Q2 2020 Occidental Petroleum Corp Earnings Call
Good morning, and welcome to the Occidental second quarter 2020, <unk> earnings Conference call.
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I would now like to turn the conference over to Jeff Alvarez, Vice President of Investor Relations. Please go ahead.
Thank you Andrea.
Good morning, everyone and thank you for participating in Occidental Petroleum's second quarter 2020 conference call on the call with US today are Vicki Hollub, President and Chief Executive Officer, and Rob Peterson Senior Vice President and Chief Financial Officer. This morning, we'll refer to slides available on the Investor section.
One of our website. The presentation includes a cautionary statement on slide two regarding forward looking statements that will be made on the call. This morning.
Ill now turn the call over to victory, but can you. Please go ahead.
Thank you, Jeff and good morning, everyone.
On our first quarter earnings call, we outlined the cost reduction measures implemented across our company to adapt to the immediate crisis as a pandemic into the ensuing market volatility I'm pleased to be able to say that can do a few months ago.
Our financial position has notably improved as we are currently free cash flow positive and expect to generate significant free cash flow over the remainder of this year. Thanks to the relentless efforts of our team as well as the moderate recovery in commodity prices.
We're determined to build upon this progress ever mindful that cobot 19 remains a threat to the global economy. The demand for the products, we produce and to the health and safety of our employees and their families but.
We continue to manage our employees as carefully as possible through this health threat.
Ensure that we continue to be position for success through the cycle. We are permanently embedding many of the implemented cost reductions into our repositions cost structure.
This morning, I will provide updates on our base management optimization progress.
Pathway to and capital required to sustain our production and our cash flow priorities, Rob will cover our financial results current guidance and debt management progress.
Turning to our second quarter results, our business has outperformed expectations, despite a slowdown in activity.
Production from continuing operations, a 1.4 million deal we per day exceeded the midpoint of guidance by 36000 via we per day.
Outperformance was primarily driven by our consistent focus on efficiency increased uptime and base management.
Operability remains high across our oil and gas operations and we've reduced downtime across the legacy of the dark of acreage faster than originally planned.
The maximize economic benefit from our existing base production, we have increased production by de bottlenecking surface infrastructure mitigating decline and reducing operating costs.
We are employing remotes surveillance processes utilizing artificial intelligence to further enhance our predictive maintenance schedule.
Optimizing artificial lift systems.
Oh hang in additional wells to centralized gas lift and reducing back pressure throughout our gathering systems and facilities.
In the Permian, We also continued to lower our water handling expenses by increasing utilization of the west infrastructure.
Domestically, our midstream and marketing business has consistently reliably delivered our products to market at times when other operators may have curtailed their production.
The close integration of our upstream and midstream businesses enabled us to shut in less production than originally planned.
The second quarter shut ins averaged about 29000 Boe per day of which approximately half for Opex plus related.
Shut ins peaked in may at approximately 47000 daily per day.
We have now brought back online the majority of the domestic production that was shut in for economic reasons, but no drivetrain detrimental impact to well performance across our portfolio.
We accomplished this would total oil and gas operating costs of $5.27 for be away and domestic operating costs of $4.69 per really significantly exceeding our guidance of $6.25 for me away.
Although a portion of the significant cost reduction relates to a deferral of activity. We expect our reposition cost base to lower full year operating cost on a daily basis over 15% compared to our original 2020 guidance as we maintain low operating costs in the second half the year either with declining production.
[noise] our teams are continuing to deliver exceptional operational results as they deliver better than expected production that lower than expected cost.
This quarter, we achieved our combined overhead synergy and cost reduction goal by increasing.
Are decreasing our overhead cost to below $400 million on an annualized basis, we have fully realized $1.5 billion. The total overhead savings versus our original synergies target of 900 million.
We exceeded our original cost synergy targets and delivered these savings in less than a year. After the close of the acquisition a full year ahead of our original to your plan.
We expect a more than 90% of the additional cost savings will remain permanent in future years.
Also reduced our operating cost by $800 million, which is an additional 600 million more in our synergy target of 200 million, we expect more than two thirds of the additional operating cost savings will be permanent even as we returned to normalized activity levels.
Our capital spending was below 400 million of the in the quarter, demonstrating our agility and adapting to changing circumstances, we're committed to spending within our 2020 full year capital budget of $2.4 billion to $2.6 billion and intend to moderately increased drilling and completion activities in the third and fourth quarters.
We are restarting activity with our JV partner in the Midland Basin, there will be running two rigs there by the end of the third quarter. We're pleased to be continuing this development would echo petrol is an excellent partner for us.
In the DJ Basin, we will begin completing a select group of high return drilled but uncompleted wells.
We will also selectively resume activity across other assets, including completing key developments sections in Permian resources within greater sand dunes and silver to during the fourth quarter and the Gulf of Mexico, where restart restarting our drillship that was idled earlier in the year.
It's all of our businesses continued to outperform they have also stay true to our core value of safety for all.
This includes all of our people in our operations our employees our country contractors in the public.
Certainly our oxy, Kim and Gulf of Mexico teens demonstrated their safety commitment by setting a new all time safety record for their operations.
Joining a others in our company who have also accomplished record setting safety performance is we're proud of them all.
In the second quarter, we continued to execute on our divestiture program in June we closed the sale of our greater natural abuse asset and Utah, Although the asset accounted for 33000 deal Weve per day in the second quarter, the cash flow impact from the sale. It's immaterial as the asset did not generate cash or income with gas prices below two.
Dollars at 50 cents per Mcf.
Well, our Rockies production will now be lower this year the remaining barrels are higher margin.
We remain highly confident in closing over $2 billion of divestitures and 2020, and we'll close divestitures in excess of that amount overtime. As we've said before we will balance divestiture timing with value realization will not sacrifice value just to close transactions quickly.
During this downturn based management proficiency has become increasingly important and maybe the best described as multiple small actions compounding and having a sizable impact on the long term decline rate.
Yeah actions, we're taking today may not be highly visible within the quarter, but remain in effect of way to mitigate our decline rate overtime expand margins and minimize the growth where it's needed in future periods.
As an example, we set new Uptime records in New Mexico, The DJ Basin and on the Lucius platform by automating more processes, where possible. We are applying these learnings across our all of our portfolio.
Earlier this year, we swiftly and decisively maximize liquidity by lowering our capital budget and repositioning our cost base, while maintaining the integrity of our assets.
Some of the near term actions, we took where activity based which will cause our production to decline through the rest of year.
However, our asset base retains its full potential which will enable us to stabilize our production through the allocation of capital through our highest return barrels.
We expect approximately $2.9 billion of capital will be required to sustain production from our 2024th quarter right.
At this capital spending level, we could keep production flat at approximately $40 WT Guy.
This is a significant reduction from the sustaining capital 3.9 billion. We previously communicated for 2021 and is a testament to the progress we made in stripping costs out of the business.
The optimize capital activity in the second half a 2020 will help serve as a bridge to build momentum into 2021, as we thoughtfully ramp up activity.
Our teams continue to optimize development plans to safely extract more value for less cost.
Our approach to stabilizing production will involve exercising capital discipline spending within cash flow and selectively allocating capital we do not intend to grow production until we have significantly reduce debt. We view the long term price of WT ought to be sustainable at higher levels than where the current curve indicates.
And any eventual growth scenario, we expect an annual production growth will be less than than the five per cent per year that weve previously stated.
Well, our dissolved desires to at least stabilized production next year, our 2021 capital budget will depend on what market conditions are indicating when we roll up the budget in the fourth quarter.
Well communicate our full 2021 capital budget and our future earnings call.
On our cash flow priorities slide we've updated the framework for how we will prioritize capital allocation and excess cash flow going forward as we move towards putting 21, our top priorities are to stabilize and maintain our low cost base production and to further de lever.
We intend to return to position, where we have the ability to deliver solid returns and again distribute more capital to shareholders with the support of the strengthened balance sheet.
I'll now hand, the call Overdraw, who will walk you through our financial results revised guidance and debt management progress.
Thanks, Mickey turning to slide nine in the second quarter, we announced the adjusted loss of $1.76 per diluted share and reported loss of $9.12 per diluted share difference between adjusting the horizontal primarily due to $6.6 billion of after tax impairments related to declining oil prices just at the lower end of the six.
$9 billion, so we communicated in June.
Additionally, we incurred approximately $100 million, a bet charges, including $149 million and acquisition related transaction costs, which was partially offset by a gain on pension curtailment.
Our commitment to capital discipline liquidity preservation was evident as we exited June with approximately the same cash Bellevue reported for April Thirtyth, we've reduced our capital spending the $375 million more than 20% below our second quarter guidance.
Progress in reducing costs was equally impressive as reduce overhead below $400 million in second quarter and decrease our oil and gas opex by more than 40% versus the prior quarter.
Provisions in new ideas, our team identified reduce cost and quickly adapt to a low commodity price environment. It's as one example of how dynamic and nimble our company is.
Including the amount expense in 2019, we have now expensed approximately $1.9 billion until acquisition related costs do not anticipate incurring additional material acquisition related expenses. This year in the second quarter. We had cash outlays are approximately $125 million related to these expenses, bringing the total including the Mt paying 2019.
$1.8 billion for the remainder of 2020, we expect to incur actually the cash outflows of approximately $150 million.
We restored our guidance and cash flow sensitivities for the second half of 2020. So we continue to have a cautious outlook as a macroeconomic environment remains uncertain and.
In approaching our production guidance for the third quarter and full year 2020, we have taken into account a number of factors, including the loss of 33000 Bu everyday associated with the divested GMB asset third quarter production will also be lower do a combination of scheduled maintenance and seasonal contingencies for weather in the Gulf of Mexico, the impact of higher prices on production sharing.
Cost contracts.
Active ethane rejection of the DJ basin and declining web based production across all our assets.
We expect third and fourth quarter production shut ins averaged approximately 20000 Boe per day due almost entirely to opex plus production restrictions.
As a testament to the strength of our base management cost reduction programs. Our full year 2040 production guidance remains in line with the guidance midpoint, we've communicated and our March 25th press release, our capital budget is expected to be $300 million less adjusting for Algeria and GMB.
Our full year 2020 production guidance also reflects the outperformance of our business in the second quarter as higher than expected production essentially absorb the OPUC plus restriction a breakdown our third and fourth quarter production guidance is available in the appendix of the earnings loss.
We expect our production change from Twoq to our Threeq guidance will be greater than our base decline. This is due to the timing of activity and bringing wells online, which impact the size of the with especially over a period where activity changed significantly. We're pleased that our annual base decline rate of only 25% remains intact. Despite significant reduction in our operating.
Cost as a higher decline of our wedge production from newer wells natural tapers off overall corporate decline will level out as demonstrated by the difference between our third and fourth quarter production guidance.
The $2 billion and notes issuance and tender offer we completed in July are a key part of our effort to address near term debt maturities loving our debt maturity profile will allow us to continue our vestra program at a pace that reflects current market conditions without sacrificing value.
We continue to focus on during as much value and cash as possible from divestitures and our expectation on raising over $2 billion in 2020 remains in place.
Workforce closing these additional divestures, we continue to make significant steps to preserve liquidity for example, the payment of the first dividend common shares in lieu of cash in the second quarter and resolve our cash preservation efforts, our liquidity position remains robust today, our $5 billion credit facility remains undrawn with no letters of credit outstanding and we have approximately seven perfect.
$2 million under 50 cash available as of July 31, I will now turn the call back over to Vicki.
Thank you Rob.
Looking forward I am confident Nazis continued success, we have one of the high quality asset bases of any company in our industry with a competitive advantage in the areas, we operate due to our scale and unique operating and development expertise.
Hi, this expertise to our diverse portfolio provided us the optionality to manage through this crisis.
We will continue to optimize our cost and capital allocation and cost our portfolio of high return short cycle opportunities.
This will enable us to maneuver through the near term volatility.
Facilitate profitable free cash flow growth in a normalized commodity price environment.
Enhance our ability to de lever and generate substantial free cash flow and a higher priced environment. We've taken these steps to succeed during this transition period, and we expect our differentiators combined with our low carbon strategy to drive our success and sustainability long into the future. We'll now open the call for your questions.
We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.
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Please limit your questions to one primary question and one follow up.
If you have further questions you may reenter the question Q.
At this time, we will pause momentarily to assemble the roster.
And our first question comes from Bryan singer of Goldman Sachs. Please go ahead.
Thank you and good morning.
Good morning on.
I appreciate the greater color with regards to the maintenance scenario and you talked about not wanting to really invest for growth until the balance sheet. A sufficiently delivered can you add some greater color on what commodity environment and leverage would you deployed the maintenance scenario that you talked about here versus something more or something less.
Well, what we're looking at as quickly as we go forward as are our debt reduction combined with our cash flow from operations. So the driver for US is to first of all ensure that we we have the liquidity to go forward. So we have the ability to meet our maturities and then the second is too.
Ensure that as where.
Processing through our asset sales that we're preserving the cash flow needed to enable us to do the things that we need to do sustaining capital and ultimately when we get to the point, where we see that that balance has turned for us where we have a lower cost structure that enables us still to meet our armed.
Territories with cash flow from operations, that's the point at which we would start to consider the next level down on a cash flow priorities switches is growth after the dividend. So the first the maintenance second debt reduction then sustainable dividend and then growth.
And then is it fair to say to fall in fair to say that at current commodity prices you would want to be in that maintenance mode or would you guys or would you be at some maintenance mode.
It really depends we we intend to improve within cash flow to sustain our production. So that's the intent that and in 2021 with such a low.
Sustainability capital required we do expect to be in that mode.
At least.
Great and then my follow up is with regards to the asset sale targets can you did the greater natural beauty sale brought in $69 million. Your goal is to plus billion dollars can you just give us any color on how that said thats progressing and then if there's any broad range. When you talk about the two plus $1 billion of the EBITDA or how much.
How much EBITDA.
And would be would you would expect could be would be given up to achieve that target.
Well first of all on I'll say, we're on track with our asset divestitures, it's going well we reported in last earnings call. The we've just completed round one of the land grant.
Process.
And then that process. We got 13 bidders. We had done commented that we expected that we had the process that we would be able to close on the land grant acquisition in the third quarter or fourth quarter being late third or early fourth quarter, we're still on schedule for that.
And the update on the progress there is that.
After the first round, we went through and evaluated those bids then we finished the second round in the second week of July now we have selected a bitter to proceed with them. We're working on due diligence and the purchase and sale agreement agreement with a bit or that we selected so.
Yes, there longer timeline for this divestiture is due to the meticulous work that really goes into a deal with so many different parts of such size, but we're on progress there and I do expect that we'll get the two plus billion divested by the end of this year. We also expect another.
Two to 3 billion of divestitures in the first half of next year and some other things that's driving the timing there is that.
Oh that while we've had some companies that have tried to be opportunistic with us and in terms of Oh higher divestitures and tried to to get our assets at a discount. We've we've discarded those are moved to the more serious bidders and some of the more serious bidders are working diligently on on.
On armed divestitures, but the problem there having is putting their model in place and.
And.
Having being getting more comfortable with lots of pricing environment will look like Fortunately these more serious.
Companies that we're dealing with now have will have a much stronger longer term view of the of oil prices. So we're confident about the additional asset sales and expect to more than achieved.
The lower end of our target of 10 billion.
Hey, Brian This is Jeff and just for clarity on the GMB sale.
We received 87 million and consideration 67 million upfront with a $20 million contingent payment based on oil prices just so there's no confusion there.
Well.
Our next question comes from Doug luxury of Bank of America. Please go ahead.
Thank you good morning, everyone on Vicki Thanks for the walk through and although the progress you've made so far I guess my first question might be for roll up and robust light could just do a little mass with you if thats, okay. So I understand.
What you're trying to tell is this morning so.
So Vicki basically said that you think you can sustain the the top the maintenance capital level of $40 oil.
Then she also said that you expect to be able to deal with debt maturities from operating cash flow. So I want to take it was too.
Data points and move to slide 11.
So in 2021 that looks like you've got about $4.5 billion an outstanding.
2.9 billion goals of capital.
Sustaining capital 800 million goals as preference shares.
Dividend, assuming that's paid in cash and then you're seeing a little over $2 billion with disposals that would get you to a little over 6 billion of operating cash flow $40 oil and mining ballpark.
Well.
Doug.
We've updated our guidance as you know for second half of this year and told you to go along with what what you've outlined.
And so and the case at 21, we did provide the sustaining capital guidance.
The 2.9 billion that Vicki reviewed in the fourth quarter.
Holding production flat the fourth quarter.
And I think it was noteworthy on that is at the last time, we provided sustaining guidances Standalone company prior to the acquisition.
It was 2.5 billion to hold settlement 15 to set our 30000 barrels a day of production.
Things are 2021, sustaining results and roughly 60% higher production for 2021.
The only 15% more capex and so with that said breakevens going into 2021 are dependent upon more than just oil price, including performance of our midstream and chemical business, whether or not we do as you said point pavey.
Preferred dividend in cash versus common and so rolling it all together as part of that pulls on plan for 2021 that Vicki mentioned that we would put together as the year goes along and the later part of the year, how they're happy with our board of directors and ultimately.
Make that available to the market on what we think our breakeven number is for 2021.
Okay I understand forgive the part B to my first question, but just to be clear launched when you gave sustaining capital rolled products, we see point $9 billion for the combined company.
And at that point with a 2.8 billion goldex dividend and an 800 million gold to press the breakeven suggested to the market in the middle of last year was $40 oil.
Now obviously production declined a bit since then but I'm just trying to basically get to the equivalent number that you gave us a year ago, which was 40 goal to breakeven the golden goose dividend commitments and so on so.
Again I'll try this one more time, so ballpark out $40 oil what do you think your operating cash fluids.
We're not going to guide that today at Doug with until we have a whole plan for 2021, but certainly as big you indicated that accompanies focus is to maintain a breakeven valued is going to be at or below that $40 level.
Our next question comes from Genie way of Barclays. Please go ahead.
Hi, Good morning, everyone. Thanks for taking my question.
I'm, sorry, I would say just following up on some of the higher questions on a tiny tiny <unk> maintenance Capex can you provide just a little more color on what assumptions are factored into that I know you mentioned, how do you pay the profit and cash versus stock for example, but also in the past you've mentioned that there are startup costs in year one.
Returning to maintenance not and you realize improvements and your U.S. base management, So well just curious on what's embedded in your 2.9 billion Ethernet on costs and base declines.
Sure Jeanine this is Jeff I'll I'll take the first type of that and Accuen, Rob can jump in if I Miss anything so I think what we're not prepared to go through business by business with the sustaining capital is for each one of those but we will give more color as we roll up a plan for next year I can add a little bit of color to that I think one of the important things to understand.
And as you know what we called out to sustained production. There is between 400 $500 million of capital associated with our midstream and Cams business. So first thing as you guys strip that out when you think about sustaining capital just to hold production flat and the thing I'd say is what we've seen is pretty much occur.
Costs all of the businesses, we've seen improvements and sustaining capital primarily driven by driving costs out of the business. The developments gets better and better I mean, I look at even though we've kind of taken this pause in activity I've watched our development teams continue to learn from everything they've done and figure out.
You know optimal ways alright. Thank all of them are confident we'll have better capital intensity when we restart the program than when we ended the program previously we have talked about some startup costs. We do think there will be some startup costs and when you bring rigs on the learning curve will have to take effect they won't start day one.
Were there will be on day 100.
Yes, there'll be some facility costs, but what we're seeing is well see offsets to those like for example areas, where we had developments that we thought were gap to build more facilities. We're seeing decline come in so you're getting incremental capacity on some of those same facilities and we'll be able to use some centralized infrastructure. It's.
Some of that so we largely thank the startup costs will be mitigated by some of these other benefits. We've seen so I think when you look at it I mean, the 25% decline we gave.
Given the year, we're having just as a corporation with lower production than what we previously thought from a growth standpoint, you would expect to see that decline to come down a little bit. So that will also help you. So when you look at all those things better capital intensity slightly lower decline.
You know across our entire portfolio, we're pretty confident in the sustaining capital we gave.
Okay, Great. That's a lot a lot and I detailed there. Thank you very much my follow up is just a quick clarification on that 2.9 billion. That's the whole total be always flat is the number to hold oil hot something similar and if not do you have a a rough ballpark estimate for that thank you.
Yes, I'd expect it to be very similar to that.
Our next question comes from Neal Dingmann Trust Securities. Please go ahead.
My first question kind of tag along with some guys about so just on asset sales I'm wondering first.
Is there any official Nick you've just wonder is there any official process is currently going on with any the properties and secondly for 21.
We'll potential asset sales success will that dictate sort of what you spend maybe high and low end capex or are they sort of exclusive to a degree.
Oh, so we do have other processes going on and I think the only other one it's probably more public is the along the process around Donna and so it's still up or for sale and Lee.
We've had a very good conversation with the finance minister in gone about that so that's the one that's more public but we do have others right now in progress I will say that though let me I would like to clarify one thing I'm.
The one that's a in Africa, that's not up for sale as Algeria.
And as I mentioned on our last earnings call, we've taken the strategic direction to make Algeria, a core asset for our company. Our teams continue to dive deeper into the data for Algeria, and the more we learned the more excited we get about our future there yet we see upside not only in the areas. We currently operate but also an expansion areas are.
This will focus will be to maximize the value. The assets. We currently have and to jump start that process. We utilize some of our experts from Oman and Houston to supporting extensive subsurface reviews.
And at the same time, we're taking steps to strengthen our operational capabilities in our joint venture.
Operator operations with Sonatrach.
Of particular importance I want to highlight that our relationship with the government's excellent and we continue to engage to ensure alignment for the future to support that were also having very productive meetings and working sessions with sonatrach along with our other partners. We're looking forward to seeing the value we can create for Algeria, and our other shareholders. So Algeria is a is is not for.
Sale and wanted to clarify that from the first quarter earnings call.
Okay, and then sort of leads me to my second question just on the growth for next year.
Good point began on LG and some of these international properties.
With prices do continue to rally as they've been how do you foresee sort of domestic growth or or.
Domestic sort of targeting capex in growth versus the international are they going to be pretty similar as far as you know can you could see both door or will it be much more domestically.
No I don't really see us growing next year I see us.
Optimizing our in following our cash flow priorities, which is really the maintenance first and so I expect that should we get approval from the board that we would spend the 2.7 to 2.9 in maintenance capital to keep our production flat for next year as we continue to lit use all of data available cash.
Two.
To retire debt to address our maturities. So that's the highest priority for next year now we do have a.
As we go forward a general pathway to more cash flow more earnings to start generating a return and to get to a competitive total shareholder return. So so we do have things plan beyond next year that will help to increase cash flow without significant additional capital part of.
What we really needed to do to maximize the cash flow that we get out of our operations was first to capture the synergies and as we've outlined in his presentation is today, the opex and SDMA cost reductions that we've achieved more than double our synergy targets and we achieved in less than a year. After the close of the acquisition.
The second part is I've been talking about here is the.
To that do that the best of the appropriate assets.
There were trying to make sure that we balance the divestitures with our cash flow until we want to make sure that we're we're divesting of the appropriate things as we go in that we're preserving all the cash flow that that we're going to need for the future.
So thus far we've divested as you know of close to 6 billion of assets in our Divesture process almost take like a three month pause.
In March April and May win when everybody was really dealing with the crisis and now we're back on track to.
As I said earlier to achieve the low end of our divestiture range.
So.
So first capture synergies second divest of the appropriate assets and third is to de lever so using the divestitures and and any cash flow that's an excess from cash flow from operations, while maintaining just a capital spend of the sustaining capital limit will continue to de lever with.
Proceeds from divestitures and cash flow.
Then.
Rob is then very involved in liquidity management here over the past a few months.
The funds, we raised from the bonds helped us to move out some of the maturities all but about little over 500 million in early 2021.
So thats really given us some room to make sure that we optimize the timing of our divestitures again as I said in my script not to sacrifice value for timing. So we've got some room to to make the right decisions around around divestitures and the third thing that I think that we haven't really talked a lot about but it's something that.
At that is really important to us as the restoration of our cash flow.
And leave started the first huge step to do that and that's through increased margin from our significant cost reductions.
Second way that we'll continue to restore our cash flow is to increase our oil production volumes. So when when you talk about growth and ask about growth. The way we need to do that is not necessarily increasing our capital spend but taking on partners to form jvs.
Just like the one that we did in the Midland Basin with Echo petrol, where we were getting carried for a portion of the capital. That's the way we're going to continue to restore cash flow for ourselves without exceeding when in the near term our capital maintenance. So the jvs that we'll be looking at first we wanted to do that does.
Last year's first that was our highest priority. So now we'll be looking at as we go along jvs in our core areas were divesting of things that would that are not core or don't won't fit within our core in the future but jvs.
On our core acreage.
And that's in areas that are lay further out in terms of development our longer term inventory.
So the Jvs will enable us to bring on a another wedge of cash flow that will get us to where we need to be to be able to get back to a stronger balance sheet get back to growth probably sooner than most people are modeling at this point. So in all this is to all the things that we're doing.
Every step we may take an every decision we make is around ensuring that ultimately.
We get back to a stronger balance sheet and that we're at breakeven at less than $40.
Our next question comes from Pavel Molchanov of Raymond James.
Please go ahead.
Thanks for taking the question is it fair to say that you've essentially.
Given up on trying to sell.
Algeria or is there some chance that that will be revived further down the road.
We it's not that we gave up on selling Algeria, there's a lot of interest in Algeria is that as we learned more about Algeria took that deep dive into it.
We believe that those assets there are of such high quality, they're going to be very competitive with our domestic assets, we want to be in Algeria, the more weve met with sonatrach and the more we.
I get to know the government in Algeria.
Better we learn the assets the depositional environment. The operations, we're very committed to Algeria, we've had interest there, but we're committed Algeria is now a core area for oxy. So it gives you will not be up for sale.
Okay from the chart showing the breakdown of your 2020 by Chad, it's pretty clear that low carbon is de minimis.
Portion of the program.
Thinking ahead to next year, and a 2.9 billion dollar or kind of base number you've mentioned what would be though.
Roll up low carbon in INAP level of budget.
I'd say that low carbon just because you don't see the capital on the chart doesn't mean, it's not a huge part of our business. We believe that are low carbon venture strategy is going to be is certainly going to differentiate us from others and we're very committed to.
There are two things that are three things probably that the low carbon ventures will do for us the first and foremost, saying the reason we actually formed it and this has been 10 years in the making that the reasonably formed it is that we needed a way to reduce our cost in our email our operations and even in our conventional equal our operations.
The biggest driver or one of them what are the two largest drivers of our cost there as CEO too and the cost that it takes too long electrically to inject our COO too so electrical cost and soon to are the two highest cost for us to further increase our margins and sleep.
Been trying really hard to do over the past few years and making a lot of headway. There. We're now attacking the SLR business because what we've realized is that they are equal our business is going to be critically important for us for the future. It got us up to.
It was a foundation of our company as we got up to the shale development and it's going to continues to be the foundation of our company because not only can we do enhanced oil recovery through Seo to processing in conventional reservoirs. We've now done for pilots and the shale play and we know it's going to be as successful and the shell is it.
I was and the as it has been in our conventional reservoirs, but what we need to do to ensure that we maximize the margins in a and get the most that we most value that we can out of it is we need to lower the cost. So the low carbon ventures team has put together a strategy that you're going to hear more about in the coming quarters, but for now I'll just summarize to say.
They they have worked out to a business model, that's going to enable us to get CEO to at either very low cost or no cost and so when you start looking at Aneel. Our project and you can get C. O. Two for essentially no cost that's going to dramatically improve the margins of are you our business in conventional.
And we'll there we have about 2 billion barrels of resources available in the conventional that we can exploit and when you take that and you expanded into the shale. That's another probably 2 billion that weekend I exploiting that as well so the massive recovery that we can get just by lowering the costs.
Most of our COO too is in of itself a reason to continue our low carbon venture strategy in a very strong way. The second thing about our low carbon venture strategy is that there's a lot of interest in the world now and thankfully to to lower our COO too and the atmosphere to reduce.
On the the impact on global warming that C O two has.
And if you look at the models that were put together by Stanford by Columbia by Oh, I see a in others, there's no way to significantly medically mitigate climate change without further reduction as CEO to from the atmosphere. So the second thing that that are LCD business model.
We will do is help to do that it'll lower Seo to emissions and that's important for the climate and we started long ago feeling like that is the right thing to do for the environment. We wanted to lower cost CEO to that was the primary thing and secondly, it's good to lower the CEO too in the atmosphere to address climate change and now the third thing.
Is that we have they're a lot of investors in the world that are interested in not only helping to invest in things that that improve the world versus things that don't so now these investors who are interested in.
And also are helping to do these kind of things realize that with the low carbon fuel standard in California, and with 45 Q that was Tas just a few years ago.
We're now able to provide revenue from this business model that we're creating so it turns into a a very safe low risk steady stream of of revenue for investors and so this does this checks three boxes for.
Yes, and is so critically important that we view this to be.
One day, we'll certainly generate we believe significant cash flow for our company as well. So we're not only improving the the economics of our you are in conventional and ultimately shale where I'm. We're doing the right thing that will help the world and we're going to get a revenue and cash flow strain from it.
Thanks, Pavel I would add to that too is related to you asked a question also about the capital on the budget is that I want you just to think about the things that they could just described which are really game changers for the company as oxys contribution solely being cash on those projects. So 40 years of plus expertise, we have me our business coupled with having sort of.
Hi for space capable for this youre type sequestration is a commodity in itself that is value. This company can contribute relative to cash and still maintain a high equity purchase percentage of these projects.
Our next question comes from Paul Cheng of Scotiabank. Please go ahead.
Thank you.
Good morning.
Rick can you mentioned the FFO Corunta, you will ready, we see wrap and doing the Calvin sequencing can you share with us that how big is that number right now.
And my second question is that.
Trying to get a little bit better understanding how from the second to third quarter the job.
As you mentioned that you think that that your underlying decline and saying that this is the timing all too well. So can you give us some a little bit better understanding and color that by month that.
The number well that is going to come on stream. So that we can do up multiple thats. It. Thank you.
I'm sorry. It was your question was the source of the revenue I Didnt know how much is so rapidly.
Oh, how much you agenda right now on those coppin sequencing.
So were the coach action on that.
Yeah, we haven't we haven't talked about externally, but we are today sequestering about I think it's 20 million tons a year. So we are sequestering today I don't know off the top of my head, but our revenue is for that but.
But we do we just now worked with the IRS to get the process in place to start to claim those credits. So so probably in the next in the coming quarters, we'll be able to provide you better estimate of that.
And Paul This is Jeff if I understood. Your second question its cadence of wells coming online for the remainder of the years than what you're looking for.
That's correct because I'm sure that too how wide that they put up some jobs. So much based on that typically life without mentioning.
Okay. So yes, so I guess two questions why production drop from Q2 to Q3 I can talk through that and then that the cadence of activity.
So if you look at Q2 to Q3, I mean, I can walk you through some of the big things. They take you from Fortino sex to our current guide. So the first thing is it take 33 off the top that's GMB sale, that's pretty easy.
The 25 based to 25% base decline we've.
Yes, that's still looks where we're at so if you back out from the number before that you back out the wedge you take 25% that's about 75000 barrels gom maintenance weather's about 20, PSC impacts and additional Opax. Another 15, and then the decline in the wedge we outlined.
Lines about 30, and then you take some other things with ethane rejection and you give another 10 I pretty much gets you the to the Q2 number.
In a relatively straightforward way so when you look at cadence of wells coming online.
Slide six team, we put out what activity looks like for the second half the year for both Permian resources, and Rockies Permian resources, the well count or wells online went up about 10 to 15 from what we previously guided.
Today, I think we have one frac core and one drilling rig and Permian resources. So the activity of started there. If you look at the DJ That's gone up about about 40 wells from our last guidance for wells online that activity really won't start in earnest probably until September or so.
So most of those will come on late in the year.
With that as you get some mitigation and Q4, but the majority of the impact is in 2021.
Jeff in Permian those wells coming on stream in the second home will be pretty variable or what that is going to be second hospitals and the ammonia the full quota.
It's probably more heavy to the fourth quarter per share.
Our next question comes from Phil Gresh of Jpmorgan. Please go ahead.
I guess how to good morning.
First question would just be.
If we go back the time of the Anadarko acquisition, you laid out in a specific leverage target I believe is two times that $60 oil.
If you think about where we are now and everything that's happened sense on you haven't updated view, what youd like to leverage target to be and that what price.
Yes, Bill we've indicated that we what they are intended to get back to an investment grade to go move back from the high yield to investment grade and we know that conversation doesn't start until we get below a leverage of three and so right now obviously between all the thing that vicky's detailed will start to divestitures and positioning the business too.
Who benefit from all the cost reductions that we've done and coupling that wasn't improving overall macro commodity environment, a lot of business itself to generate free cash flow to retire reduce.
Moving both the numerator and denominator of the same time in that process.
That's our current goal is to get below three to have that conversation on being investment grade again, the move from there.
You have a price deck, where do you think you to accomplish that based on all the things even outlining today.
We havent you know as far as looking at a price that we would accommodate obviously the trajectory that price is going to impact the timing of that and so that's a one part of the equation, we can't control of the trajectory of the pricing. So we realize that if it's obviously a sharper increase than the timeline to accomplish that a shorter and if it continues on anymore.
Moderate pace is going to take longer to get there than otherwise.
Okay.
A follow up question just fee I guess is sort of getting out what Doug Doug Leggate was asking about.
With the outlined two or 3 billion of asset sales for the first half of 2021, and the free cash flow generation with the sustaining capex and implied free cash flow generation.
You've outlined.
Do you believe that those things are sufficient to address the 2022 maturities as well.
Top of the actions you've already taken for the 2021 maturities or just any additional color to help us think through.
Not just 21, but also 22 maturities. Thanks.
And so I think it's as Vicki outlined one of the key things a major our divestitures is doing them on a timeline that allows us to get the greatest value for those and not being sort of that fire sale position actually highlighted.
Sure and running this many processes you do have businesses where.
There are people that were willing to close on a more rapid timetable, but as of expense of our company and ultimately our shareholders in closing those and we're not going to do that and so we're not going away arbitrary deadlines ourselves that so one way we manage that is not just from the free cash flow business, but also the capital markets and so the recent transaction, we did was meaningful and several ways because you are.
Prior earnings call was only a few weeks removed from negative price environment April we discuss the company was looking at every possible form a liability management, our disposal and so but the continue to improve it allowed us ultimately what improvement demand in commodity prices to approach the market.
Despite getting private fewer stays in the month of June to do it.
With an unsecured debt offering raising was intended to be one of the half to $2 billion.
Unsecure debt on our existing maturities and they all do sit here today those those bonds themselves in a short period of time have rallied to the point to where I close yesterday or the five or 110.
Seven over 112 in the in the 10 to over 115, indignities indicative of the strength of those bonds and our ability to probably returned to the market.
When they are opened at our discretion at and achieved similar results at a lower price and so I think the one way when you look at that to manage both the 20 twos and beyond.
And even potentially to 21 to some extent to go our sometime for the divestitures our timeline.
Is returning to the capital markets.
And that gives us a time, even looking at 21 itself, but we did to the $2 billion of divestitures. We have outlined for 2020, coupled that with a similar sized transaction. We did in July that clear to us runway essentially going all the way the 22 by itself.
It allows us the time for the free cash flow generation of the business allow the impact of those cost reductions we've done and really goes back to the combination of our underlying thesis roaming acquisition that we've now taken the world class portfolio, we have a de coupling that with the operational actions. We have so that that allows us to make that.
You should work.
Our next question comes from Jeffrey Campbell of Tuohy Brothers. Please go ahead.
Good morning.
My first question I wondered if you could update us on your federal land position permits in place.
Percentage of current anticipated Delaware basin spend that might be directed to the federal acreage assuming no change in government policy, just sort of what's going on there.
Assuming things stay the same.
Sure. So this is Jeff so I'll take the first run it that's one thing we did on you'll see on slide 29, we updated the footnotes with what our federal acreage position is because it came down with the sale of GMB in a couple other thing. So yes, we have approximately 1.7 million net acres of federal land eight.
Hundred thousand onshore 900000 offshore.
And so if you look at your key development areas Permian has about 280000 acres I'm a federal land. The vast majority of that's in new Mexico, None of the former APC development area is on federal land, so pretty clean running room, there in the DJ yes, its miniscule, you'll see it's like 40.
Thousand acres, so there's very little in the DJ on federal land as well so from a permitting standpoint, both in new Mexico, and Gom, which would be the most exposed to federal land. Given the question. You asked yeah. We've got permits approved that give us running room for the foreseeable future remain at activity rates even at.
Much higher activity than where we were prior to co bid, we would have plenty of running room.
Permits that are already approved and both of those areas.
It was there another part of your question or that has it all.
No. That's that's fine I guess, the only other thing I asked by so many managers is just.
If you can disclose at what percentage of current capex or the anticipated capex. Some 2021 might be directed to those federal.
Positions.
Yeah, I mean since since we haven't given a capex for 2021 wouldn't for current Capex you can pretty easily take the gom number that we disclosed and then you know of remaining Permian part, which is only a couple of hundred million or the rest of the year may assume much.
No.
A quarter of that from new Mexico, So, it's a pretty small number.
Our final question will come from Leo Mariani of Keybanc. Please go ahead.
Hey, guys I was hoping you could talk a little bit on kind of leading edge well costs on terms of what you're seeing obviously, there's been significant cost reductions in the business here that you guys have been able to implement could you give us maybe a little bit more color on what youre seeing in terms of.
Kind of.
Completion, and drilling and kind of facilities cost kind of all in on a per well bases in the Permian the DJ where they are today.
Versus kind of where they were maybe to start the year on like a perfect basis or something.
Well, we haven't updated that since our last disclosure on the last call. The thing I'd tell you as you know I mentioned earlier on the call them.
I do fully expect.
That capital intensity cost plus the benefits will be better once we start back up so I do expect those to come down but the data sets been so small that it almost be misleading to say this went from X to Y just because it's we've drilled and completed so few wells, but I do.
Fully expect I mean, there continues to make great progress.
Operational designs and seeing that the other thing I've mentioned as we previously talked about how much of the capital synergy we capture like we said, 70% because again, we only measure capture if we've actually Dominic and so with a small activity said, it's hard to improve that number but they went up to 80%. When we look this this quarter. So they do come.
We need to make progress on the small activity set so we're doing and I'll just add to that that our team on the new Mexico team is working on some really exciting things and driven by a high MMRM Ramirez who's who's working hard on trying to further reduce well cost and and there's a lot of.
A lot of a collaboration going on there to make that happen and so I think with the subsurface team support and now that's going on there I think that we're in for exciting news for for next year when when we do pick up another rigor to maybe.
Okay. That's that's helpful and I guess just want to follow up a little bit on the debt reduction initiatives. You guys. Obviously did good job kind of talking about sort of whats under way on the asset sale side.
You guys also of course, our free cash flow positive and then.
Lastly, you talked about refinancing some of the near term maturities are there any other levers that you guys might consider to kind of accelerate debt pay down not necessarily maybe today, but as you look forward into next year any other things that you think you might.
Pull out of the tool box to try to cut down a little faster here.
Hi, notably yet obviously, the other ones that aren't in that category right now be issuing equity or something like that we did do the warrants.
I don't see us pulling that lever as we discussed last time.
So I think the combination of.
The liability management tools, we have from the accessing the capital markets divestitures in the free cash flow right now we feel like is going to give us.
A pathway that allows the business model to work.
And the interest of time. This concludes our question and answer session I would like to turn the conference back I've heard of Vicki Hollub for any closing remarks.
I just like to say thank you all for your questions and for joining our call have a great day.
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