Q1 2020 Earnings Call

Well, some 20 <unk> earnings conference call.

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Please note this event is being recorded.

I would now like turn the conference over to Jeff Alvarez, Vice President Investor Relations. Please go ahead.

Thank you Brenda.

Good morning, everyone and thank you for participating and Occidental Petroleum's first quarter 2020 conference call.

Call with US today, our Vicki Hollub, President and Chief Executive Officer, and Rob Peterson, Senior Vice President and Chief Financial Officer.

This morning, we will refer to slides available on the Investor section of our website. The presentation includes a cautionary statement on slide two regarding forward looking statements I will be made on the call. This morning.

Now I'll turn the call over to Vicki Vicki. Please go ahead.

[music].

Thank you, Jeff and good morning, everyone.

And the short periods since our last earnings call the actions taken by Saudi Arabia, and Russia, as well as the world wide spread of Cobot 19 have pushed all prices to the lowest level in recent memory and created significant uncertainty where the macro environment.

As oxy adapts to this challenging in evolving market her thoughts remain first and foremost with those who have been impacted by covert 19, we hope that this tragic situation passed as quickly and that you on your families will be safe through this crisis.

We were taking extra extra precautions to preserve the safety and health of our employees and contractors with minimal disruption to our operations.

Before I go any further only express my appreciation to all of the Oxy employees for your focus performance and delivered results. Despite the stress of the past couple of months.

I also think you advanced for the success I know you will achieve as we realigned our goals to maximize value through this recovery period.

That's mid March we have taken a series of decisive financial and operational actions. So that oxy has the resiliency to whether this difficult period.

In addition to reducing our capital budget by more than half, we expect to deliver an additional $1.2 billion of overhead and operating expense reductions in 2020.

All of our long term differentiators remain intact, and we are well situated for success when market conditions improve.

We had the best people in place to leverage our superior assets and we will continue to deliver outstanding operational results, including our ability to safely and quickly reduce activity in this low price environment, while preserving the integrity of our valuable assets.

Before I highlight our first quarter results at our efforts to achieve cash flow neutrality in 2020.

I would like to welcome Rob Peter send to the earnings call Rob was named to.

To the position of senior Vice President and Chief Financial Officer.

Before becoming CFO, Rob served as senior Vice President of the Permian Neal art since joining oxy and 1996, Rob itself key leadership positions, including serving as the president of the boxes Kim.

And a few minutes, Rob will cover our financial results revised guidance and debt management options.

Now moving to slide four.

To survive in this environment, we must continuously deliver best in class operational results and below cost operator, and the first quarter. Our core business did just that delivering industry, leading results with lower capital spending and faster time to market.

Our Midland Basin team set a Permian basin record by drilling over 7300 feet in one day and they did it twice in the quarter.

Our Texas, Delaware chain drilled a 10000 foot horizontal well in the silvertip area in 15 days over four days faster than our previous record.

In the DJ Basin, we drilled a 10000 foot horizontal well in under four days it reached our lowest average cost per foot for all drilling during the quarter.

We also set a new record for both major frac providers in the Permian with 18 stages Fracked and one day.

These accomplishments completed by different teams demonstrate consistently high performance across all of our businesses.

Our midstream business continued to provide flow assurance to deliver our products to market a differentiator that has become more valuable in the second quarter as the industry faces storage restrictions around the globe.

Well, we're shutting in barrels that have become uneconomic at extremely low price realizations.

[noise], which Rob will touch on in a few minutes.

Our midstream business provides us with optionality and routing barrels to obtain more favorable realizations.

Turning to divestitures, we did not disclose any additional material transactions in the first quarter as travel restrictions and the falling commodity prices have severely disrupted the market for asset sales.

Well, we remain committed to closing divestures overtime, we will not sacrifice value the close transactions quickly.

Given the market condition, we are no longer confident and raising sufficient funds from just divestitures to address all of our near term debt maturities, but have numerous options available, which Rob will highlight.

Since acquiring Anadarko, we've been working toward the sale of our African assets and previously closed on the sell in Mozambique, and South Africa.

Over the past few months Oxys had several meetings with our partners in Algeria to discuss areas for mutual collaboration and April we decided to continue operating in the country.

The Algeria assets have high potential then generate free cash flow at low commodity prices.

At the current brents trip, we expect to generate $100 million of annual free cash flow from Algeria, while investing $30 million some capital and 2020.

We continue to discuss the sale of our gonna asset, but recognize that this transaction is at increased risk given the current environment.

Now moving to slide five inside six.

We're taking aggressive action to protect our long term financial stability and the integrity of our assets.

We are lowering cost and moderating activity to achieve cash flow neutrality, while maximizing liquidity.

Well then four days of Opex failed. The automating we moved quickly to reduce cash outflows by reducing our S. DNA in operating costs beyond our original synergy targets.

Yeah, we cut our full year 2020 capital budget.

Our operating teams immediately launched initiatives to capture an additional $1.2 billion, an S DNA and operating cost reductions.

This will get us to a 2.3 billion dollar reduction from pro forma 2018, which is more than double our original synergy targets.

This is lowered our quarterly overhead consisting of best DNA other operating expenses and exploration overhead to approximately $400 million on a run rate basis.

I will reduce our operating expenses to $6.25 per be away in the second quarter.

Our capital reductions, we will result in a full year budget of $2.4 billion to $2.6 billion.

To achieve these cost savings, we modified our operating processes, we place a significant number of contractors with employees.

And reduced executive in employee compensation.

We are leveraging existing inventory to reduce orders for new or replacement equipment and were further consolidating vendors and we're utilizing created solution sets it such as reverse auctions to source commodities and surfaces.

The state in magnitude of our reaction demonstrates our recognition that the oversupply of crude must be addressed by all of us within a few weeks, we dropped down to two domestic rigs and had substantially reduced activity in Oman in Colombia.

We are also currently minimizing well intervention by taking a disciplined approach to downhole maintenance that preserves a long term integrity of our assets and reservoir is.

Despite these changes are operability remains high which we believe position so strongly compared to other operators.

As this downturn will inevitably stress all producers and operators base management proficiency will become increasingly important.

Oxy is well positioned with a large asset base and we had the reservoir management expertise established in our conventional youre operations to recover more barrels from existing reservoirs without the need to build a growth wedge.

Many of the same teams that established our capital intensity leadership and have Innovatively applied our advance subsurface modeling to the shale reservoirs are now applying their knowledge and skills to base management across our portfolio.

To preserve liquidity what are the most difficult decisions. The board made was to announced its intention to reduce our common stock dividend.

Those who know oxy understand that this was not a decision that we took lightly but one that we had to take to protect long term value.

We also paid the April 15th preferred stock dividends in common stock to boost our liquidity position, which is an option norbord may consider each quarter.

Going forward to our focus will remain on strengthening our balance sheet.

I'll now hand, the call over to Rob who will walk you through our financial results revised guidance and debt management options.

Thanks, Vicki turning to slide eight.

We are approaching the remainder of 2020 with a cautious outlook and have withdrawn or for your guidance and cash flow sensitivities.

To prepare for a prolonged low price environment, we're taking decisive action reduced cash costs.

The progress our teams have made in reducing activity in collaboration with our partners and service providers, while minimizing adverse impact has been a remarkable.

As Vicki mentioned, we are fully captured $1.1 billion of overhead and operating expense synergies in a repositioning our 2020 cost base with an additional $1.2 billion of overhead operating expense reductions that makes pretty fully realized this year.

We have also for the reduced our full year capital budget to a range of $2.4 billion to $2.6 billion, which will lower our second quarter capital spending to approximately $500 million.

Looking towards our 2021 and 20.2 debt maturities, we're taking significant steps to preserve liquidity, including the boards. The Nelson tend to reduce our common stock dividend and the payment of the deferred or the preferred dividend in common shares and little cashless second quarter.

We arent tend on raising as much cash as possible from divestitures and expect to raise over $2 billion in the near term. It may take a Florida quote divestitures excesses near term estimate as we're not prepared to sacrifice back today's challenging environment conditions.

As we pursued the batteries across our portfolio. We're also actively reviewing in about even our capital structure and often to be able to me at or near term debt maturities.

And this contacts we continue to review our debt management options, which could include the utilization of free cash flow continued asset divestures utilization, a lively manager solutions such as debt exchanges like that you maturities the refinancing of debt and accessing capital markets.

Additionally, we are monitoring the 2036 zero coupon note and they could be put to us in whole or impart. This October based on what the security is currently trading we may be required to retire up to $990 million a debt depending on the numbers, you're a coupon holders that she was exercised a redemption option.

At April 30, if we had $6 billion liquidity, including cash of approximately $1 billion and are you on utilize 5 billion our credit facility.

To date, we provided financial assurance through a combination of cash surety bonds and letters of credit made available to us on a bilateral basis and I'm not issued any letters of credit under our credit facility.

Moving to slide nine.

Turning to our financial results. The first quarter of 2020 is the first quarter since the acquisition close that we reported off your financial results without consulting Wes.

In the first quarter, we announced an adjusted loss of 52 cents per diluted share and reported loss of $2 on 49 cents per diluted share.

The difference between adjusted reported result is mainly due to $1.8 billion, a charges, including impairment of goodwill related to Wes and all other oil and gas properties and $140 million of costs related to acquisition, partially offset by a net positive mark to market gain on crude oil hedges.

Through the first quarter, we have expense approximately $1.8 billion and acquisition related costs and anticipate expensing into this $150 million integration cost this year.

In the first quarter, we had cash outlays of approximately $800 million related to these expenses, bringing the total including the amount paid in 2000 $19 billion to $1.7 billion.

For the remainder of 2020, we expect up acquisition related cash costs of approximately $250 million.

When you slide 10.

We have provided guidance for the second quarter of 2020 and expect to return Rabbani full year guidance in casual sensitivities once basin differentials and market conditions stabilize.

The production ranges, we a private sector provided for the second quarter are wider than in previous quarters after accounting for the uncertainty or potential shutting it beyond our forecast.

The second quarter, we are forecasting shut ins, averaging 45000 Boe per day of which approximately two thirds voluntary due to individual well economics would remain one third due to OPEC plus restrictions.

We expect shut ins to peak in June around 75000 Boe per day, our guidance does not account for potential involuntary shut in related to flow constraints, all oil and gas Guy. That's now includes out Jerry I think opinion operation.

I'll now turn the call back over to Vicki.

Despite our activity reduction all of our long term core differentiators remain intact. Our leadership is low cost operator track record of operational excellence and a portfolio of world class assets are competitive advantages that better position us for success when market conditions improve.

These attributes combined with our differentiated low carbon strategy are expected to drive our success and sustainability into the future.

Well now open for questions.

Thank you well now begin the question answer session.

To ask a question you May proceed Star then one on your Touchtone phone.

You are using a speakerphone please pick up your handset before pressing the keys to withdraw your question. Please press Star then too.

Police limit questions to one primary question and one follow up if you have further questions. You may reenter. The question queue. At this time, we'll pause momentarily to assemble a roster.

Our first question comes from Paul Chang with Scotia Bank. Please go ahead.

Oh, Thank you for more me.

Vicki I I know maybe it's.

True premature and then you guys just just focusing on putting out a fire, but with cope at my team get when looking at some point that you're what Paul selling oppose cold that my team out. If you then have changed a y'all operating and financial Palm Beach.

Oh, I'm not going forward basis.

I'm sorry, what was the last part part of your question Paul.

That you end up holds a cope up and I can't give way looking Oh opened as long as a whole. So now that may change Youre, a financial and operating problems like before that I thing.

I thought that merger you have been talking about potentially I find that San long term growth weight that you guys, making positive thing.

And that might be a debt to EBITDA Rachel into one then I'll hop time, where they'd be bands that we just Pos who'll went through how that may have changed on those pardon me test.

So certainly for us what the mother Cobot 19 situation crisis has done for US is it's caused a.

But of the near term <unk> focus for us to to do differently than than what we had set out as you know and there. The you mentioned, we had a 5% growth plan going forward, but what our near term priority is there's two.

It is to protect our cash flow, so preserve cash and and generate then growth in our cash but the way we'll do it we have plans for the near term we have plans for cashless neutrality breakeven in individually I low growth plan, but for the next few months then into maybe.

We ended this year and all through the recovery our focus is going to be on base production management.

So we have not abandon our long term future growth plans, but for now what we're gonna do is keep the capital as we've just said for 2020 and focus on.

Mitigating our base decline as you know a as we've often said our base decline right now is about 25%. So our near term focus will be on.

Optimizing the performance outdoor existing wells in existing reservoir is to ensure that we're getting all weekend out of those.

On focusing on for incremental barrels.

That helped to mitigate the decline will focus on developing behind pay pipe in the existing reservoir. So there's gonna be a lot more focus on our base production and our current assets rather than a drilling you growth wedges and the in this near term. So we're really excited about the facts.

That would this vast base of assets that we have everywhere. We are we have stacked pay so that stacked pay enables us to and those wells, where we don't see opportunities to optimize existing production to develop other intervals and bring those animals on at much lower cost then it would cost to do.

Drill and develop new wells. So the near term focus is just that is to mitigate our base production decline, that's optimizing performance from existing wells and using that mpas infrastructure to to help to lower our cost on a per unit basis.

I'm doing that probably through the rest of a this year and into the recovery depending on how long that last will be our focus ultimately I'm sorry, Joe has always that I fully understand yet on what you're trying to do but I'm trying to understand that on does longer.

He says.

Got it has said you Ben change the way how you'd look at the base, that's more <unk> and have you changed.

What you see how quite <unk> that you're going to use are you going to use it that low growth rate going forward with them the pipe at saying I admit that even a more strange and podcast thought that that's a good or bad I know, what they page Rachel or that you think yes. They will.

That's that's usually I think that it's really it's more my question.

Our highest priority will be to lower the debt so rather than generate.

You are have a growth target our target is more to take free cash flow to lower debt nimble structure, our capital programs around ensuring that we can do that we believe that but the assets that we have we can get to a scenario where are our system.

Any ability price is such that we can generate free cash flow in a lower price environment that free cash flow would then be used to lower debt. So debt will be the highest priority in the near term.

Over the Internet and when I say near term I'm talking over the next couple of years.

Our next question comes from Pavel Molchanov with Raymond James. Please go ahead.

So can you provide an update about the status of discussions with the stated Wyoming dying to sell a surface acres there [noise].

Yes, Oh, we [laughter], we are running a process to sell the land grant and that process as we kicked off this year early this year. We've just completed round one of the bidding process for the land Grant and we were pleased to that we had 13 bidders for.

The land grant so now we'll take that to around two of the bid process and a that's that's really about all I can disclose about that but where we're excited about what we've seen thus far we would expect to be able to close on that asset and probably late Q3 or early Q4.

Okay understood and so you guys have talked in the past.

Our carbon capture project.

Our investments in our and capture Oh, you given that quite funny, but.

So much.

Can you guys talked about carbon capture it into that program or any of the project.

The the way restructuring our development of the carbon capture was such that we were not going to have to put out a lot of oxy capital.

Because what oxy is providing to potential partners in our low carbon ventures projects going forward is the opportunity for others to come in and be a part of it we bring the the reservoir is for the C. O T sequestration, we bring now the land to build the facilities and we bring the XP.

Cities to take the C O two from those facilities and sequestered reservoirs. So what we bring to the table is our experience in our existing assets.

What others could as partners to us bring to the table, although the funds that will help us build us facilities.

Yeah, I like to add to that and also say that and the in them and they pursuit of these are the cash generation lower cost basis that this not only drives the cash flow neutrality, but there's also the opportunity to do so overall cost through it. So it's still very much part of our portfolio or or or a cornerstone to future development.

Yeah, they the and and the way we do that is that for our CFO to enhanced oil recovery operations. The two largest cost and that operation in fact, 40% of the cost is associated with the cost of C. O two and the cost of the electricity that's required to inject that C. O. Two were addressing both of those is low.

Carbon ventures, it's it's a lot more about sequestration. It's just a question. It's also about lowering our cost. So that we can take are they make our current C. O two business better as Rob a thing, but by making it better and less expensive. We can also expand that out into our shale play.

So that gives us the option to to grow that a lot more and over the expanse of all the shale play not only in the in the Permian, but then taking that once we have that bought model built in working and applying it a in Wyoming in Colorado as well.

Our next question comes from Doug Leggate with Bank of America. Please go ahead.

Hi, Thank you [laughter] excuse me. Thank you aren't good morning, everybody I hope everybody is doing well out there and raw welcome to all but have a bump is more fire I guess.

I Wonder if I could start coupled with you your your slides on the options for that I, just wonder if you can walk us through.

Oh realistic these options or what discussions have you had with buying some potentially exchanging refinancing.

<unk> I'll put a possibility on if you could clarify why it looks like you burned overbuild goals are to caution here knockers for perspective.

Okay I'll only the first the second question first the primary reason of the other cash was the payment of the dividend in April so that was the predominant use of cash in the and the month of April normally obviously, we don't provide or April cash or cash on hand during earnings call, but we thought it was important to put the most current information out in front.

A you know with regards to discussions with Oh, specifically had I certainly you know I won't comment on those.

But we do believe we have adequate liquidity for the near future based on the cash from operations.

No net asset divestitures, and the cost savings or what the associated.

Operational expense reductions that we've talked about already today. We're also wellhead <unk> hedged for the balance of 2020, a and we've taken that in combination with the steps to reduce our cost where the tragedy, which is going to help conserve cash and low price environment.

You know, we continue to look across the portfolio, but recognizing minimally SASSA satisfy all those 20 21.2 debt maturities without actually having more recovery.

But we do believe it at our disposal, we'd certainly be on the Oh. We currently have in places we do have I'd be a free cash flow that asset divestiture proceeds exchanging the debt and extend maturities and the refinancing the capital markets I'm. So I think we're taking those actions I do think those are all opportunities for us to address a those.

Near term maturities that are out in front of us.

So it'd be clear you think refinancing the markets open to you.

Absolutely.

Okay, but my follow up is on the underlying decline pickier since probably for you you talked about 25% I should not something missing if it's on the base business, but can you walk us through more thought moves like as an exit rate, including what assumptions you have for asset sales and obviously the bucket My mind you found on though.

Oh says isn't going forward <unk> exit it looked like and if you could.

What do you think the sustaining capital for that exactly is are there was such a number going into 2021 I'll leave it there. Thank you.

Well the you know our we've set our base decline is 25% and the reason I'm I'm hesitant to give you a number for what it's going to look like in Q4 is because of what we're doing now to refocus our our teams.

As I said in my script, we're gonna take these incredibly talented people who have done a great job growing up Permian resources, and we're gonna supplement them into our base production management teams and that's not to say we don't have also great people operating our base production management, it's just that when you're.

In a high growth mode, sometimes some of the base management doesn't get done as is diligently as as it is it should and can in an environment. Like this so we don't expect that our decline will will stay at 25% well. We expect is that we're gonna have teams.

To find ways to mitigate that decline by again bye.

Optimizing production from existing wells by virtue of changing artificial lift types.

By reducing back pressure on the wells and or by a doing cleanups, just doing acid treatments on perforations and things like that so theres optimization opportunities with the existing wells that are producing today. The other thing. That's a that's there is we've always had does this inventory of.

Of zones above and below the existing producing intervals in our wells that have capability to produce it's just that those were not I'm going to get us to the higher growth rates that we were executing over the last few years there there I'm perfectly suited for mitigating a base decline.

Fine, but not for an intense growth program. So we expect that those will help to mitigate the decline a that 25%. So it's hard to tell you right now what a Q4 exit rate would be we haven't put together all of our plans. The teams are working them, but I am very confident that.

From from Q3 to Q3, we're not going to have a 25% decline, we're gonna have something much less than that.

Dog and this is Jeff Paul had on your sustaining capital and you know like Vicki set I think the important thing to remember and you've covered us for a long time. If you go back before the unconventional boom when we really broad all that great inventory forward. Yeah. We were a base management company you look at our you know our business and what we're doing now in Oman, and Colombian and Qatar that as well.

We did so you know a lot of other parts of our business have been continued just stay focused on that now we'll bring that to the rest of the business even to a higher degree and we have a whole new dataset to do that but on sustaining capex I think what Vicki said you know it's worth pointing out why we don't give a specific number so let's talk about where we have disclosed previously we said.

And 2021 that our previous plan, our sustaining capital would be 3.9 billion at 40, W.T.I. I don't remember that was growing into 2021. So let's now talk about the building blocks and how we're doing against those.

Thank you talked about the decline right. Yeah. We've mentioned that that's kinda continue to get better. The other thing that helps out to current rate is we're not bring it on a bunch of unconventional barrels high decline barrels. This year, so you'd expect that to be better than what we said before starting production level. It was gonna be higher than what we previously or what we think now just because we're not grow.

And then to 2021 like we previously thought so that also gets factored in capital intensity as we've shown best in class capital intensity, you know on her on her growth areas and we continue to get better. So when you looked at the barrels we can add for every dollar spent I'm not only as a best in class. It also continues to get pass.

Her so again I help or on what yeah sustaining capital will be now what's kind of work against that.

It's obviously you know as Rob said spend and 350 million a quarter in the last couple of quarters that sustaining capital that we put out before what's kind of you know on ongoing basis tour you spent sometime tomorrow or the year before you had an activity set so when you start back up from the level, whereas we do expect to have.

Oh, some startup capital let's call. It that you know it's things like you know just why spend a dollar today I don't get production for a couple of months from that that will impact that period. When you look at that first year of sustaining capital yeah. The learning curve impacts you know, which always happen when you start back up on programs, but the great thing about that if you looked at.

Records, Vicki talked about and the Midland Basin, that's the area, we shut down in restarted and within a few months, we're setting records from an execution standpoint across the business because they took learnings from other parts of the business and were able to immediately apply him. So while we do expect in that first year, you would see some of that startup capital.

Come through in that sustaining capital number we don't think it'll be huge and then we'll quickly work through that so again as you're thinking about that sustaining capital you can take all those components in place and look at how the business is changing and what you would expect it to be but we do continue.

To be older believe we can drive that down.

I'll just use one more example, you know Bakken or in 2000, when I'm when Steve Chazen bought or the Permian Basin Altera. The their criticism of that was that he was buying harvest mode assets and I can tell you in Denver City now all these years.

Later these decades later, we're still adding reserves to the Denver unit, Oh still finding ways to.

And increase the reserves in their production there so with that is our niche and we do it well and we just got to refocus on it.

Our next question comes from Bryan singer with Goldman Sachs. Please go ahead.

Thank you good morning.

Hi, good morning.

Let's start with just a couple of clarification questions on a couple of points that you made first I think that Vicki in your comments that you expect $2 billion of divestitures coming in the near term can you clarify whether that includes versus exclude gone and include versus exclude.

And then also I think with also mentioned that accessing capital markets.

Solution.

Actual side can you talk to whether that is whether they're into consideration of equity a common equity issuance.

So I'll I'll talk about the divestiture or the 2 billion does not include gone huh.

And that's all I can say I specifically on that.

Rob.

Yeah, It with regards to be a issuance of common stock, it's not something that we're considering right now in light of the the price of Oh the stock.

Great. Thanks, and then my follow up more of a bigger picture you have a slide on the change in corporate governance on the back in that state that today's presentation. It given some of the recent changes both in the board parts and management. The dividend can you broadly discuss into conversations you've had with the board any shifts and focus our priorities generally are.

Typically relating to the urgency and levels of de levering.

M&A.

And the breadth versus concentration.

That's within the company.

Well I'll say I will say one thing that from a personal perspective I'm incredibly excited that Steve Chazen came back onto the board and as chairman of the board because Ah specifically, we didn't need help with with dealing with the debt situation in this environment and so from my perspective.

What I see with the board now is is his his ability to help lead us through.

Lets us what's a very very challenging environment for every company and in the world, but especially for US since we are we had these maturities coming up.

I think the I'm. The other experience that was brought onto the board and no Graziano and Andrew Langham is also an ability and experience with debt exchanges and also with with the dealing with with the debt situation. So those experiences a those three that we just.

Brought on a is going to help us through this environment and already helping us and creating value for us. So I think that we strengthened our board.

And the a in the way that we definitely needed to do in this environment.

Our next question comes from Ryan Todd with Simmons. Please go ahead.

Great. Thanks [laughter].

Maybe a a couple of questions on there.

Question first I guess on the on the Capex and Opex cuts going forward pretty impressive cost reductions in the near term a in particular, the additional $600 million topic can you can you talk about how you view the the sustainability of those cuts going forward I guess, both from a capex and the operational side are those the kind of thing that.

The necessarily to ramp back up as you start ramping back up activity levels or how much of those you think you can kind of structurally capture.

I think that does certainly the full 600, a millionaire criminal in the Opex is that that full 600 is not sustainable because one of the things that we did just to get us through this quarter, because we expected Q2 to be the worst quarter.

Well some people are encouraged by prices, where they are we still have a concern about storage. So we expect the end of may 1st of June to be a particularly challenging for us. So we wanted to make it through Q2 at the lowest possible cost structure. So the 600 million an opex probably about.

60% to 65% of that is it sustainable.

Part that's not is where we were going to need to bring back some of our well service rigs because currently we're in a mode, where since we yeah, we need to reduce production anyway to help with the oversupply issue as a as some of our well sell right now we're not putting those wells back online so as we get beat.

On this doesn't difficult period over the next month or month, and a half and start into the recovery. That's when we'll start bringing some well service rigs back at the point, where we feel like it's necessary to start and we had the cash to be able to do that so that'll that'll increase our cost a little bit, but we dropped those rate rigs significantly.

There's some other minor things that we would do differently, but.

But I believed that our teams may find as as we're doing this other opportunities to offset some of the costs in the activity that will need to start back.

And I'll just add to that I mean are building on Vicki point that you know one of the unintended benefits of the slow down is it allowed us to really stepped back and take a very deep look at the way, we do things and how he personally the business and it give us time to really in part this passion for cost reduction margin generation and.

Make that equal our passion for their growth we've had in the past so that we can really internalize a into our culture that this is the way, we do business and hold on to that as things turned the other direction eventually on the recovery one of the challenges if he'd.

It's such a short shock to the system, it's really difficult to move the cultural the business, but the things that we've done and the inspiration within our people to really get passionate about cost reductions of margin generation Dalton without moving forward I will pay dividends for the company.

Hi, Thanks, maybe a quality I'm sorry, just to finish that I think it speaks to the quality of our our employee base that that they are motivated. They found these things so quickly and that there they're excited about the challenge that we have and ready to to address it and achieving.

Your next question is Hey, Ryan can I had one thing because I think it's a pretty remarkable thing with what Robin Vicki side. If you look at our asked DNA, where we'll be on overhead well be at a level lower than we were as hoxsey standalone in 2018. So the costs that have been driven all the business by the teams.

As a remarkable and we basically doubled the size of the company and we're back to the same overhead before we did that.

That's the impressive I appreciate all the Oh, the clarity there maybe a follow up on the Permian I get it gets lost and everything else is going on right now, but well performance year to date in the Permian is again, showing pretty significant year on year improvement, maybe and maybe any comments on talks about the drivers of this is this.

There's high grading from lower activity levels or is that something that's a more sustainable as activity eventually ramps in the basin.

Yeah definitely sustainable it its basically a continuation of everything we're doing and applying those things I'm on the new assets and combined in the learnings from the boat so take internal learnings from yeah. The mill the legacy Anadarko acreage in applying that and new Mexico on things like regional sand or landing.

Points and development philosophy on the APC acreage I mean, we show you that silvertip slide you can see the level of improvements that are being made I mean, that's probably the most disappointing thing for me I'm in the whole thing that's going on as all of that momentum, but the teams have built up in those improvements that we expect to be sustainable.

Now going to kind of be put on the back burner, but we strongly believe we'll get it back quickly other thing I'll point out on the slide you're looking at Ryan is that now includes wells on the <unk> former APC acreage, but has the new design that we've talked about that outlets design those are in there and there are driving it.

Our performance improvement as well.

Yeah, I'll just below that to the you know what one of the a you know the investment thesis still remained and if anything.

Coming out of this because we have such a vast portfolio, we get high grade even further than we would've been able to a standalone oxy, our ability to come out with a lower cost lower capital intensity wells in choosing those it's much greater than would have been without the original Oh actually assets.

And I can't let this conversation them without also adding to date DJ basin. The performance. There has that that team that drilling team has been incredible. So we have to give a shout out to them. They continue to improve their performance.

Our next question comes from Paul Sankey with Mizuho. Please go ahead.

Thank you good morning, everyone <unk> Im trying to focus to volumes can you give us.

Detail on the base decline rates and talk about the various regions in the various mitigations.

So that we can try and get towards you don't know, but that is obviously less as you imply than the 25.

Some decline but.

Exactly where we should come out from that my question essentially is can you talk through the decline rates and the various components.

And how you're going to mitigate thanks.

Well I think that it's important to know what Jeff said earlier is that when you as you know the highest decline for the shale play is right in the first first year first year in half two years. So as we're slowing down the the decline of our shale production is going to start to.

Mitigate itself just by virtue of the fact that we won't be drilling is not as many new wells in fact, very few new wells. So so that decline is gonna be less than it traditionally is the email our business. We've said in the past is normally a 4% to 5% decline and that's when we're using all the the full.

Using our COO too we have some shut some of our C. O two wells and so that decline now could be actually a little bit mitigated, but it's gonna be versus a slightly lower volume not I'm not a lot of a production is shut in there.

So the the the middle East the conventional reservoirs are lower decline, but overall, it's hard to go through and look at each of those as we're modifying what we do everywhere. So it's really hard to give you a number that you could then rolled up into the single number. It's just know that we're working on the decline every way.

Where the shale decline will be less you are will be less where the production that's on a so lower than that 5% probably down to 4%.

With whats producing today.

And I guess, the other piece of that to witness that unlike typical a historical quarters. When we've been executing a development and growth plan. We're building a significant backlog of a wealth of existing wells at won't need to be read drilled or anything to bring that production back online. It's really that activity set that the Vicki mentioned around downhole maintenance et cetera that will bring barrels.

Back online and away different than we've seen and per year cores, which is really difficult to measure in light of not knowing where prices are the recovery trajectory right now.

Thank you and then the second and final.

This was the court's it's a calculated cash flows because of the mix of oil price can you can you talk about what sort of cash flows. We can expect from you current price environment and.

Let's say for example, the sensitivity if we believe the strip which is currently.

About $25 a barrel for next year I see excuse me.

$32 barrel is the April next year strip could you give us a sense for how much cash flow would be generated in those two departments current and future.

[noise] Paul I can tell you. It this is not going to help you at all I was trying to think of away to help you with your model here, but.

<unk> pretty much where we once we get past Q2, we are we'll be able to balance our our cash flows.

Inflows with our outflow so we'll be will be neutral in Q3 in Q4, but I'm not I don't think we've given you our price assumptions either so I'm not sure that helps you at all.

But the sensitivities I would say that as our production declines about the sensitivities have gone down a bit they're not at the <unk> dollar change in oil prices equal to 250, Oh, so they're not quite there yet they have declined a little bit we again, what that ends up that sensitivity ends up being depends on how.

Much we can mitigate the decline as we go.

Our next question comes from Jeffrey Campbell with Tuohy Brothers investment Research. Please go ahead.

Hi, Good morning, a weve got to beat on the dead wrong quite a bit so I thought it asked a couple of different questions. One is looking forward.

I see continuing to pass technical solutions to reduced head count and improved performance and to give an example of what I'm thinking about.

Automated directional drilling seems to be getting some increasing traction.

Yes, a where we were going to push the envelope on everything now and that's part of the reason we've been able to reduce our SGN a significant leaves our teams are leveraging I'm technology and automation as much as we can we probably have a one of the most automated areas in our Permian Eagle our business.

Yes, I with respect to the drilling, yes, where we're pushing the envelope there too.

Because you've seen the improvements and how we're drilling our wells. So there's much automation is we can install we are in part of that automation is a it's gotten us beyond where in the drilling.

Area, where we need the typical you know to push around the drilling rig or the drill or a two to manage the process, we actually build models by which they the computer can basically do the the drilling of the well.

Did it takes an engineer to to help to build those those models, but once they're they're automated then it's a process of just a then tweaking to to get better.

That's on the drilling side on the filled operation side to our C. O. Two operations are very highly automated we can actually manage those from a a central control room. So we are we're managing that as we've.

Improved and started to better rely on our artificial intelligence with respect to well productivity and those sorts of things and what well should be doing versus what they are.

That's part of what I was talking about when I said, we're modifying our production processes will depend more on managing letting those tools that help us manage which wells are really need any kind of fiscal or visual onsite versus being able to completely managed from a control room. So there's lot of autumn.

Nation that that we've installed that's going to help us move toward this toward a lower a much lower as DNA environment.

Yeah, so that two ways as it is also you know we're doing a a vast look our portfolio to what when you have a portfolio as large as oxys and you can't apply the same sort of techniques in approaches to every bit of the portfolio and so this is allowing us time again to reprioritize some bucket our portfolio in areas, where in some cases, we may be very.

A quick to bring a while back production or in other cases, we may leave wells down for an extended period of time or not he was the same type of approach to actually how we're gonna main paying the well or how to automate the well and this sort of not a one size fits all approach has also bringing a lot of savings and not only that but also in them or people are required to to continue to operate the fields we operate in.

Oh, Thanks, I appreciate the detail color and just quickly get back to something that you mentioned in the prepared remarks regarding Algeria as one I'm actually I understand this is it your intention to operate there now.

Tell price recovery or have you decided that it is a core asset going forward notwithstanding what's even offer to buy that can't be reviews.

It's a core core asset going forward and and if we got an incoming offer for Algeria that was something that we couldn't reviewed refuse we would certainly need to.

Ah coordinate that with sonatrach and with the where the ministry of oil because it's one yeah. We do have partners and that's the way. It is a working internationally Oh, sometimes you then decisions need to be coordinated and we need 'em, we need to be committed there were committed to to be there and to do our best too.

The increase value and enhance the operations and we believe we have the opportunity to do that it's a great asset <unk>. Its one of them one of the best assets that Ah that's in that region. So we we're excited about it and then we're gonna stay if again, if someone came up and it made an offer that that we can review refuse.

I'm sure the Ministry would be interested in that as well.

Okay, great. Thank you appreciate it.

Our next question comes from Leo Mariani with Keybanc. Please go ahead.

Yeah, Hey, guys just wanted to a after a couple of house keeping items on some of the guidance here I insist second quarter, you guys talked about a 45000 Boe per day shut ins I was hoping to get a little bit more detail around you know kind of what you're regions Ah that's kind of split up to that.

Also on your midstream guidance and you guys are saying negative 310 and minus 350.

I guess pre tax income you no significant change you know versus first quarter. I was just hoping you could kind of a you know elaborate on some of the reasons a in the big change on the midstream.

Hi, This is Jeff I'll start with those and then picking Rob can jump in so yeah that as you mentioned you know for second quarter. We're estimating 45000 barrels of you know shut in production one third of that as Rob said as Oh pack plus related so you can realistically I assume that's.

From home on Algeria.

The remainder as domestic and that's an economically driven and the best way to think about that half of half of that the domestic part is from the Permian, which was the yarn resources and then the other half dozen the Rockies and just to give you a little color so that 45000 barrels a 3% production compared.

Our guide a number of wells were shutting them is about 9% of are well count with that so as you would expect you know you've got you know a proportionate yeah, a lot more wells being shut down because you're on the low end of that economic curve and you do production being shut in.

My first 1% of production, we shut in as about 5% of our wells. So that's just gives you some perspective in color and when people talk about shutting in wells. They use all kinds of descriptors you know whether they are temporarily abandoned what the bridge plug or just turn it off artificial lift or things like that and yeah. We're we're definitely doing this in a way that.

Ventures, we protect the reservoir and the well integrity and also that we can start back up at the lowest possible cost.

So in your question about midstream.

We can go through this offline a lot more detailed because as you know that business has a lot of moving pieces, but the primary difference you know and that the Q2 earnings estimate versus what we saw in Q1 is almost entirely timing driven we recognize the large mark to market gain related to your hedge position and as prices fell at the end of Q1.

That impacts Q2, so in Q2, those same low propane prices are impacting the revenue will realize on our physical barrels when they're delivered we can talk through that more offline, but that's that's the primary driver of that change.

Okay. No that's helpful for sure and I guess just your second question here in terms of a you know philosophy I was just trying to make sure I'm sort of reading it correctly in terms of what Oxys plant is a you know for the next couple of years I. It sounded to me is though I just given the pending 21 in 22 maturity that.

The company is going to continue to.

Focus on just mitigating declines until there is much better line of sight for taking care of a lot of those maturities or for actually taking care of them. You know what every pfizer exchanges or whatever just wanted to to make sure I sort of understanding that correctly that the message you guys are kind of liberty.

It depends on the price environment, but primarily a this year it'll be a decline mitigation going into 2021, it depends on how strong the recovery as a lot prices, we see in 2021, Oh, there's the potential that we could add a few more rigs back.

But it would still be a scenario, where we need to generate some <unk> free cash flow as well. So we would balance what were the activity level with a with achieving some oh free cash flow generation after capital.

Our next question comes from Josh Silverstein with Wolfe Research. Please go ahead.

Thanks, Good morning, guys and as part of the debt pay down strategy them I'm circuits arsenals before but would you consider equity as part of this as well.

Like the baseband right now is to pay the preferred with $200 million I'm sure as each quarter. So we're not just do a a larger equity deal to help on the with the balance you right now.

No we didn't touch on that'll earlier and <unk> the current share prices, where it we don't have an intention on issuing additional equity to pay down debt.

Got it okay, sorry about that and then you mentioned the 5 billion dollar credit facility that you have available right now how much of that can can you used to pay down debt right. Now and then secondly, you know you hadn't asked until target before that was used to pay down debt you guys now have a <unk> absolute debt reduction target.

Where are you ones get too.

So we can draw on the credit facility at any point in time, a were not drawing on it because we don't feel like there is any arista drawn on it at any point time that we need it in terms of a debt restructure that I've told that number to get too you know what the goal is ultimately over time to get back from an investment grade.

Type rating, that's what our current passes.

Our next question comes from Janine way with Parkway. Please go ahead.

Hi, good morning, everyone. Thanks for taking my call.

Just wanted to follow up quickly on Josh its question right now.

In terms of that announcement and the revolver.

No I believe.

Sure I don't think there's a trigger on it I just because you're going.

I'd, hi on Saturday, but I have that correct.

Do you anticipate that sometime down the road that you might need to an RBL facility that might have elaborate.

That's correct, that's a cat covenant.

Oh, Yeah, Ginnie and you do have that correct on the current RCR facility, a and we don't see a need to go and RBL type facility.

Okay, great. Thank you for taking my question.

Our next question comes from Richard Tullis with capital One Securities. Please go ahead.

Thank you good morning, everyone I'm going back to the mid stream quickly.

Under your guided pretax losses, the first half of the year, partly driven by the timing issues that Jeff just discussed what do you see is a more normalized yearly pretax income run rate for that business going forward.

Hi, Richard This is Jeff I'd put that in the category of.

Well, we didn't guide for here, so I mean that Theres, just so much volatility and all of those markets that I'm, we didn't feel comfortable providing guidance beyond the quarter until we see more clarity on how things play out from a recovery differential standpoint, and all of that so.

Well well defer that I would tell you I mean, you understand the building blocks of the business you know or assets that go into that in the middle East and Cogen and some of the other things those are still there and still good assets I'm. So their third there. It's just the volatility around you know all the other aspects on the marketing side.

Fair enough and as a follow up.

If I'm too towel does not move forward with the gone out acquisition do you do you see.

Yes immediately what do you need asset write back on on the marketing sale block or maybe you're doing that now and then secondly are there other asset that maybe you weren't looking at digest and at the time of the Anadarko acquisition announcement that maybe you look at now in a in a better come.

Odyssey environment, just given you know the difficulties close and the Algeria, a deal et cetera.

I would say, yes to that gone is a an asset that we still consider to be up purcell, whether to tell buys it or not it would still be up for cell and and there has been some interest in it. So that's something that we would still pursue divesting.

And I might have thought I think I said earlier, but let me reiterate that at the early beginning of the year, we when we looked at Algerian gone as as a divestiture targets. We wanted to have a an alternative and the alternative that we came up with would deliver a similar.

Similar proceeds when are they similar reduction in cash flow. So we started marketing in early this year and alternative to the sale of Algeria and gone up we started that process and as we got into the process.

All the travel restrictions on where applied and a this is one of those things, where we need people to come in and we need to do management presentations, we need to dive into details with the technical team that's assessing the value of that asset. So it's it's one that requires a little more interaction. So we have put that on.

Hold right now as we wait for travel restrictions to be lifted and for the environment to to get better, but we do have other assets to sell that's the alternative a that I'm talking about is just one there are other things that we can do with some of the acreage in the Permian and potentially even in the DJ with respect.

To.

Even if it's not outright sales its davies, where we could generate some cash up front and then a potential carry their other there lots of other options, but no. We don't want to do is do it in this environment. So we it really depends on when the cut recovery occurs how strong it is a as to the timing of those.

And that's why I'm, we're not going to put ourselves in a situation, where we get closer to debt maturities and then where we found mccann execute the divestitures before the maturities occur, but we've got we've still got asset sales that we can do and and we'll do it as as they make sense today, but we're gonna <unk> make sure that we can get maximum value for that.

Yes.

In the interests of time. This concludes our question answer session as well as today's conference. Thank you for attending today's presentation. You may now disconnect.

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