we generated approximately $2,600,000,000 of free cash flow, even with inflation continuing to pressure costs and capital spending. Domestic operating expenses were higher than expected, primarily due to the impact of Winter Storm Elliott, equipment upgrades and platform life extension work in the Gulf of Mexico and inflation. Overhead increased the result of higher accruals related to compensation and annual environmental remediation. Capital spending in the quarter was higher than expected due to inflationary impacts, Investments in attractive OVO projects, schedule changes leading to activity in higher working interest areas and rig start ups for our Delaware JV.

Speaker 3

We further improved our liquidity position this month when ICP became the 1st company ever securitized offshore oil and gas receivables in an amendment that increased our accounts receivable facility by 50 to $600,000,000 In 2022, we paid U. S. Federal cash taxes of approximately $940,000,000 in line with our previous estimate. As we move into 2023, we expect to be a full U. S.

Speaker 3

Federal cash taxpayer as we've utilized all our NOLs and U. S. General business carry forward credits. We expect our full year production to average 1,180,000 BOE per day in 2023. As it was the case last year, production in the Q1 is expected to be lower than the preceding quarter due to scheduled maintenance turnarounds primarily in our international operations.

Speaker 3

You have fewer wells come online in our U. S. Onshore business in the Q4 with only about 15% of our Permian wells and 6% of our Rocky wells for the year turning over to production. That said, our overall projection trajectory is expected to be smoother in 2023 than in the prior year. Throughout 2022, we worked with Colorado regulators and local communities to successfully navigate the permitting process.

Speaker 3

Work positions us to add back 2 rigs in the DJ by the

Speaker 4

end of

Speaker 3

2022. Given the reduced activity levels over the last few years, our Rockies production is likely to be lower in 2023 In last year, production is expected to stabilize in the second half of twenty twenty three once the benefits from the additional rigs picked up in the Q4 of last year fully materialize. Defect rules in Colorado typically lead to a pad development approach with a linear time to market cycle as compared to simultaneous operations in other shale plays. This operating environment creates negligible additional costs for our development, but this year is expected to have a noticeable impact on time to market as our activity ramps up. The DJ Basin remains an exceptionally high return asset for OXY and we welcome the return on sustaining capital levels to that business, which Predicated by the regulatory certainty and permitting efficiency we are now experiencing in Colorado.

Speaker 3

The production sharing contract we announced last year with Algeria is expected take effect in March, once the agreement is in place, net barrels to Oxy will decrease by approximately 15,000 Boe per day, which is reflected in our 2023 guidance. We do not expect a material change in operating cash flow because the tax rate will also reset under the new PSC. Operating costs across our oil and gas business are expected the second half of twenty twenty two as inflationary pressures remain and our lower cost D Day Basin production declines. In the Gulf of Mexico, Maintenance work to further reduce planned downtime and extend platform lives will impact operating costs. We are also increasing EOR downhole maintenance work and CO2 purchases.

Speaker 3

On a BOE basis, operating costs may increase internationally due to lower reported barrels from the new Algeria contract. 2022 was an exceptional year for OxyChem as the business exceeded $2,500,000,000 in income. We expect 2023 to be another strong year by historical standards was unlikely to match 2022. Plastic soda prices reached all time highs in the Q4 of 2022, but we are now Facing downward pricing pressures as the macroeconomic environment remains uncertain. EUC pricing fell sharply in the second half of twenty twenty two, It has begun to stabilize.

Speaker 3

As I mentioned before, Oktogent's integration across multiple core and bridges enables us to optimize our production mix to what the market demands. We remain optimistic about the business and our capital investments will further strengthen our margins and competitive position. Looking forward to the rest of 2023 and beyond, We remain dedicated to extending the success of 2022 and advancing our enhanced shareholder return framework. I'll now turn the call back over to Vicki.

Speaker 2

We're now ready to take your questions.

Speaker 5

Thank you.

Operator

Please limit questions to one primary question and one follow-up. If you have further questions, you may reenter the question At this time, we will pause momentarily to assemble our roster. And today's first question comes from Rafael Du Bois with Societe Generale. Please go ahead.

Speaker 4

Hello. Thank you very much for taking my questions. The first one is about the DAC-one timing, Which seems to have slipped a little bit with operating status now to be reached mid-twenty 25 instead of end 2024. And I was wondering if We should consider that it means that all the DACs, the ones that follow, could also be delayed? That will be my first question, please.

Speaker 2

No, we don't expect delays in the other DACs. The delay came because of the supply chain situation that we're experiencing today. We expect that since those are further out, we'll have more time to prepare and to address some of the supply chain challenges that we have today. So we don't expect Scheduled to change.

Speaker 4

Great. Thank you very much. And my follow-up is on the $200,000,000 to $600,000,000 CapEx For the low carbon, can you maybe help us better understand what is dedicated for DAK1 and what is left for other projects?

Speaker 2

We haven't broken out that $200,000,000 to $600,000,000 at this point. Richard, do you have anything? Yes.

Speaker 5

I was just going to add, I mean, to kind of help give you some color on the program, I mean, certainly some of that is allocated as we started construction for DAC won this year and obviously continue on the next couple of years with our construction pace. We do continue to develop our CCUS hubs around the Gulf Coast that we previously disclosed and we announced with the midstream partnership today. And then the other piece, and I think it partially answers your first question is continuing to look at our DAC Pre feed and feed work as we go into the South Texas hub, we think that's meaningful. And so while we're progressing and optimizing the schedule for DAT1, In parallel, we're working with the same innovations and learnings and applying that to our South Texas hub, which we think will be able to keep us on pace for that development as well.

Operator

Thank you. And ladies and gentlemen, our next question today comes from David Deckelbaum with Cowen. Please go ahead.

Speaker 6

Good morning, Vicki. Thanks for taking my questions this afternoon.

Speaker 2

Thank you.

Speaker 6

I wanted to dig in a little bit more. You talked a bit about reaching this $4 per share return of capital threshold and now looking at the preferreds as this trigger as a priority. How do we think about your view on the returns of capital on retiring preferred versus say supplementing that with asset sales as we work through the year, especially as you get beyond the Q2 of 'twenty three and that trailing 12 month $4 a share Benefit kind of rolls off, especially from that notable lump in the Q2 of 'twenty two. How do you think about Navigating that and should we expect you to kind of pull forward other sources of cash to try to stay above that threshold?

Speaker 2

Yes. Hitting the threshold has been really not a target, but an outcome of a plan that we wanted to execute anyway. Share repurchases is such a critical part of our value proposition that this is the way it has evolved. We're not really sure what the macro is going to do Toward the end of this year. So in terms of what if any asset sales we would do to keep the pace, That really is dependent on the value what value we see in doing that and what we have available.

Speaker 2

But I would say right now, we don't have anything on the list to sell. Of course, anything we have is for sale if it's for the right price. But there's nothing that we're actively marketing right now. And we believe that the second half of the year could potentially bring a macro environment that allows us to continue Without engaging in any additional asset sales.

Speaker 6

That's helpful. Maybe if I could switch just to the second quickly around Low Carbon Ventures and DAC. There's obviously some funding that's been made Under the Bipartisan Infrastructure Law, it seemed like you alluded to some flexibility in the budgeting around deck For potentially other sources of funding, can you walk us through maybe the application process and the timeline For how we might think about any potential loans that would be coming through or when we might have some more information around other sources of funding?

Speaker 5

Hey, David, this is Richard. I'll try to answer a piece of that. Really 2 pieces, as you described, and we continue to have Good discussions with capital partners, not only for DAC 1, but as we look at capitalization over the life of our development plan. And so that's an important Part that we want to stay fresh with. The second part is, as you mentioned, some of the grant programs that Are directly associated with CCUS and DAC specifically, we're not in a position to talk in detail on that today, but we are And have communicated before, we think our projects fit very well, the intent of that program.

Speaker 5

We think the Really the advanced design and really state that we're in as we go into DAC 1 and then into the South Texas Hub puts us in a really good position for that type of program. I think the South Texas Hub, As you look at that in particular, it's just a unique opportunity to look at sort of the large scale build out when we've contemplated the 30 DAX for that area. So to directly answer your question on updates, I think we'll have more as we go this year, But we'll leave it at that for now.

Operator

Thank you. And our next question today comes from Jeanine Wai with Barclays. Please go ahead.

Speaker 7

Hi, good afternoon. Thanks for taking our questions.

Speaker 2

Good afternoon.

Speaker 7

Hi, Vicki. Our two questions, I guess, Just on the Permian, if we could. The first one maybe on inventory and the second one on sustaining CapEx. On inventory, we compared your updated Slide versus the prior version. And after adjusting for wells to sales in 2022, it looks like the location count for the wells that breakeven for It really isn't all that different, which implies about a 16 year inventory at the current pace.

Speaker 7

So just wondering if you can talk about Amy, the differences and assumptions between the old and the new inventory calculations, whether it's on costs or on development strategy, example, we saw in the footnote there that your updated inventory uses the 2022 budgeted well costs and how different would that look if you use current costs?

Speaker 5

Great. Hey, Janine, this is Richard. I'll try to help answer a few of those. I mean, very proud of our Inventory, obviously good acreage position that we have and have accumulated, but very pleased with the team's Ability to continue to advance that. So as you noted, especially in Permian Resources, strong less than $60 breakeven With long activity, I'd say some of the changes that have occurred, we tried to highlight one even in that slide is really thinking about longer laterals.

Speaker 5

So, able to continue to core up acreage where we're at, be patient in development areas to allow that to happen Really sequence our developments to accomplish the longer laterals. So as we were able to do that, obviously, that may go down 1, but we've made a much more valuable single well inventory. The other thing I would say is just really the environment over the last Couple of years, as we restated capital or began to put capital back into the program Since 2020, that's allowed us to really develop some new areas In zone, so for example, the 1st Bone Springs wells that we noted, very proud of those. What happened during that Under investment cycle, we continue to work the technology and the development plans to really advance those zones. And so those Tight advancements in areas and zones like that also are adding to our inventory.

Speaker 5

But that restoration in capital, we believe this year especially will allow us to further Advance our inventory, for example, we have 40 target wells in 2023 that we believe will fully replenish the wells we drill this year. And so we've pretty thoughtful in terms of how we're expanding that and approaching that inventory. And so hopefully as we go, that will continue to grow in the Permian, But even in areas like the Powder River Basin, we're resuming some activity this year.

Speaker 7

Okay, great. Thank you for that detail. Moving to the sustaining CapEx. In the $3,500,000,000 sustaining CapEx estimate, how much of that is allocated to the Permian? And does that Keep Permian production flat versus 2023 levels.

Speaker 7

We know Oxy has got a ton of different operating areas and there's a lot of different ways to keep production Flat there. Thank you.

Speaker 2

Yes. When we think about sustaining capital levels, it's really how do we maximize the return on capital employed for each of part of the business and the EOR part, the EOR part, the way we've been able to maximize return on capital employed for it is to actually keep the facilities fully loaded All of the time, so we're not we don't have unused capacity and keeping those facilities fully loaded requires a certain level of capital. We certainly have the potential to continue to grow the EOR business beyond that. But up to this point, that's what we've been able to do to

Speaker 8

get the

Speaker 2

most value out of it. The resources business combined with the EOR business Would require about $1,800,000,000 for sustaining capital. And this year, we did increase EOR and that's part of the reason to do that is that the lower decline of our EOR business, the lower decline of the chemicals business And our gas flow assets in the Middle East, those are critically important to us. And as you know, we're expanding Alhosen, which will Not very not by very much will that increase the sustaining capital there, but will provide us Additional low decline cash flow from that asset as well. And that's what we most like about our portfolio is that this diversity Of having the lower decline assets combined with the higher decline, but higher cash flow generating assets At least initially, it's very complementary.

Speaker 2

So we have the best of all worlds, I think, in the diverse portfolio that we have.

Operator

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

Speaker 9

Good morning, all. Good morning. Just maybe to start out, I was hoping to see if you could give us an update, Maybe how things have progressed since the LCB Day on the Point Source business, maybe some of the conversations you're having With the IRA bill coming out and any color that we may be able to look through on when the first project might start up and how you guys are thinking about Kind of the total volumes you've secured so far for sequestration on PointSource?

Speaker 2

Okay. Thank you for the question. I'll pass that to Richard.

Speaker 5

Yes, great. Hey, Matt. I think things for many of us in CCUS and certainly in the U. S. Are progressing well post IRA.

Speaker 5

I think lots of work going on with emitters to transport to sequestration. Our focus Really has been sort of similar to oil and gas, really working to secure the best sequestration sites And develop those in a way to be both large scale, so we can get the economies of scale, but

Speaker 3

Be able

Speaker 5

to provide that certainty as these deals are put together. So we have really 5 hubs that we're working that we've Talked about we've got several classics wells in progress as well as characterization of these sites. The midstream providers are very important. And so being able to secure those partnerships early, I think, aligns Really the downstream from the capture site to be able to do that. So as we think about sort of how this plays out over the next couple of years, we're hopeful that As we go this year, more projects will be able to combine that capture to transport to sequestration and really hit FID And then begin construction over the next couple of years.

Speaker 5

I think our work even going back to Some of the work that we've done in the Permian over the last several years around some of the capture projects there really helped inform us, hopefully as a good partner about How do you manage that kind of across the value chain? And so our focus is, again, really on that sequestration. That really puts us in a good position to Take together the synergies with DAC as we develop that. And so we're playing that role and having good conversations towards those Projects and again expect this year to have more updates.

Speaker 9

Great. And then as my Just around OxyChem, a strong start to the year with the Q1 guide. Just curious how you all are feeling about the outlook for caustic and PVC and Maybe what's baked into the guidance expectations as we progress through 2023?

Speaker 3

Yes, sure, Matt. So we ended up seeing for the year was Domestic PVC demand, that was actually down about 6.8% in 2022 relative to 2021. What we did was we saw export demand ended up being about 46% higher. So the total PVC demand actually grew about almost 7% year over year In 2022? And so we're looking into what's going on and what's in our guidance.

Speaker 3

So we saw that softness in PVC through the Q4, It appears that bottomed out late 2022, early 2021, 2023. So PVC buyer adjustments we believe We're largely completed as prices were falling and we believe as we sit here today that many buyers' inventories are low as we enter a construction season. We've also seen PVC export prices not only bottom, but are actually starting to trend upward most recently. And in the domestic market, all the producers have announced price increases in the domestic market for PVC. So thinking about the guidance in PVC, It reflects the uncertainty on the trajectory of the domestic and global economy that's going to drive that business.

Speaker 3

And so while there's still this huge pent up demand we see in And the low inventories, there's still headwinds were from the impact of the higher interest rates, which now may not peak As early or begin to subside as quickly as anticipated. And of course, the pace of economic activity increases in China is just going to continue to be an impact to the PVC business, Globally impacting trade flows for PVC. So that's what's factored into this kind of murky outlook for PVC. The caustic soda business, we saw export prices, I discussed in my early comments, in the export of our decline, not just from the Impact the global economy from the China taking again longer to restart, but also European markets stocked up significantly on caustic soda as we went into winter. That certainly has started to loosen now.

Speaker 3

So you've gone from tight market conditions to looser market conditions and these operating costs Come down dramatically in Europe as energy prices have fallen. Our guidance on the caustic side of the business, this assumes it's going to take time for this unwinding of European inventories and a gradual opening of the Chinese economy. So but again, I would say, as we talked in the past, chemical business is still heavily weighted in domestic construction and global GDP. We're going to know a lot more about the total trajectory of the year than we do And sitting here in February, then we will maybe in May or June at that time, we've got a couple more months to look at it. So overall, that guidance for the year just reflects That uncertainty around both sides of the business at this point.

Operator

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

Speaker 10

Hi, guys. First of all, apologies. I was a little late getting on. So I hope my questions haven't been asked already, but A lot going on today. Vicki, I want to ask you about the Gulf of Mexico trajectory and the cash operating cost.

Speaker 10

It seems to me at least that this is an area where we've always had a little bit of it's been a bit murky to Just what the decline in the development backlog looks like from the legacy Anadarko portfolio, but it seems that you are doing a lot better on the production guide and the trade off Maybe it's a little bit higher OpEx. Can you give us your latest thoughts on what you see as the trajectory longer term for the Gulf?

Speaker 2

Our plan for the Gulf of Mexico is to continue to keep it at around the production rate that it's at right now. It's, as you know, a So we have the inventory and we have the plan laid out to ensure that we can we have The development ready to maintain the current level of production where it is. We don't intend to Significantly grow production. That could be part of the outcome of what some of the exploration development will lead to. But it's our intent and it will be lumpy.

Speaker 2

As we've said before, capital there will depend on our exploration successes, how those go and timing. But on the average, our production level should be about where it is today.

Speaker 10

For what period?

Speaker 2

I would say that we just picked up some leases as you know. We're now doing the preliminary work on those leases. I would say that our trajectory is certainly between somewhere between 5 10 years Of potential inventory to maintain what we have today.

Speaker 10

That's helpful. Thank you. My follow-up is a favorite question of mine. I hate to be I want to ask about your breakeven, but new onset a little bit. Obviously, we've had some inflation, your Breakeven capital, what do you reckon that is today?

Speaker 10

And I guess what I'm really trying to understand is how you think about dividend capacity as Part of that breakeven, let's say it's $40 is that become like a ceiling for your dividend thoughts? And I guess the clarification point, if I may, Vicki, is there's been a lot of questions there about DAC obviously. When you think about that breakeven, are you including The capital or sustaining capital for the DAC business as well? Thank you.

Speaker 2

Certainly, I would say that we are not including Capital for the DACs as a part of our breakeven or sustaining capital. If we were in a scenario where we were down in a $40 environment, Unless we had significant capital inflow from somewhere else, we would significantly cut back our development On the DACs, unless that development was supported by others. So I would say that when you think about the breakeven for us and I kind of wish we had never Brought that term up because it's so misleading to people. I would say the difference in where we are today and where Maybe we've been in prior times is that we keep a model of What it's going to take to support our dividend at various oil price levels and what we said is Still true that we want to ensure that we're close to $40 breakeven or less, so that if we're in that environment that we can still sustain the dividend. I never want to go through a scenario where we would have to cut it again.

Speaker 2

But what that breakeven really is, it's what would the price And the world looked like at $40 So you can't take our numbers right now and back into what it would be And expect it to be $40 We've obviously elevated our capital investment higher Then what it would be, what the calculation would show the breakeven is today. So breakeven for us means that if you're in a $40 environment, Then the supply chain, the services and materials, all of those things would be adjusted to that kind of environment, To that cost and in that environment, our cost would then be less than it is today on an OpEx And even labor costs, services, materials. So in that environment, we look at what would it take to ensure that we could Our dividend growth and that's how we would calculate that. So And sustaining capital is different. As I explained earlier, sustaining capital is where you have every asset, The investment level at the point where you're generating the best returns that you can generate from the infrastructure and facilities that you have and the resource that you have.

Speaker 2

So with what we're doing today, as we continue to reduce our cost structure as we continue to lower our interest from our debt reduction. And we've as we We'll buy back some of the preferred. We'll lower that cost as well. We use those two Measures as the primary way we can calculate how much we can grow our dividend. So as we're continuing to reduce interest, as we're continuing to reduce the preferred dividend, That will be the capacity available for the growth of the dividend.

Speaker 2

And to further get it to increase it on a per share basis, Our share repurchase program is intended to help with that as well. So it's an absolute number cap that we have As well as a share repurchase program that allows that dividend per share to continue to increase over time.

Operator

Thank you. And our next question today comes from Paul Cheng with Scotiabank. Please go ahead.

Speaker 8

Thank you. Good afternoon. Two questions, please. If I I have to apologize. I want to go back into the inventory.

Speaker 8

That number, how that will change for those that is for less than $50 WTI and if we change the And we have gas pipe to $250,000,000 and the internal weight will return to say 15%, 20% And also for the course, I mean, how that is going to get changed? That's the first question. And the second question that I think a lot of your peers that or at least some of them have signed the LNG supply agreement and one of your largest peers actually Make an investment equity investment in the LNG plan. Want to see if Oxy think that, That will be a suitable investment for you and what is the game plan there? Thank you.

Speaker 2

I'll take the LNG question first as Richard is pondering the other question. The LNG question, One of the things that we've always tried to do is make sure that we do things that are within our core competence. And so our core confidence is getting the most out of oil and gas reservoirs and handling CO2. So LNG is not something that we would want to be a builder of. And if it's something that we don't want to be a builder of or use As a part of our strategy in our oil and gas development and our low carbon business, if it's not a part of that, That's not something that we would put our investment dollars in.

Speaker 2

We're not going to go too far from what we know how to do the best.

Speaker 5

Hi, Paul. This is Richard. I'll try to answer your question on the inventory. I mean, as you think about sort of a discount rate against that inventory, Obviously, if it's higher that would change the numbers a bit, but we are still very strong in that inventory. For example, In the DJ, as we think about that program and we look at gas price fluctuations, we look at plus 50% type program returns Even at a lower gas price than what we show there.

Speaker 5

It will impact things, but I think in terms of the strong returns that we have, well exceed sort of our expectations on return on capital. And we continue to manage that inventory to drive really what we develop into those lower breakeven categories. Probably the other thing To say on that, basically the inventory this year with the wells that we drill are all less than $40 breakeven. So we've been able to high grade Ahead of time to make sure that we have sustainability of those returns, and as I mentioned earlier, the wells that we targeted to replenish 100% of our Drilled wells this year will expect to carry that same result.

Operator

Thank you. And our next question today comes from Roger Read with Wells Fargo. Please go

Speaker 11

ahead. Yes, thanks. Good afternoon. I'd like to follow-up Really, I guess, on the Gulf of Mexico, maybe secondarily on the EOR side, relative Capital discipline or maybe even aggressive capital discipline over the last couple of years for the obvious reasons. Just wonder how you're comfortable In terms of the outlook for the Gulf and also for EOR, just that, wherever your base declines are now, any sort of catch up Capital maybe to maintenance or anything like that, but it sets you up for flat in the Gulf and maybe flat to growing in the EOR over the next couple Just what you did to get comfortable with that outlook?

Speaker 2

Well, I think just starting to restore the capital to both of those assets Has been helpful and it is basically all that we needed to do. One of the things that we never stopped doing was Investing and making each of those operations better. And that's why a little bit of the increase in OpEx is making In the EOR business, getting some of the wells that had gone down during the pandemic, putting those wells back online, which increased our well maintenance budget, but those are very inexpensive in the high return barrels. So starting to do that and We didn't shut down any kind of maintenance around the infrastructure and no kind of decreases in capital around the maintenance of our equipment. So really it was more from the standpoint of Just getting wells back online for EOR.

Speaker 2

And in the Gulf of Mexico, we've taken the opportunity To work on the not only the surface to ensure that we could increase our Run time there with reduced capital and not being as aggressive with drilling wells out there, we were still By improving productivity by spending dollars on improving run time and also putting in subsurface pumping equipment to Expand the radius of our SPARs and to also increase productivity and extend Our reserve life is out there. So the work that we've done in the Gulf of Mexico has really kept us prepared to get back to

Speaker 11

Okay, thanks. And just as a quick follow-up, any issues with permitting anywhere on federal lands or in federal waters?

Speaker 2

I'm sorry, what was that? Permitting. Yes, permitting, since you're not so much federal onshore, but federal offshore. Federal Offshore, we've had not had issues permitting thus far. Even when the permitting moratorium came out, We were able to still get things done and get things approved.

Speaker 2

And so I don't see the permitting going to be an issue for us offshore at this point.

Operator

Thank you. And our next question today comes from John Royall with JPMorgan. Please go ahead.

Speaker 12

Hey, guys. Good afternoon. Thanks for taking my question. So just looking at your guidance for domestic OpEx per barrel in 2023, looks like it's up about 6.5% from last year and more in line with 2H of 2022, which I think Rob said in the prepared comments. Just comparing that with the 15% inflation on the capital side, can you talk about the gap there on why the OpEx inflation rate is so much better than the CapEx inflation rate?

Speaker 2

Yes. I'll just reiterate the comments I made about the Gaum and then Richard's got some information on onshore. For the Gulf of Mexico, as I was saying, some of the work that we did was just to prove up our ability to increase our run time there. And That in and of itself is going to increase your OpEx a little bit this year and a little bit for next year. But it's delivering in terms of barrels because as you've seen the Gulf of Mexico has helped offset some of the declines from other areas And some of the storms.

Speaker 2

So we're better prepared offshore now for higher productivity. Richard, do you have some on the

Speaker 5

Yes, maybe just a little bit on onshore OpEx. I mean, one major difference when you look at capital in that 15% And then kind of what we're seeing in OpEx is OCTG. While we have some exposure to that in our Kind of maintenance activities, it's far less pronounced and that was the single biggest category really last year for us. So really OpEx, it's been a couple of things. We break it down into inflation and then Scope and scope would be some of the maintenance activities like Vicki's describing for the GOM.

Speaker 5

So really 2022 from an OpEx perspective, U. S. Onshore, most of it was really WTI or kind of price indexed inflation, things like power, CO2 price ruts, which were a little unique there, gas processing, things like that. And really, scope was pretty well managed. Our maintenance activities picked up a bit at the end of the year, mainly downhole maintenance and EOR, As Vicki said, as you go into 2023, it's much more balanced.

Speaker 5

If you see the increase, there is a little bit of Inflation carryover in terms of processing in CO2 volumes Water management, compression, these type of things show up. But by and large, we've been able to hold that cost structure for OpEx pretty well. We go back really kind of Q1 2020 and look at those type of run rates and we've been very good holding our cost structure Probably the last thing I'd say kind of to the maintenance activity similar to the GOM. For us in U. S.

Speaker 5

Onshore, it's a lot about uptime improvement. So Continuing to work with our 3rd party gathering and processing companies and then within our fields to be able to Be resilient through weather and just sort of manage this production in a good way. So adding that uptime adds significant value to year and so some of our OpEx related activities have been focused there as well. Great.

Speaker 12

Thank you. And then Next one is just on the quarterly progression of production. And apologies if I've missed something here, but I see that the midpoint of production guidance stays the same in 1Q versus the full year, but you do have the Permian ramping and you have the Alhozan project Starting later in the year, so what are some of the moving pieces there that are kind of pulling things the other way? And then how do you expect production to progress throughout the year?

Speaker 5

Maybe I'll start just kind of U. S. Onshore perspective. Permian being able to Ramp up to the end of last year and really secure the resources by the end of the year puts us in a much better position for sort of steady state growth. However, The Q1, as we noted, is a little lumpy.

Speaker 5

We had about way ahead is about 40% less wells online versus kind of Other quarters in the year or even against Q4, a little lumpy on the Permian. And then really the movement part is the Rockies. We've been under invested from sustaining capital over the last several years. And so as we talk, resuming some activity there. We have about a Q4 2022 to Q1 2023 about a 15,000 barrel a day decline and that Steady's out into the Q2 and then we actually start growing in the Rockies in the second half of the year.

Speaker 5

And so that From an onshore perspective is a big part of that moving part. And then the other one is really our GOM weather assumption. So I think that's the other piece to consider when you look at the trajectory on total.

Speaker 2

Yes. On total, as Richard mentioned, Dom will be down a little bit, international up a little

Operator

I'd like to turn the conference back over to Vicki Hollub for any closing remarks.

Speaker 2

Thank you. I'll their diligent focus and pioneering work that contributed to so many advancements in our core cash generating and emerging low carbon businesses, So much appreciate all that you do and for always going above and beyond. So thank you all to the rest of you for joining our call today and for your questions. A good afternoon.

Operator

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

Powered by Quartr
Earnings Conference Call
Occidental Petroleum Q4 2022
00:00 / 00:00