Q4 2020 Occidental Petroleum Corp Earnings Call

Good morning, and welcome to the Occidental's fourth quarter 2020 earnings Conference call.

All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero.

After todays presentation, there will be an opportunity to ask questions to ask the question you made press Star then one on your Touchtone phone.

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

Thank you Andrew.

Good morning, everyone and thank you for participating in Occidental fourth quarter 2020 conference call on the call with US today are Vicki <unk>, 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 investors section of our website. The presentation includes the cautionary statement on slide two regarding forward looking statements will be made on the call. This morning.

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

Thank you, Jeff and good morning, everyone.

One of your 'twenty was the year of extreme volatility for our industry underworld.

For the year now behind US our operations have returned to a normalized activity level in support of stabilizing our full year production at our fourth quarter 2020 right.

We entered the 'twenty 'twenty, one with an improved financial position of taking the necessary steps to protect our asset base and de risk our balance sheet.

I'm, particularly proud of our teams who leveraged our technical expertise to mitigate production decline well relentlessly lowering costs the capability of our outstanding employees to consistently deliver remarkable results safely was key to our ability to navigate the challenges of the last year as well as the challenges presented by the winter storm last week.

This morning, we will provide the details of our full year 2021 play out. This total maintains our best in class capital intensity, even with the modest activity increase we started in the fourth quarter of 2020.

We'll also provide an update on our divestiture and deleveraging progress as well as reviewing our financial results and guidance for the year ahead.

Throughout 2020, we focused on maintaining the integrity of our production and asset base as well as lowering overhead and operating costs are.

Our achievements have positioned us to build on our track record of operational excellence and efficiency gains as we stabilized production in 2021.

In the fourth quarter, our businesses continued to outperform and generate momentum for a strong start to this year.

We exceeded our production guidance, while continuing to deliver lower than expected operating costs for the quarter.

Our oil and gas operating cost of $6 80 per Boe.

And domestic operating cost of $6.05 per Boe continue.

Continue to demonstrate the lasting impact of our cost reduction measures as our domestic operating costs were significantly below our original expectations for the year.

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Although our activity slowed in the second and third quarters. Our teams did not Miss a step as we normalize the activity in the fourth quarter, our onshore domestic off assets went from running 22 drilling rigs in the first quarter down to zero in the second quarter and then returning to 11 rigs by the end of the year.

Operationally, we continued to outperform our expectations and delivery of efficiency improvements with new drilling and completion of records.

Our Texas, Delaware and DJ Basin teams demonstrated our consistent drive for efficiency by exceeding our original well called synergy targets in the quarter.

The team that we're very proud of the.

No matter, how favorable are challenging the environment in which the operate we never take our eye off saved safety.

Many of our teams tied or set of new safety Records last year all of our company wide performance was our best ever as we simultaneously work to minimize the risks from Covid.

We transitioned into 'twenty and 'twenty, one with an improved financial position, having achieved our divestiture target for 2020, we closed approximately $2 $8 billion of asset sales $2 4 billion of which closed in the fourth quarter and 2020, we utilize the divestiture proceeds to strengthen our balance sheet by reducing debt and lot of them.

<unk> by approximately $2 4 billion and $300 million respectively.

We also completed a successful financing program extending approximately $7 billion of debt maturities together. These the chip of G must place us in a strong position for the year ahead. So we can focus on reducing debt and improving our business, while maximizing the value of our unmatched asset base.

Press, we made last year in reducing operating costs will continue into 'twenty and 'twenty one as the synergies we delivered and the vast majority of our additional cost savings remain in place.

These savings are now embedded in our ongoing operations, we expect to deliver overhead of $1 8 billion, which reparate represents full retention of all synergies and a significant portion of our additional cost reductions will.

We'll continuously seek new opportunities to lower costs and expand margins as we move forward.

To spend $2 $9 billion of capital in 2021 to sustain our production at our fourth quarter production rate.

Our plans are based on the $40 of W. T. Our price environment, and we're prepared to flex spending lower if necessary if oil prices continue to improve this year, we will not increase capital in support of production growth.

The flexibility and Optionality to our scale and asset base provide are often underappreciated.

We were quick to adjust to future potential commodity price dips or regulatory changes, while being positioned to leverage the benefits of future price uplifts.

Our capital spending plans, reaching the high degree of flexibility, allowing us to adapt to a changing macro environment.

The level of capital spending required in 'twenty and 'twenty, one to sustain our production demonstrates our ability to deliver best in class capital intensity, even in the period, where we were not growing production.

Leveraging our technical expertise, particularly in the subsurface characterization enables us to drill the best well, while we continued to pursue new ways to lower cost with the goal of spending less to produce more barrels.

The efficiency of our capital development, coupled with our low base decline and our relentless pursuit of maximizing every barrel from our existing wells allows us to hold our production flat with capital of $2 9 billion of 2021.

We were pleased with the progress achieved to date in closing divestitures of reducing debt, especially given the challenging market in 2020, we exceeded our 2 billion divestiture target with the closing of the mineral and surface acreage in Wyoming, Colorado, and Utah as well as our onshore assets in Colombia.

Colombia, we are targeting targeting an additional two to 3 billion of asset sales to be announced by mid 2021.

We're making progress towards this new target and have already closed approximately $350 million of transactions.

As we near the end of our large scale divestiture program, we will continue to balance the transaction timing with the price realization will not sacrifice value of closed transactions quickly.

As commodity prices continue to strengthen we expect the value the buyers place on the assets to adjust accordingly.

<unk> always prioritize obtaining value for our shareholders over meeting of deadline or divestiture target, which we've imposed upon ourselves.

As Rob will speak to you at the moment, our debt reduction efforts combined with our ability to refinance the $7 billion of near term maturities over the last year of places us in the favorable position.

We continuously review our portfolio to ensure we have the optimal mix of free cash flow generation capital efficiency and the low decline assets.

We now have one of the best portfolios and obviously its 100 year history, but this doesn't mean that we have stopped looking for opportunities to improve our asset base the.

The frequently complete acreage trades to core up positions and operator ship. It on occasion may pursue opportunities, where we see an outstanding value and the bolt on acquisition.

Example, we recently exercised the preferential right to increase our working interest in the Lucius project, which we operate in the Gulf of Mexico.

We expect that our investment will pay back from slightly over a year and of $40 oil price environment.

Our oil and gas highlights slides includes just a few of the many achievements our business delivered in the fourth quarter, even during a period of increasing activity, we continue to improve uptime and reduce time to market of lowering drilling and completion times.

Includes our Gulf of Mexico operations, who beat the previous spud the first production of Rec record by three days.

Additionally, we will continue to push the envelope on driving out cost and achieved our original capital synergies for both the cost savings from the Texas, Delaware and DJ Basin, almost one year ahead of schedule.

We were pleased to have been awarded of new concession onshore block five in Abu Dhabi, which is adjacent to onshore block three where we've been conducting exploration work.

Following the award of block five we made in multi reservoir of discovery in block three.

We still have more exploration and appraisal work to complete that are highly encouraged by the results to date.

Last year, we communicated our revised framework for excess cash flow, which prioritizes, maintaining our low cost production base, reducing debt and strengthening our balance sheet.

Our cash flow priorities remain unchanged as we do not anticipate growing production for at least this year.

Our immediate goal is to continue reducing debt and with the support of the strengthened balance sheet return capital in a more meaningful wage of our common shareholders.

Now I'll hand, the call over to Rob who will walk you through all of our financial results and guidance for the first quarter and full year ahead.

Thank you Vicki.

In the fourth quarter, we announced the adjusted loss of 78 cents per share and a reported loss of $1 41 per share with part of.

Diluted share the difference between our adjusted and a quarter ago is primarily due to the approximate $850 million of loss on sale, ladies and the carrying value of assets about the during the quarter.

Vicki mentioned our team is lack of contributed to the improved financial position that we have today.

Most of our debt by $2 4 billion.

Financing $7 billion of near term maturities in 2020 significantly Derisked our financial profile.

Especially relevant considering we are targeting an additional $2 billion to $3 billion of divestitures of Colombia.

In 2020, we repaid or extent of almost $6 billion of 2021 maturity.

$7 billion of 2010 P maturities.

More than $250 million of 'twenty three maturities.

It leaves us with less than $375 million of the remaining 2021 maturity will be repaid over $9 billion of debt over the last 18 months lowered outstanding principal of approximately $35 billion.

While we were able to adequately manage this level of debt in the mid cycle environment.

Our focus remains on debt reduction and strengthening the balance sheet to provide stability throughout the cycle.

I think kind of in our fourth quarter capital spending increased from the third quarter. The support normalized activity levels ahead of point of 'twenty one.

Even though the activity levels increase from the fourth quarter, and we returned of paying a per dividend. The cash we still generated of approximately $800 million of free cash flow driven by the strong operating with one of our businesses and our focus on improving margins.

We entered 2021 with $2 billion of unrestricted cash on hand.

We're pleased with our progress to increase our share price since our last earnings call.

Traded above the $22 strike price of the warrants, we issued last year and the share of trade above the warrant strike price War horse gained the right, but not the obligation of exercise of warrant the purpose of Aki share at the point you are either.

Of January 31, approximately 12000 warrants have an exercise of resulting in about 12000 newly issued shares.

The addition of warrants are exercised we will allocate the resulting cash proceeds of debt reduction.

We are beginning to benefit from activity added in the fourth quarter as is often the lag between the change in activity in rebuilding them back on the production, we expect our fourth quarter production to be slightly lower sequentially when compared to our fourth quarter of 2000 22020.

We expect the production decline in the first quarter is due to the timing lag and adding activity as well as the impact of the recent storm all of our operations and turnaround activity at all of Hogan Adolfo.

Our first quarter production guidance includes the 25000 Boe per day impact of the unprecedented weather event in Texas last week, although the storm had a meaningful impact on our Permian production, we expect the impact to be temporary as our operations recovered quickly all of it.

Ultimate ability to recover barrel loss during the winter Shlomo the terminals, we were able to reach our precisely our full year guidance. We anticipate the full year production will be essentially equivalent to our fourth quarter rate excluding Colombia.

Going forward, we of combined Permian resources, you are in the single Permian entity right.

It relates to providing guidance of reporting results of the further integrate our Permian operations of low carbon strategy, the oil and gas, we anticipate increased opportunities of sharing of resources.

We're also guiding the Gulf of Mexico separately provide additional clarity on the seasonal production variances as we can power of countered by the fact that.

Our focus continues to be improving the items, we can influence such as growing our cash margins through operational improvement and lower expenses the rec.

Neither of certain non cash items that we have less influence over our forecast an increase of non cash expenses. This year on a per barrel basis, we expect the DNA will rise due to a higher depletion rate and reserve decreased during the year. When we issue. Our 10-K, we will disclose the low reserve position.

Significantly lower commodity price environment during 2020 and activity level lower than we had forecasted at the end of 2019.

Our 2021 capital plan provide while I provide details by asset and investment production and capital guidance you provided from the first quarter and full year, taking account of the regulatory environment kind of standards.

Day, our high quality asset base provides the flexibility to adjust activity and capital allocations of the environment may change.

<unk> changed the regulatory environment, Kurt we will provide an update of our guidance at the warranty.

For the full year, our capital plan and crude includes running six rigs in Texas, Delaware, one of new Mexico four of the Midland Basin and two in the Rockies. The drillship. The return of the Gulf of Mexico late last year is expected to remain active throughout 2021 of them.

The flexibility of embedding our capital plan combined with the financial improvements made last year of place Occidental in a much stronger position for the year of ahead, while we still have work of due to strengthen our balance sheet. We can help the necessary runway to continue optimizing the performance of our assets.

We'll improve our financing position I will now turn the call back over to Vicki.

Part of the recent regulatory actions that the social cost of carbon and methane had become increasingly important for our industry the way.

Been active and engaged of being part of the solution.

Low carbon strategy enables occidental to play a leading role in limiting methane emissions and we're moving C. O two from the atmosphere, while amplifying our existing businesses and benefiting our shareholders. We expect to improve the profitability of the enhanced oil recovery in the Permian and in other regions as we reduce the carbon intensity of our own emissions from products.

As we implement our low carbon strategy, we expect to continue working cohesively with the regulators under the new administration, while demonstrating our commitment to safety and the environment.

Checked our operations on federal land to continue and have more than 350 approved permits in new Mexico and approximately 175 in the powder River basin with many more pending and the Gulf of Mexico, we have not experienced any impact on operations.

Following our last earnings call, we released our 2020 climate report detailing our target of reaching zero emissions from our own operations by 2040 with an ambition to accomplish this by 2035 and an ambition to be net zero, including the use of our products by 2050.

Part of our low carbon strategy, we can provide the solution for partners and the other industries as well, which is the airlines and utilities.

So as the industry's may not have an alternative means to significantly lower the carbon footprint.

As I've said before the opportunity before us as the Mets and we're ready for the challenge. Thanks to our incredible employees, we can plan through the lens of being the best in class low cost operator for the exceptional portfolio of assets in tandem with the goal of reducing our greenhouse gas emissions and executing our strategy to lead in the low carbon world.

Well 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.

If you are using the speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then two please.

Please 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 will pause momentarily to assemble our roster.

Okay.

The first question.

Comes from Doug Leggate of Bank of America.

Please go ahead.

Thank you and good afternoon everybody.

Thank you for taking my questions.

Maybe Vicki first one is for you you touched on the midstream I think over the last couple of months.

Talked about the possibility of maybe.

Not quite a blend and extend but some kind of the potential renegotiation of your.

Midstream tariff I Wonder if you could walk us through where that stands today and the footwall for raw please.

Oh, Yeah, I'm kind of starts us out and then I'll, let Rob add.

Some to this but we have looked at alternatives and options we've had conversations but it is.

Other companies and potential partners and we have not.

Come across a solution that was acceptable to us from a value standpoint, we're still continuing to consider options that are there that are being brought to us, but we're not willing to sacrifice value.

Two to do a deal that's going to negatively impact us in the future. So we're still working the option around that.

We believe that over time.

There could be ways that we could adjust what we have today, but the strategy is just not in place for us to be able to execute on it now.

Yes, I would second that.

The key.

Those contracts roll off in 2025 as we've indicated.

Before and the Vicki point simply finding a way to actually find the simple economic value.

Hmm.

The two okay great.

Elsewhere I get your voices.

Drifting in from the ether somewhere some of them of someone else's stock.

The top 10 here, but anyway. Thank you for the my follow up is on the balance sheet on the.

The disposal I guess, the disposal target Vicki I realized the.

It looks to me anyway that you've pushed out maturities Stephen.

One of them.

And you continue to talk about line of sight from the disposals for this year. So I just wonder if you could walk us through your level of confidence in achieving the target and what lies behind the confidence and while I realized I guess use of the bottom end of your original target I wonder and of higher oil price environment from.

You would still look towards the upper range of about $10 billion to $15 billion range that you laid out because of a year or so.

Thanks.

As I stated in my script. The most important thing for US is the value proposition and as we consider options and I can tell you. We have the incoming offers for various things. So if we wanted to.

Simply achieves the $2 billion to $3 billion divestiture target, we could achieve that but what we're weighing is the.

The value proposition of the offers that are coming in and so we're going to stay very committed to making sure that and that we get the best value for whatever we execute on them, but I will say that I have some confidence that that will get there because of the the <unk>.

Fact that we had multiple opportunities we're not depending on just one or two.

Possible divestitures, we have the all in our portfolio. It's so large so diverse we have multiple options to choose from so I do believe that we could get to the upper in debt, but it's more likely that we would target the lower end.

And of the timing of the laureate really depends on on how quickly we can get.

Are the the offers to where we need them to be and again, we have a couple of processes in place right now and then the some some things on hold.

It's all about value for us and getting to that number and regardless of oil price.

If the Value's there, we still want to make the execution to get the divestitures, who are $2 billion target and we believe we can do that.

The next question comes from Brian singer of Goldman Sachs. Please go ahead.

Thank you and good afternoon.

My first question is with regards to the.

Low carbon ventures, and the tie in to enhanced oil recovery and it might be a couple of partner first with regards to enhanced oil recovery can you talk about your ability and need and remind us of just your ability and need to expand investments and the production of <unk> to meet your net zero goals.

And how that factors into your capital budget in 2021, and then the second part is on slide 38, our focus is very much I think largely from our low carbon pathway on the upstream side arguably maybe with the more U S. Onshore Benson I wondered if you could talk about the opportunities you see in petrochemicals on international aid your day.

Carbonization goals.

Well, our our enhanced oil recovery projects in the Permian our.

One of the the anchors that we have from our low carbon ventures strategy I would say it's not the.

The way we're doing of our strategy is not of necessity that we do it in association with our C. O two enhanced oil recovery projects in the Permian, but we believe that's the best way to do it and the best value proposition for our shareholders. So that's what we focused on initially.

And if I could just.

I want you to as I talk about the production cycle.

You to the the timeline where.

It shows how this idea of was originally brought up it was the R. C O two enhanced oil recovery projects of the Permian are they were the reason that we started this vision and we started the vision.

More than 10 years ago, we started the vision well before too.

2008, where you see on the timeline that the original 45 SKU tax credit was established we were a part of our government group is a part of helping to get that 45 Q tax credit approved.

And and put in place and so that's in what we started looking at was how to maximize the vast resources debt that we had already and and conventional reservoirs debt were conducive to C. O two enhanced oil recovery.

That started the process back then what we wanted to do is we wanted to come up with the way to have a lower cost long term no decline supply of C. O two and that's why we came up with the anthropogenic C O two option.

And so you see in 2010 and split of our century C. O. Two century plant came on and it's it's capturing C O two delivering it to our Denver unit.

And in West, Texas, and the Denver unit MRV plan you can see we got approved in 2015 of the Denver unit is one of our.

Largest C O two projects and we can't we are continuing to add reserves to it even today, it's it's massive and so that and in addition to so the hubs and Barbie plan that we got in 2017, it's important to note. The way we were the company that got the first two permits ever.

The issue by the EPA for before.

The sequestration and capture of C O two in the reservoir and the MRV is it means monitoring reporting and verification is just a.

The plan that ensures that you put the when you put the C. O. Two on the ground you have properly sequestered debt. So we got the first two of those and that whole process. As we started getting that done was to try to take advantage of the more than 1 billion barrels of resources that we have left to develop and.

And our current holdings and conventional reservoirs in the Permian and as you know the Permian is so vast we have lots of ability to extend way beyond that.

I know you didn't ask the rest of the question, but I did want to talk about.

What what started as of vision to improve our of our cost structure and extend.

Our ability to develop even more resources in the AOR business. It's now turned into more than that it has turned into an ability for us to create a new business.

The new business that not only will add additional value for our shareholders over time, but reduces the missions in the world and it will be the leaders in helping to chest technology. The direct air capture technology put it in place make it operational and commercial and and that will be will provide.

An opportunity for others to expand it in the world.

And so I'm moving to.

So what that does beyond our our enhanced oil recovery in the in the Permian you have to look at some of the things that that are a part of what we're doing in 2018. Another thing that was critical for US was when 45 key was expanded.

And when we when it was expanded and improved by Congress at it enabled us to make.

To make this commercial the first the first direct air capture and carbon capture from industry commercial.

So that was an important step than we established our low carbon ventures group, we joined the oil and gas climate initiative, we see a.

Teamed up with wide energy to capture C. O two from their project. We did some other things around emissions two we announced our Goldsmith solar project and two other things that we did is we invested a net power.

In 2018 net power is a technology that will generate electricity at a lower cost than the typical of power plant and with the opportunity to capture the C. O two as a part of the process of the weakening.

Hum sequestered in our oil reservoirs and then the start of 2019, we invested in carbon engineering and carbon engineering has the technology that we will use as a part of our director of capture.

Process to Triple C.

Oh, two from the air into.

So then sequestered in our oil reservoirs and you can see true there are there other things that we continue to do overtime. That's led us to where we are today, there's I won't go through and read all of those but there's a lot that's been done and the foundation has been a very meticulously planned and staged and now the foundation of set for.

For us to to finish some of the processes that we have in discussions that we have in place today to get to a point, where where this really becomes a business that that has three waves of of benefiting us and benefits the world and so without going through and reading the rest of that all of them.

Oh go ahead of the and stop here and let you answer.

The answer or ask you a follow up.

Great. Thanks, My follow up is actually the similar line as it relates to the the two of the technologies that you've talked about the emission free power and direct air capture.

What milestones are you looking for in 2021.

Do you have full confidence that these two technologies can get the scale that you use the feed study is out for at least half of them maybe ever and the first train or half of where are you kind of want to get capacity to per direct air capture and I'm wondering if you can just kind of talk about your confidence in the technology. What the milestones are that youre going to meet whatever cost thresholds. You are you are.

Looking for to get to to get scaled up.

Well the first real milestone for US was announced yesterday and that was the or that'd be today and that was the selection of R. R.

Our engineering and construction company that's lauralee.

Quarterly is day, they're an incredible company there they have also of passion around.

Carbon capture and around doing the things of that that they need to do to to also become carbon neutral and I want to point out in and of all of the partnerships that we've developed so far all of the partnerships have been with people who share our our vision and our commitment that debt. This is.

Has to create value for our shareholders, but it's also the right thing to do for them for our operations and for the World.

All of these guys share the same thing United Airlines, who is partnering with us to to build the direct air capture they should share the same vision of waiting they're committed to become carbon neutral so selecting a warranty and having them onboard with the commitment that they have and to get the feed study done that's going to be a significant milestone for us.

And we're hoping to get that done and by 2022 and then the construction beyond that would take about 18 months to two years, but we're very confident and in.

The that the technology would work because every part of the direct air capture is being used in some way somewhere.

And as I think I said on the last earnings call one of the key things debt that's needed in there and as a part of it is that potassium hydroxide, which we use a lot of anyway and so.

We're familiar with what we need to use we're familiar with the with the pieces and parts and I have confidence that our team and working with morally to work out of the details. We'll do the same thing that we've been able to do in <unk>.

Altos and where are.

That was the very complex.

<unk> facility that we built there and I know of belabor this probably too much but that was incredibly impressive to build the facility.

The middle of the desert the that's huge in the sulfur recovery units that are a part of our hubs and we're very very unique and different and.

I don't think there are any debtors is that that large than anywhere else in the world, but we.

Working with our partners that we're able to make that work right off the bat without without any kind of glitch and not only the made.

Made it work so we were able to expand it by 30% with just an incremental $10 million off of the 10 billion that it took to the build it so all of.

Our major projects team knows how to build things Morley is very very experienced and knowledgeable I think between the two of US our team in them I think we have a great chance to to build with this first one of.

The first one is always more costly than the next months to come because we learned a lot from it but the I believe we'll learn a lot from building. This first one and making it as efficient as we can be and then learning as we get it the online how to make it even more efficient.

Yeah, Brian I would just add per order of magnitude debt first stack trained and Vicki described would capture of 1 million tons of annually, which is about 5% of what we sequester annually and the EUR business day.

The next question comes from Paul Cheng of Scotiabank.

Please go ahead.

Good morning, good afternoon to.

Two question. The first I think it's called wild well when I'm looking at your presentation.

Of the cash flow priority I'm actually surprised that you put a retiring the P for equity.

At the bulk of them given the it's actually pretty of high coupon eight per se. So just wondering that why that wouldnt be a higher part of all of the people you two week kind of such a high coupon debt to some degree I mean, even though you said people of equity from our standpoint, there is no different than the pets.

So maybe that you can elaborate on the it would be off the thinking.

Secondly that fall on your page 15, I think you gave some a beta.

Data about the Permian do you left one of break that you're going to run in the number of wells.

And it seems that that's including the Youll out now so can you break it down.

The number of rig that relate to the unconventional and the number of wells that you're going to come on stream and in terms of the boot directory.

Just had a pretty steady program are way up or flow of the year or that it's more of a happy bottom Oh that is the is already a happy of what that is bottom half of it in terms of the program. Thank you.

Hey, Paul This is Jeff I'll answer your second one first because I think that one is probably a little more straightforward. So the answer your question. It does conceptually include Permian EUR and the other were guiding those two businesses together, but I can tell you there arent any drilling rigs and Permian are planned for this year and thats for trajectory.

I would say, it's relatively flat, except Q1's got a.

It's not a huge difference, but a little bit P.

We're of wells coming on and you do in Q2, three and four and that's just because of the the ramp up trajectory. So if you look back we average two rigs in the third quarter of 25 rigs in the fourth quarter of 'twenty and then now we're going to average about 12 rigs in Q1. So when you just think about that trajectory.

And how the wells online lag of that.

It makes sense for Q1 to be a little bit lighter.

There's not a huge difference between those.

I'll, let Robert take your first one.

Hey, Paul So yeah. So looking at the slide you see that the preferred equity is at the bottom of slide frankly, obviously, we're focused on the top two pieces of the populace right now as it relates to the Berkshire. The so the way the agreement of <unk>.

Works is that in order to retire principle, we would have to have a at least of $4 per share of common distribution of our 12 months period to open up paying on a one for one basis down on the Berkshire preferred principal and so certainly we don't foresee.

Of that type of distribution of the common in the near term future to open it up to do anything outside of that would require an agreement with Berkshire in order to make it.

Reduction in the actual principal in the near term of thought that we're not aware of the fact that our ability of the source capital is well below the coupon rate today, but we don't have the ability to.

Of course that upon the situation as we sit today.

Thank you.

The next question comes from Dan Boyd of Mizuho Securities. Please go ahead.

Hi, Thanks.

So I just want to follow up with a few questions on the the emission targets and the carbon capture business.

So just first can you maybe give us an update of review of your existing pipeline infrastructure and your ability to book.

Capture revenue from Jeff you know the 45 to tax credits and sequestering.

Carbon in the sort of as we think about I think you've made comments Vicki about.

Revenue from your carbon business matching your oil business in the in a couple of decades from now how big does how big of a role is direct air capture versus using your existing infrastructure.

Our plan is the use both as as you May know, we had the largest infrastructure of any C. O two enhanced oil recovery in the world in the Permian, we have the pipelines that we need to move the C. O two around too long to wherever we need it to go in for her own sales. We also have the gas price.

Testing plants and the.

Of the supporting infrastructure for for those plants and the and the pipelines. So that's why when we when we think about how to maximize and continue to develop the <unk> reserves, that's our preference and as I'd mentioned in my when I was going through the of the timeline the deal that we've made with the <unk>.

The energy there a and ethanol.

So they have two plants in the Permian basin, and there I'm not in the Permian Basin I'm, sorry that two plants in Texas and their plants are not too far from the pipeline that will get that's C. O two to our infrastructure in the Permian. So that's why we did the deal with them. We've also teamed up with the cement plant in call of.

Rado too to do the same thing and that plant there will tie into a pipeline that we have coming from the southern Colorado, all the way down to the Permian. So we'll be getting C. O two from that plant into the pipeline and two our AOR operations of the Permian. So it's that infrastructure that we're trying to definitely take it.

Vantage of but the the really good thing about the direct air capture and the thing that that some people have missed is you can put direct air capture anywhere because you don't need to put it where are the pollution is because of the wind balance the concentration of C. O two around the world. So the.

Well, we can do with the direct air capture but it right close to the facility or they are the reservoir that we want to put it into that's why it makes it possible to have direct air capture in the Permian and the DJ The powder River, Oman, and ultimately and hopefully in Algeria too so.

We can put it anywhere we want in this this creates opportunities way beyond the Permian we wanted the prove it up in the Permian because.

That is the of the best place for an almost in the world for enhanced oil recovery.

The utilization of the C. O two is best there and so.

We've got a good option good opportunity to maximize our infrastructure nobody else has the scale that we do and the size that we do and the opportunity that we have so we're very very excited about it and we do believe that over the next five to.

10 years that the the benefits of of ARIA, our low carbon business will equal our chemical business and then as you said ultimately it's going to the be as profitable and deliver as much as our oil and gas is and stuff.

Okay.

Very helpful.

My follow up would be you know as we look at your goal of being carbon neutral can you talk about how much of that reduction comes from direct air capture and how that ties in with getting companies like United to come in as a partner and you'll presumably you're talking to companies such as Amazon and the like of those that one too you'll lower there.

Carbon footprint of how do you share those carbon credits as you get others to come in and fund the facility cost.

Yeah, I think it's the the direct air capture is going to be a huge part of our future to do this we're going to continue the other partnerships all of that debt would consider the <unk>.

Services agreements with others to to help them.

Have a place to send their carbon from their facilities from their plants or the industry, but but where I'm. Most excited about the direct air capture because of where we can put it and all of the maritime industry. The airline industry of the tech industry, we're having conversations with companies from all of those industries and the thing that that we really.

Need to have in place.

And what we're working on too is to ensure that that we have that there is a way.

And a.

Certified process to attract the C O two molecule from the reservoir to it's in use and as that matures then we're gonna be able to ensure that as we build these partnerships that the the partners we have.

We'll be able to take full credit for what what their investments should provide them well, but we do the same but it's all going to be associated with either anthropogenic from industry or direct air capture and I believe overtime victory capture will be a bigger percentage of what we do.

Yeah. So thanks, I hate I hate to be greedy on my first conference call with you but.

My last one is just on the competitive cost competitiveness and the cost curve of of direct air capture recognizing it's still early days.

But I get a lot of pushback on just the the cost of and the need for very high tax credits to make this economic but can you talk about where you think the cost curve can be.

Three to five years from now as you start to build these facilities.

I think it's not going to it's just not gonna take very long for us to get the to the point, where the tax credits are going to be necessary.

Like solar and wind.

I can tell you that.

I hear the most negative comments from those who have a reason to say that solar and wind.

Our unprofitable today, the direct air capture never will be reality is there's never been of commercial plant built that or you can optimize the process like we're going to do we do expect it but as I said earlier, the first plant will be the most expensive, but I don't believe it's going to take very many.

Plants for us to build to get it to the point where it.

It is economical and does not need the credits initially we do need the credits.

But the but we're we're very close to to being in a position to from for the credits to go away. We believe because of the fact that where if you. If you couple that of direct air capture.

With an oil reservoir and you don't have to build the pipeline to take it very far you've already there of optimize the cost of of the the initial build and the ability of didn't get it in place and then they can operate and every component of the direct air capture is working somewhere so it's a matter of just putting the components together.

And getting them to be more efficient I believe like any new technology that that the the cost debt.

They will come down how quickly it'll come down I think is going to be driven by the expertise of experience commitment and drive of the of those working on it and I can tell you our team and morally.

The reason, we selected them is because they clearly have the vision on how to how to make this work and then and there is committed to it as does our team and so I have high confidence that over time.

Not the not too long of time, but then the the second or third unit, we're gonna have it down to the to the level where.

We're of credits are not going to be needed. That's why we're very confident that we can expand this to the other areas internationally.

The next question comes from Jeanine Wai of Barclays. Please go ahead.

Hi, good afternoon, everyone. Thanks for taking my questions today.

Our first plan. Our first question is on the 'twenty, one plan and kind of what that might mean for an early peak for 'twenty two.

Leverage improvement is pretty significant this year and on the 21 completions.

Trajectory and the amount that you have the VAT.

Crude of ramp into year end to get ready for maybe modest corporate corporate oil growth and plenty of trying to if prices of orange.

Or is the plan next year to instead get back to a more meaningful base dividend or is the goal just to do both I think in Paul's question, you might have said, the Permian tells where maybe a little bit ratable.

But we're just trying to figure out if there is any kind of.

The completion capex in there to get ready for 'twenty two.

So let me start Janine and then Robin Vicki can jump in on the back end. So obviously Q1 production is lower than the average for the year. So there is the two.

234 is kind of be higher than Q1.

Partly because of the storm and then partly just because of how we started up our development program late in the year and how that flows through but I wouldn't think of it as some cash.

Continually increasing trajectory heading into 2022, it doesn't necessarily look like that.

Every quarter will be a little different but definitely the back yeah.

Three quarters are higher than the first one I think as Vicki said.

Not driving towards growth for 2022 of our cash flow priorities.

Main intact.

We're very focused on deleveraging generating free cash flow from the business and we can use to continue that pace.

And move that forward as fast as we can.

Okay, great. Thank you that's very helpful for.

The Permian on sustaining Capex, how do you anticipate that the area next will change over the next few years and Ken that one 2 billion in Capex can that hold the Permian flat over say a three to five year time period as the Midland JV carry runs out I know there was some gross net of shoes.

With some of the guidance this year, but how do you anticipate that one 2 billion being sustainable.

Yes, I mean, you mentioned a couple of points there, let me hit on them, so like the Midland Basin JV.

Very helpful from a capital intensity standpoint, if you look at that where the southern 50, Terry or through you know, we still got a little more than 600 left on that so that'll get us through at least another couple of years from a capital efficiency standpoint.

Yes, if you asked us the gas, where we're gonna be it's difficult to do that because I wouldn't have expected would be as low as where we are today three years ago. When we were doing this business because of the teams continue to get better just as an example of our capital intensity and the resources business there'll be half this year of what it was two years ago.

And that's in the year, where we're ramping up capital so usually that works the opposite way. So our teams continue to get better and better. So why would hate the gas on what that's kind of be it wouldn't surprise me to see of being a little bit higher than the $1 $2 billion three or four years from now, but I wouldn't expect a meaningful change.

From that number to hold our Permian basin flat I think youll get puts and takes are declined continues to come down as you saw the.

Corporate decline going from 25 to 22, that's largely driven by our improvements in our unconventional businesses both from Permian resources going from 37 to 33 also in the Rockies, that's coming down to about 33. So I continue to expect that to improve a bit and as the teams get better and better.

That should also help with that capital intensity going forward. So I guess the short answer is it could go up a little bit, but I wouldn't expect the huge change over the next few years.

The next question comes from Raphael do block of <unk>.

<unk> Generale. Please go ahead with your question.

Good afternoon, and thank you for taking my questions the <unk>.

First one is about your AR aging for crude oil I was a bit surprised not to see a new slide on this in your presentation package could you. Please.

Remind us of.

What is your position on the on the aging.

And.

Can you confirm that you didn't take sort of the position in Q4. Thank you.

Okay. Thanks Rafael so.

You know historically in the company is not one that is regularly engaged in hedging.

Preferring to realize the prices over the cycle appeal of that delivers the most value for shareholders, but we did to your point with the increased leverage take on a oil hedge in 2020.

The debt had a collar in 2020, but then it also had a call provision in 2021. So the only thing remaining from that oil hedge as the call provision in 2021.

We have put in place as the slide deck shows on slide 20 natural gas hedges four of 500 of 30 million standard cubic per day as of 12 31 with the value between $2 50, and $3 64 and of course with basis similar to the cost of spaces. We had on the hedged on oil at year Theres no extending call option.

Now on the oil on the on the gas side, we continue to evaluate additional.

Additional hedges, particularly on the oil side on the regular basis.

We evaluate the cost of doing so versus not doing so as you can imagine the do a pure put is still fairly expensive. Despite the improvement in price and a costless collar.

Collar hedge is going to require both of the cap in the current year.

Of the one we have hanging over us today last year's hedge extending one of the 2022 and so we look at the you know we moved the debt maturity is down quite a bit in the near term.

Which is somewhat of a hedge against downturns of the business in the near term. We also know that our shareholders. Appreciate our heavy exposure of leveraged to oil price and so we have not put something out of place as of now but doesn't mean, we're going to kind of continue to evaluate them and see if they're going to be constructive in the future.

That's very helpful. Thank you. My second question is are you quantified if any one of costs before restarting your wells in picks of stuff because of Covid wave and some question of what's your Kimco Division did you quantify any financial implications of the cold waves before this.

The vision.

We have not yet quantified the the cost of either one of the oil and gas restart or the chemicals, we're still in the as I think we've put out we've got 90 per cent of our production back on the chemicals and the oil and gas of the chemicals businesses.

Ill.

Starting up some of their facilities.

But it's going to take us a little while to get to the end of this to all of them to quantify the cost, but but the good thing is we see no permanent damage with anything in the wells are starting back in looking are looking very good.

And the last questioner today will be Phil Gresh with J P. Morgan. Please go ahead.

Hey, good afternoon, Thanks for taking my question.

The first one here just.

On the capital budget for this year I think in the past, Jeff you've talked about.

For every $10 a barrel of there could be potentially 10% of inflation risk.

I know that the Capex guidance uses the $40 Wty price so I'm curious.

What are you seeing on inflation and if something were to pick up later in the year is the priority to maintain the production if it requires ray.

Using the Capex a bit for the input for the inflation or would you be more inclined to stick hard stick.

The hard to the two nine budget.

Ken.

Yes, I mean, that's the point you raised fill is true I mean, we've seen that both flexing up and down generally.

A pretty good guide for us with that $10 change in commodity price.

We see that type of inflation deflation well, it's a little different this time and you guys are looking at it really closely the most of the time in the past.

Changes in oil price correlated with changes in activity and so this time as you know we've seen of pretty strong run up in commodity price lately, we haven't seen the correlate of activity change that we historically see with that and so really when you kind of layer down were a lot of the inflationary pressures come from it's from changes in <unk>.

The and the need for resources and so on so this time looks a little bit different we're not seeing huge inflationary pressures yet of course, there's parts of the market that are driven by housing starts more than they are a number of frac crews running and things like that and so you get little puts and takes and what we do know.

And what we see we have built into the budget. So it wasn't absence of any of that but it was largely pored on a lower price environment, but we don't expect with what we see at least right now that number to have to change materially or inflationary reasons.

Little early in the year, but at least with what we've seen it right now we don't expect that to change.

Okay got it.

And my follow up was just along the lines of <unk> question.

You touched upon.

The Permian, but I was curious because of some of the other areas.

The Gulf of Mexico D. J also.

The the implication of of what sustaining Capex for those businesses are is quite low relative to history. So I was just curious if you had any additional color on those other lines of businesses and watch them.

You know what the implication would be for go forward sustaining capital beyond 'twenty one.

In past calls.

Really wanted to comment too much beyond 2021, yet, but just anything else you could share there would be interesting. Thank you.

Yeah, I mean, I'd say the same thing so I mean, the gobs of interesting and so let me hit on that one first I mean, you see what the capital is this year I think if we looked at that over a long period of time as you know it's capital tends to be a little more lumpy from doing bigger chunks than it does in the Permian or D. J, because one well it doesn't just cost of few million dollars.

There is much more of that goes with that nurse tieback costs and things like that so all of it if I was going to characterize the gum I mean as you know our strategy is generally around high return tie backs. The teams have been super successful with what they've been doing and I think Vicki had on the first two wells that they drilled with oxy drilling dynamics are coming in of <unk>.

Cost of 35% less of them, where they were in 2019. So that's really going to help you know when you look at sustaining capital and we're having good success delineating new reservoirs around our platforms. So a lot of good things happening there, but the so explicitly answer your question. If you looked over a five year period I would expect the sustaining.

<unk> to be higher than the number that we have this year.

It may be a.

Couple of hundred million in a given year higher than what we have this year.

But it's again not a huge difference from where we are this year, but probably a bit higher over a five year period. When you look at the DJ It's probably similar to what we said on the Permian again the performance improvements are making I know we talk about this a lot of lot, but I am astonished at all of our businesses and what the.

We're doing and let's look at the Rockies you know you look at their rig release to rig release time in the fourth quarter from the two rigs. They ran it was $4 three days I was 27% better than what it was in 2019 and that's in a restart of period. So again, they're doing really really well same thing on our E. P.

Of our business you know one we don't talk a lot of BOE, they pulled over $350 million out of their opex last year.

And that largely of sustainable this year. So you'll look at those things and all of those kind of benefits are going to flow through to the sustaining capital as we look a few years out so for D. J I'd give a very similar answer there could be a little bit higher than what we're seeing this year just because of the number of docs. We brought on this year.

But it's not going to be a huge material change so we feel pretty confident with our 2.9 maybe.

Maybe a little bit higher if you're in a much higher commodity price world for a longer period of time, but we don't see a change in.

30%, 40% of that kind of thing, we feel pretty confident of about that the next few years.

Okay, great. Thank you.

In the interest of time. This concludes our question and answer session I would like to turn the conference back over to Vicki <unk> for any closing remarks.

I'd just like to say thank you all for your questions and for joining our call have a great day.

The conference has now concluded. Thank you for attending today's presentation you may now disconnect.

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