Q1 2021 Occidental Petroleum Corp Earnings Call
Good afternoon, and welcome to the Occidental as first quarter 2021 earnings Conference call. All participants will be in a listen only mode should you need assistance. Please signal a conference specialist by pressing the Star T followed by zero. After today's presentation there'll be an opportunity to ask questions to ask a question you May Press Star then one on your <unk>.
Tone phone and to withdraw your question. Please press Star then two please note. This event is being recorded I would now like to turn the conference over to Jeff Alvarez, Vice President of Investor Relations. Please go ahead Sir.
Thank you Chuck.
Good afternoon, everyone and thank you for participating and Occidental's first quarter 2021 conference call on the call with US today are Vicki Holt, President and Chief Executive Officer, and Robert Peterson, Senior Vice President and Chief Financial Officer. This morning, we will refer to slides available on the investors search.
<unk> of our website. The presentation includes a 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 afternoon, everyone.
I'd like to start this morning by saying how pleased we are with our first quarter operational and financial performance the momentum.
<unk> generated by our improved cost structure and capital intensity leadership was a catalyst for our strong results. This quarter and is expected to continue to provide a solid foundation or free cash flow generation.
This morning, I will cover our first quarter operational performance and divestiture progress Robert.
Rob will cover our financial results and balance sheet improvement as well as our updated guidance, which includes an increase in guidance for midstream and obstacles in 2020 one earnings.
Our first quarter results are a perfect. Perfect example of how our ability to consistently deliver strong operational performance and strengthened our financial position.
In the first quarter, we generated $1 $6 billion of free cash flow, which is our highest level of quarterly free cash flow in a decade.
We also closed almost $500 million of divestitures repaid $174 million of debt and exited the quarter with approximately $2 $3 billion of unrestricted cash.
Our plan to stabilize 'twenty, one 2021 production at our fourth quarter 2020 exit rate is on track, we delivered first quarter production from continuing operations of over 1.1 million daily per day with total companywide capital spending of only 579 million.
Particularly proud of this achievement given the operational challenge posed by winter Storm Yuri.
Our domestic oil and gas operating cost of $7 20 per Boe and he continued to demonstrate the lasting impact of our cost reduction measures and includes about $83 million of atypical costs related to the winter storm.
I want to note that we have fully recovered from the storm with no lasting impact.
Even with incurring storm related costs in the first quarter, our full year domestic operating guidance has only increased by 10 cents per Boe, which.
Which reparate represents a significantly smaller increase than the approximate 25 cents per Boe a debt to $83 million in total opex would have otherwise added.
This is a significant achievement made possible by our team's continuously seeking efficiencies and finding innovative ways to safely and effectively lower cost.
In the first quarter Oxy, Ken benefited from robust PVC pricing and gradual strengthening in the caustic soda market.
Obviously, Ken Zenner krausz integration across multiple chlorine derivatives provides us with the ability to optimize our caustic soda production fall opportunistically adjusting our production mix to maximize margins.
Obviously, ken's ability to adjust to rapidly changing market dynamics was invaluable during the downturn last year, we were able to provide critical products to the medical pharmaceutical and disinfection markets to respond to COVID-19.
Given the recent improvements in the chloro vinyls and caustic soda markets, we expect Arctic and to extend its track record as a market leader and consistent generator of free cash flow.
Additionally, during winter storm Yuri our team was able to safely protect our assets as well as provide essential products to our customers. Our teams effective response limited the storm's impact on facility maintenance costs to an immaterial amount.
Midstream <unk> marketing's outperformance.
Compared to guidance in the first quarter was primarily driven by our ability to optimize long haul gas transportation in the Rockies, along with the timing impact of export sales.
Following the increase in activity in the fourth quarter, our oil and gas business continued to push the envelope with new efficiency gains as we seamlessly transitioned into the first quarter.
Our Permian teams outperformed expectations in the first quarter by setting new drilling records in New Mexico, and Texas, Delaware and the Midland Basin, Although it's also driving down cost.
Our first quarter Permian achievements are especially impressive as we have now augmented the efficiency of our oxy drilling dynamics with remote directional drilling and exciting innovation that allows the drill bit to steer from a separate location.
Being able to control and optimize our operations remotely and instantaneously apply shared expertise similar activities as numerous advantages that we expect our operations to benefit from in the future.
We also continue to achieve significant efficiency improvements in the Rockies, where in the first quarter. Our D. J drilling team and reached our lowest average cost per foot in program history.
Also like to highlight them on for their best ever H S performance with no recordable and the first quarter, while drilling the longest lateral and oxy, Oman history, and achieving record drilling times.
After a pause in the issuance of new drilling permits on federal land earlier. This year. We have now started to see the process move forward again with the approval of new permits.
Currently do not expect the permitting process to have an impact on our activity levels as we still plan to run an average of 11 rigs in the Permian This year and two in the Rockies.
In late April I testified before the U S Senate energy and natural resources Committee in support of lifting the federal leasing moratorium.
As I told the committee continued onshore oil and gas development means high paying jobs community reinvestment and meeting energy and product needs during the transition to a low carbon economy.
We look forward to working with Congress and the administration on ways to create clarity and short and long term regulatory certainty.
After we announced the sale of our Colombia onshore assets last year, we updated our divestiture plan to sell $2 billion to $3 billion of assets by the middle of this year.
Our progress towards this target continues as we closed almost $500 million of sales in the first quarter.
Oh, it's Colombia, we now have closed approximately $835 million of divestitures and are well on our way to achieving our target, but we will continue to make the best value decisions about weighing the impact of future cash flows in our current environment versus the benefits of meeting that deadline or divestiture target.
Looking back over the last year I'm, particularly proud of the accomplishments our teams have achieved and look forward to the opportunities that lie ahead.
Have we optimized our portfolio improved our balance sheet and continue to reduce costs. We've also created a pathway to achieve net zero emissions.
As we take our next steps toward achieving our future goals, including further balance sheet improvement returning additional capital to shareholders and bringing our first commercial scale direct air capture plant online. We will continue to maintain our low cost capital efficient stable production base with the goal of maximizing free cash flow generation through.
Net capital discipline and margin preservation.
Our cash flow priorities are structured with the aim of positioning our company for future success. While we are encouraged by the improving macro environment and are especially proud of our team's ability to maintain and sustain our production base. We will continue to improve our balance sheet until we reached the point, where our financial position will support a more meaningful return on capital.
And return of capital to our share holders throughout the commodity cycle.
I'll hand, the call over to Rob who will walk you through our financial results for the first quarter and guidance for the remainder of the year.
Thank you Vicki I want to Echo <unk> comment that our strong performance in the first quarter, our cash flow priorities illustrate the importance. We continue to place on capital discipline free cash flow generation and balance sheet improvement.
Looking ahead, the steps necessary to transition from our current for our medium term cash flow priorities focus on balance sheet improvement will continue to influence our financial policies.
Throughout 2020, which was one of the worst years of our interviews and are focused on deleveraging and have continued to reduce debt in the first quarter of this year, we repaid approximately $9 $6 billion of principal since August of 2019 with more to come as we complete our divestiture program combined with leveraging our ability to generate excess free cash flow and maintain our commitment to capital discipline.
On past calls I've highly up a preference for a viable path to return to an investment grade credit rating, we're allocating excess cash flow to our medium term priorities, while credit range or based on several factors, including a certain level of debt returning to investment grade in a mid cycle commodity price environment may include reducing debt through the mid $20 billion range.
We're not there today, but we believe this goal is achievable given our potential to generate free cash flow.
We were paying $174 million of debt in the first quarter and have less than $225 million maturity fueled the remainder of 2021.
As we generate cash organic free cash flow and close the remaining divestitures, we have several options available to deploy that cash to.
To improve our balance sheet and the option to call. The 2022 floating rate notes prior to maturity in may at times of our cash flows and to build into the maturities come due.
We have additional options available to address these maturities, which we are currently evaluating may also consider retiring $750 million of notional interest rate swaps. Later this year for the fair value of milk, which was approximately $665 million per quarter and this will improve cash flows by almost $50 million per annum at the current curve.
In the first quarter, we announced an adjusted loss of <unk> 15 per share and a reported loss of <unk> 36 per share difference between our adjusted and reported results is primarily due to a gain on asset sales and positive fair value adjustments offset by a planned lease expiries.
The legal contingency related to our 2016 settlement with Ecuador.
This quarter reclassified all derivative instruments with mark to market adjustment items affecting the comparability we.
We expect this change will be helpful to investors compare and underlying business performance between periods and reconciling actual results for our guidance, which was previously excluded the mark to market adjustment.
We were able to add additional gas hedges in the quarter and have now hedged approximately half of our 2021 domestic natural gas production with a floor of $2 50 per Mcf.
We are on track to spend within our full year capital budget of $2 9 billion, having incurred capital expenditures of only $579 million in the first quarter. Our operational success combined with our focus on sustained production in a more supportive commodity price environment enable us to generate $1 6 billion.
And free cash flow and exited the quarter with almost $2 3 billion bond.
Unrestricted cash on hand.
Our business incurred a negative working capital change in the quarter, which was largely driven by higher accounts receivable and inventory balances through the commodity price recovery over half of the working capital change was due to commodity price, which reflects the timing difference between the revenue is recognized when the cash is received we also made several payments that are typical in the first quarter, including property taxes.
Net interest payment employee benefit payments and pension contributions.
The potential for the working capital change partially reverse over the remainder of this year as expenses were accrued last year were already paid in the first quarter of this year.
We are pleased to be able to update our full year guidance for midstream and oxy, Ken reflecting strong first quarter performance and improved market conditions, our revised guidance combined with our operational achievements have enabled us to lower our 2021 breakeven to the mid $30 range that wty basis before the per dividend.
I would like to reiterate debt. Despite the first quarter weather impact to our Permian production of approximately 25000 Boe per day as guided in our last call combined with the production impact associated with divesting $280.085 billion of minerals and a negative PSC impact that were 5000 Boe per day related to higher oil prices, our full year production guidance of $1, one 4 million.
Bo per day remains intact as does our full year capital budget of $2 9 billion.
I'll now turn the call back over to Vicki.
Thank you Rob.
We are encouraged by the positive reception of our 2020 climate report received following its release in December as well as the enthusiasm our low carbon strategy continues to generate we understand that many of our stakeholders have a desire to learn more about our low carbon projects and the returns these projects will generate.
Well, we are not yet able to share the economics, we will have created.
Created partnerships to finance and deploy cutting edge, <unk> technology, which leverages, our expertise and our tens of billions of dollars worth of C. O two infrastructure assets enforce space.
We are creating these cross industry opportunities for others to invest alongside us to maximize the deployment pace and carbon removal impact we look forward to sharing more information when possible.
As part of being a socially and environmentally responsible operator, we consistent consistently make operational improvements in addition to working toward our net zero goals.
In the first quarter, we started in water recycling facility in the Midland Basin, then began utilizing recycled water in our South Curtis Ranch development in partnership with an industry, leading water midstream company, we were able to increase our water recycling efforts and lower cost.
Recycling water has been a large focus of ours in new Mexico for several years and we were pleased to have been able to expand this effort into Texas.
Before we begin the Q&A I want to announce it in April we became the first U S oil and gas company to commit to adopting the world economic Forum's stakeholder capitalism metrics.
We'll go to our process to incorporate the forums metrics most relevant to our business into our environmental social and governance reported. We believe this is the appropriate framework to supplement our reporting on ESG progress enhanced transparency and strengthen our engagement with investors and other stakeholders.
I'll now open the call for your questions.
Thank you we will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone if youre using a speakerphone. Please pick up your handset before pressing the keys.
So a draw your question. Please press Star then two please limit your questions to one primary question and one follow up and if you have further questions. You may reenter the question queue and at this time, we'll pause momentarily to assemble our roster.
Okay.
And the first question will come from Dan Boyd with Mizuho. Please go ahead.
Hi, Thanks.
So.
I wanted to ask one on direct air capture but I think you know first just kind of starting with the free cash flow outlook here could you just give us an update on your dividend breakeven I think last time, you talked about it it was in the high thirties I, presumably it's lower given the improvements that you've seen in chemicals and midstream and maybe also just comment on your free cash flow.
Generation this year at the strip adjusted for work you know even if you include working capital I think there's probably a lot of questions on that today, given what the stock's doing.
Sure Dan Thanks So.
Our revised guidance when you combine and operational achievements.
Did lower our breakeven and what I would say the mid $30 range on a W. Ti basis before the purpose preferred dividend specifically that we give a range because it is influenced by a number of factors that you listed including the cash flows, including the natural gas prices realization per our products divestiture timing and where our chemicals and midstream fall with respect of earnings guidance and obviously.
This quarter, we were able to significantly move our guidance on both the chemicals and midstream business, which has a material impact.
On that on that range, but in addition to that you know as we take that organic cash flow.
We can further improve the breakeven and doing things like I mentioned in my opening comments regarding the interest rate swaps, where we retired the $665 million.
Oh of notional value, we're sort of a $50 million notional value that was 665 at the you know the quarter.
We're able to eliminate about $50 million of interest cost for the year using the current curve.
So theres a lot of things that go into that you know in terms of forecasting out cash flows into the area and we don't forecast cash flow forward on that side of it.
I think you can see pretty representative quarter is a fairly clean quarter outside of a few things and I think you can see eliminate the working capital and get an idea what kind of cash we would generate at similar prices moving forward.
Okay, I'm sure you're going to get more on that so the Vicki I wanted to go back to the direct air capture I came across the document it was a presentation that someone on your team made to the California Air Resource Board I think back in October that you talked about building or at least having four facilities online in 2025.
And there was also a petition to get.
Credits or or I guess generate the credits during the construction phase. So can you just talk about that and what that might be able to do in terms of your ability to finance this and in creative ways as you just touched upon.
Yeah, I'll say that we don't have any concerns about being able to finance our first direct air capture facility.
The first one where once we have both trains built will be able to capture 1 million tons per year C O two.
So they're there to us or no financing concerns, but it is helpful to us when we can to generate them.
Some cash as we're building the facility that's what that request was about and if we could get that request for that.
Those us to do is accelerate development of the next facility. So what we're trying to do is what I believe the cause.
Card and others want to do and that is accelerate our ability to be able to have a positive impact on the environment and also to be able to create value for our shareholders. We're trying to accelerate debt, where we can and so we believe that.
We will be able to provides are obtained some funds either from that or potentially from some modifications that we think is critically important to 45. Q is currently 45 key was the tax credit if that were ended direct pay to.
To us.
For the the carbon that would capture that's another enabler that allows us to accelerate the construction of the technology get that advanced faster and more built sooner. So so there we're looking at multiple ways to accelerate all that we're doing in the Permian with respective direct air capture.
The next question will come from Neal Dingmann with Truest. Please go ahead.
Good morning, all Vicki I know you've mentioned in the prepared remarks that you were fine with as far as permits and it's not going to influence the two rigs in the Rockies just wondering would you if.
If and when the decisions come out in August what might a you know I guess changes could we see either in the Gulf of Mexico, or Rockies I guess, depending on you know.
How are we to the degree of what comes out.
I think the changes that will come out or will not impact current leases I do believe that we'll be able to continue permitting on current leases my concern is that.
That there could be a moratorium on longer term moratorium on picking up additional leases.
That would be bad for our industry it would be bad for the United States.
It would put our country in a position where we would likely have.
And even tougher time, increasing production above where the United States is today as you know we were at one point over 13 million barrels a day of oil production from the U S. That's a that's a scenario that gave us strength in world politics, and gave us the ability to to completely supply are.
Oil and products domestically, we would not have to to import very much at all at a 13 million barrel a day level, because I believe our refining capacity somewhere.
Near a $17 million. So we would have some capability to be almost completely independent.
With a moratorium on a federal leases.
That would really drive down that you know our industry's ability to react and where we are in that we've got not even a half million acres of to developed in the U S and all of that $9 5 million acres I think of only about $1 6 million or a federal and.
About half of that is offshore so from a new lease standpoint, there are some companies that are in better position than others and where we believe we are well what I'm advocating for is the industry and for the for the country because the other thing about this is some of this is being touted as a.
You know a way to reduce emissions for the United States, which you would be definitely a bad news because we are very prudent with what we're doing in United States compared to a lot of countries around the world.
We've reduced emissions significantly in the U S and continue to push technologies to further reduce.
API, where part of API and in a lot of companies within a P. I have committed to voluntary.
Partnership, where we're all working to share technologies and to help each other and reduce emissions and to get the best available technology in place to address emissions and climate change. So I think that for me. The biggest worry is not on existing leases. It's just the moratorium.
It could be extended.
For a long time on taking out on anybody picking up any new releases.
No I don't like the details thanks, and then just a follow up.
I'm just wondering what are your financial investments and I guess sort of two party here just talk about maybe what type of financial investments you see in your carbon capture and initiatives other cleaning them generics because you seem to have an advantage, especially out there in the perm.
Some other isn't really my main question around that is will the funds that you spend on that is that going to be in.
Influence, what youre able to spend on either on some of the upstream or are they too sort of independent there. Thank you.
No our our low carbon strategy as is.
Very connected to our C O two enhanced oil recovery projects.
And as we've mentioned before we started.
Working on this low carbon strategy, because we want a day.
More a sustainable source for C O two and a lower cost C O two four our enhanced oil recovery.
Where we're positioned today is incredibly exciting because in the Permian basin, we have.
Such a footprint not only reservoirs for space and resources, we have the processing plants, we have the pipelines in all of that necessary to further accelerate development of additional 2 billion barrels in our conventional reservoirs and we haven't even been able to calculate.
Yeah, well, we could get from C. O two enhanced oil recovery in the shale so doing that in the Permian and doing that in the DJ basin and the powder River that that sets us up for decades to come of of generating.
New reserves and production from existing reservoirs, and so really it's tied to its tied to that is tied to being able to create value for our shareholders through the extended production of of more reserves than what can typically be produced out of conventional or unconventional.
Resources for example in conventional reservoirs with C. O. Two you can get up to 70% or better recovery and whereas it would just primary development normally you get $20 to 25 per cent most.
So we can get better than 70 per cent with C. O two flooding in the unconventional where most companies will tell you that you'll you'll get at most 10 per cent the 12% recovery of the hydrocarbons from the shell play, but with Cotwo enhanced oil recovery, we've tested it we run four pilots and we now.
I know that we can.
Potentially.
Get 75 per cent additional recovery or maybe even double it so.
So we're sitting in a position now where we have a significant amount of future potential development and we have it in the areas, where we operate the areas, where we already had the infrastructure. So as we go forward our incremental production and recoveries are just going to continue to be at lower and lower cost.
Beyond.
The point, where we were able to get these direct air capture facilities built but what's also going to help us there too and help further lower cost is.
Executing on our net power.
<unk> technology, which you were also an equity investor in net power is the process that generates a lower cost of electricity.
I can besting hydrocarbons with oxygen and therefore spits off of pure stream of C O two.
At and no other emissions. So we can take that see how to use it in a reservoir. So it's essentially a lower cost emission free electrical generation process for us. So we have we have a lot of ways. As we go forward and this is why we're incredibly excited a lot of ways to get more more oil out of there.
A ground for lower cost and so as we go forward our cost structure will continue to decrease not just from the debt reduction that that Robert.
Robert talked about but from the actual development and operations in the field and in addition to that we will be able to provide aviation and maritime industry with with a net carbon zero oil.
So we're going to be the these solution for actually aviation and maritime and that's why United wanted to join with US from building. This first the direct air capture facility. So it's exciting for US sorry, if I'm talking too long on this I'll stop here and see if you have anything else to ask but it's it's exciting for us and where we're really.
I'm looking forward to being able to talk more about this and as I said in my script, we we can't yet because we're in the middle of some processes and some discussions and interactions with others that we hope that in the fall or close to the end of the year, we will be able to share more about it and and get you a model that.
The two you'll be able to.
See and understand at that point.
The next question will come from Doug Leggate with Bank of America. Please go ahead.
Thanks, Good morning, everybody.
Robert.
On the cash breakeven question, but I don't want to do a little math with you real quick.
One 6 billion of free cash, obviously before working capital annually.
Annualized at six $4 billion.
$250 million per door.
The remarks on the <unk>.
Average.
Price in Q1 was 50 761.
So how do you get mid thirties unify on Fox crack spread.
All of them the gas useful booth thirty's, what's what am I missing.
So I think that.
Part of what is missing from that is certainly the Capex and then also whereas I would say the chemicals. The performance in Q1 as you can see in the guidance is sustained throughout the year the midstream inclusion in Q1.
Is more of a one time event associated with winter storm year or so.
As part of Annualizing, the Q1 numbers Thats, what I would.
Modify your analysis five.
I realize you are not repeatable, but still.
Delta is about seven bucks.
Okay I'll take it offline my follow up Vicki.
Yes, it's a regular question every quarter.
More progress each time, but still a long way to go to get to the $3 billion can you give us some color on <unk>.
Timing visibility at this point.
Yeah, I would say that if if I.
I include the unsolicited offers that we've got and we currently have offers in hand that would get us well above the $2 billion minimum target. However in this environment.
Back to Hum.
That we would well make the $2 billion.
But whether or not we go above the 2 billion really depends on how the macro continues to look for us and in everything that we're getting in and every divestiture that we that we have the potential to do we always want to evaluate what it delivers for us versus what the cash flow in the future.
Regenerate so what's the value proposition for us and and it's also ensuring that the other part of the consideration is making sure that we have enough cash flow to meet our maturities debt maturities and even to go beyond that to as Rob was saying to deal with the interest rate swaps and some other minor costs that we.
So it's all about lowering our cost structure and making sure that we maximize our higher margin cash flow keep that intact.
So lean.
Still have gone up we have not announced.
Any others that we have but we do have a couple of several things actually in process. A couple that have a net are higher priorities for us to do one is Ghana as we've talked about it before.
But because we have several processes running now we feel comfortable that we'll get to the $2 billion and then.
Going beyond that is really going to be a preference based on and the decision based on the valuation.
The next question will come from Neil Mehta with Goldman Sachs. Please go ahead.
Thanks, So much I just wanted to build off of the cash flow question from a quarter can you just walk us through again, why the cash flow and our working capital net.
Number was so large and then how should we think about the reversal of a lot of this just sounds like a timing stuff.
And certainly export barrels will eventually hit their final destination. So I would think a lot would come back, but just walk us through that.
Yes, sure sure Neal happy to do that for you. So if you look at a typical first quarter.
We would historically see.
As someone who has significant draw in the first quarter because of the but it was certainly more sizable in the first quarter of this year. I mean, you go back to 2018 Q1 withdrawal of about $7 million 2019. It was about $9 million per the opposite reasons of this quarter of 2020 was about $200 million draw because we price going the opposite direction.
Operating margin the pandemic hit and with the price wars going on so regardless another 1.3 billion draw we experienced our first quarter does is exceptionally large the majority of that was driven by the change in commodity prices. It was a timing difference between revs.
Revenue recognition and cash received so at the end.
2020 W. T. I was its about $48 a barrel and it was $61 a barrel at the end of March and so this price increase of about 30% impacts both our AR balances and our inventory significantly, especially when you consider our midstream business and how many barrels on the water at any given point in time, and even that's a bit exacerbated because.
We discussed a bit last time in Europe, essentially been shut down.
Significant cargos.
Of oil from the Gulf since the third quarter of last year and as a result, we've had to change our mix our portfolio of export shipments with rebel.
Most part heavily weighted to oil.
Closely related to shipments to Asia, which is longer voyages for crude oil water longer because of the transit time.
And then I mean, obviously you know compared to other years, we have a pretty modest capital budget and so we're not creating this thing thinking about payables through our capital spending. So when you look at the combination of the price impacts coupled with all those first quarter events like the semi annual interest payments the payments of property taxes, we made.
I seem to have a contribution to the a b C.
Pension plan during the first quarter.
And then so you put it all together we do expect as you pointed out as you know receivables start to come in and some of that will reverse itself a year goes on.
Is it fair to assume Q2 should be a decent working cash our working capital cash inflow all else equal then.
I guess it depends largely on what happens with price going into the second quarter also.
Nobody expected it.
And the follow up its Jeff on the chemicals business are obviously margins are really strong. So just get your gas a big picture view of where we are in the chemical cycle and how your business fits into that.
Yes, so absolutely nothing to happy to do that and talk about our chemical business, which had an excellent start to the year.
When you look at the chemical business. It has both some impacts from.
Winter storm Yuri to some extent, but also because how you went from Yuriy impac.
Impacted the overall business itself and so no collateralized production struggled significantly in March post storm. If you think about urea it had a much wider impact any individual hurricane what it had in the past and so you still had a lot of inspections et cetera going on a restart so in the month of March and that has extended into.
After a very difficult hurricane season last year, and so going into the end of 2020, we already had a pretty tight supply demand balance in the second half of the year.
And that was coupled with a pretty significant amount of demand as you know building products are in very high demand right now so our PVC demand and margins were significant.
Already going into the year and so if you look at our operating rates as the industry. There are only about 71 five per cent for the first quarter of 'twenty, one, whereas last year, there were 89% and so the combination of the stronger demand coupled with the production offline to start the year as already tightened up an already tight supply demand balance.
So on a case of PVC.
Construction investment is very strong demand expected range for all with the housing starts outlook low mortgage rates a lot of emphasis on remodeling et cetera, right now that is driving PVC demand.
So PVC demand domestically is up almost 5% compared to the same period in 2020, which drives down.
The amount of PBC that is actually being exported and exports were actually down about 30% compared to the same period last year and so with resin tight in the domestic market were able to expand margins just like we would any other commodity.
Plus vitamin imbalance.
And then what we're seeing in the caustic soda businesses, whereas previously when we guided we anticipated to start we are seeing caustic soda bottom and we thought we start seeing improvements in the second half of the year.
<unk> pulled that forward.
And so now we're seeing caustic soda prices improve in the second quarter as you move forward and so we're just getting more of that as the year goes on and so we're expecting not only continued high margins in the PBC business.
Resilient demand through the balance of the year as construction continues a pool I mean, so they're PVC is really no different we're seeing prices of wood and everything else.
We'll also see caustic soda benefits net process at all and as Vicki mentioned Oxy is a significant amount of other derivatives beyond just PBC that we sell is the company a lot more variability in the molecules that can sell to produce additional caustic soda and produce additional oil.
Parts of the chlorine chain I'm, just going to expand our ability to increase the value delivered by the business.
It's the reason why we talk about how much value is locked in the chemical business and why when people talk to us about the chemical business a lot of times and while we don't do something different with it because it's just hard to up for people to grasp, but a small commodity chemical business that can turn off these types of cash flow on this asset base and its really is a remarkable business.
The next question will come from Jeanine Wai with Barclays. Please go ahead.
Hi, good afternoon, everyone. Thanks for taking our questions.
My first question, probably maybe for Rob I, just wanted to make sure I heard your comments right.
Paired remarks, so getting down to the mid 20 billion range on gross debt, that's where you think you need to be to hit.
Does that mid cycle prices and I think ultimately that's an important goal for you all.
So about $10 million more to go from there can you just remind us what your view of mid cycle prices are at this point and how does this jives with your prior target of three times leverage as the trigger for growth, which I think was also at mid cycle prices.
Yes, it's around $50 range and if you look at the price index.
Next that are being used by lottery agencies, there in the high forties right now to close to $50, they're not so they don't move their price decks with the current environment of being in the <unk>.
Mid to high <unk> low <unk>, so that makes a significant difference on where that breakeven location debt.
So is it exactly 20 $10 billion right now obviously, there's a lot of different things that factor net that might indicate in my remarks, but it's somewhere in the neighborhood of that somewhere as all these other things will go into that that could it could mitigate it to be a little higher than that would be possible or even a little lower than that but obviously.
There's a lot of things that go into it but it's somewhere in that range.
So even though that you can probably move forward and get pretty close to that or below that three times in your in your model for the second half of the year.
The end of the year based on current oil prices were to continue if not at that price deck that we're gonna be considered for investment grade.
Okay got it so.
In terms of some moving pieces.
My follow up is in terms of the moving pieces on that medium term goals.
There is a sustainable dividend.
This growth capital now we can.
Kind of have a bogey roughly on a gross debt. So how do we think of the trade off for all of those things.
I'll take some time to reduce the debt we've got the preferreds.
You do have like very healthy oil prices as well as.
Asset sales that are coming in so I'm just kind of wondering when we're looking at our free cash flow profile and.
The new debt targets, when we can kind of revisit the growth conversation versus the day.
Dividend and paying off some other things.
Yeah, So Jamie I would say that you know obviously as William Vicky's remarks.
We're squarely focused on leverage reduction right now and looking at the opportunity to get down to that investment grade type level.
Embodied in that is going to be.
Using the proceeds both from the free cash flow from the business using the proceeds of any divestitures that take place and combine those two things together to reduce the cost we have outstanding.
And that can be through a host of different things as I discussed my remarks between what we're evaluating near term.
On the ability to put that cash to work to reduce debt.
That conversation will eventually rotate over into medium term priorities focusing on the on the dividend.
But we haven't established a policy about the dividend might look like it's going to need to be sustainable as we've indicated in our priorities. So it could be a combination of something that's fixed and some variable component we haven't decided on that at this point.
But that conversation will come at the.
We've made more progress on our debt reduction.
Yeah.
I would just add to that and you know we had this this great production profile right now and with a production profile that we have the chemicals business supporting it and what we're really focused on is margin expansion, we have lots of opportunity for that and that's what we're most excited about so there will be continuing shareholder.
Our value growth, but through margin expansion.
The next question will come from Devin Mcdermott with Morgan Stanley. Please go ahead.
Hey, good afternoon, Thanks for taking my question.
So my first one kind of builds actually on that last point Vicki on margin expansion and just the the old comments you had in the prepared remarks as well on cost reductions you had said that you.
You were able to identify some cost reduction opportunities in the quarter that offsets offset some of the winter storm impacts I was wondering if you can comment as to whether that was deferrals or more structural reductions in debt as part of that as we think about the margin expansion opportunities going forward are you still identifying things like upside that's introduced from the Anadarko transaction.
Or maybe said another way is there still more room to run on reducing the cost structure here, where some of the levers to drive that cost structure down.
Yeah, you're right, there's more opportunities to continue to reduce our cost structure in both capital and Opex and one example, I'll give is we went back recently and took a look at our drilling performance.
Between 2015 up true what we're doing in 2021.
And I can tell you we rolled out our physics and logistics space Oxy drilling dynamics in our domestic operations in 2015, and then and rolled it out internationally in late 2016, and I think I've said before we haven't seen an area, where we're where we've rolled this out we haven't had.
And about a 20% to 30% reduction in our cost.
The exciting thing in looking at our day to today is we've decreased our drilling costs from $200 a foot back in 2015.
<unk> $35 a foot in 2021 for our global drilling that's everything around the world.
And so we've we've.
Visually pointed out the performance improvements in the Permian, but we've not only seen it in the Permian we've seen it in the D J.
In the powder River and now Oman is seeing a lot of good things happening there by using this process and its proprietary to us we developed it. So it's it's making a difference. We've also started applying it to the Gulf of Mexico, and seeing some good things there that we'll be able to.
Quantifying report on here in the near future so its drilling.
On the drilling side, it's still and I will say before I lead drilling some people might say that you've probably got all of that and right now we're not improving from 2019 to 2020, even in the downturn, we improved by 14% what we were doing there. So there's.
The improvement is happening even today so far this year, we've improved by about 4% only one quarter into it. This is as we were picking up rigs.
This is what.
What we're doing there is working but also on the completion side, we're still setting records for how how many fracs. We can do in a 24 hour period and so that's improving the.
The other thing we're seeing is that our Permian team day every one of them actually is continuing to work on the subsurface model and this has been a point of extreme emphasis for us.
Because of the variation in the shale plays so we started really enhancing our subsurface expertise about six or seven years ago, and working hard to get that to where we needed to be and we have some incredible people in house that now do that work.
And that what we've learned in in the shale play we've extended also to looking at conventional and to doing more with seismic and part of that was driven by.
The the good efforts that the the Anadarko staff had accomplished and achieved with.
Some of the three D seismic into our team.
Our domestic people started looking at how others were doing things and taking what others are doing and made it better. So so every phase of what we're doing we're trying to do better and we're seeing it's still continuing improvement.
One is using what they call day, a an oxy jetting system, where in existing wells. They can go in and jet with a process that ensures maximum contact with the reservoir.
Through each phase of of the of the jetting process, both vertical and horizontal wells, that's delivering better recovery from.
From the existing reservoirs to and to me. The more you can get out of or the reservoir that you've developed the better off you are in an even better when you can go back into existing wells and get more out of those.
So I'm quite confident that we will continue on both the opex side and the drilling side, the completion side and facilities to continue to lower our cost. Our teams are driven to do it and did it even during this pandemic and did it in a big way. So I think in new Mexico and several of the areas.
They worked really hard there they lowered our break even on some of those areas by $10.
$10 a barrel so all of that's incredibly encouraging for for what we have going forward considering the the footprint that we have and the areas that we know the best.
And I think I'll, just add to that I mean.
I think that when you hear about all the exciting things underlying the business.
He talks about and I know externally.
The thesis of paying down debt seems incredibly boring for foreign external thesis right as part of the reason why we're working so hard and committed to this and getting that behind us. So it's really that we can focus on almost on the story of the company being beyond that what is going to be when we do fully expect that debt goes down it will translate into the equity value.
And a total enterprise value, which is good for our shareholders, but we understand they're talking about reducing debt doesn't seem too soon probably exciting but there's so many other exciting things going on at the time, we Miss a fact of all the great things that we continue to breakthrough.
But we thought was the best we could do before we beat it.
Successively since the acquisition.
Okay.
Yes, no that.
Definitely makes it a lot of medicine and the progress toward a modest site on the debt production. It is definitely a good story as well and maybe then shifting focus to some of the other initiatives I know carbon capture in low carbon it's up a few times already right I have one follow up there.
We think about the milestones from here to reaching S. E. On some of these potential projects, including the direct air capture project in the Permian just walk us through what's remaining there it sounds like policy.
And financing isn't one of the milestones at this point, but what are we looking for in order to bring that project to fruition.
Well, we the big step was to select our engineering and construction partner, we did net surely so the feed process is ongoing now and front end engineering.
So we're working that now we expect to have F.
Early next year and start construction by the end of next year. So.
So I don't see that there would be anything barring some weird micro macro thing happened to us that that would change our schedule right now.
Our teams or.
What they have done our major projects team led by Ken Dillon.
Along with Whorley, they put together a sub team that as the front end engineering is happening they're looking for ways to already ways to optimize the designs as they are in progress.
And so I'm really excited that the the first one I believe is going to.
They surprising to some people in terms of its design and and how we're going to be able to build it there were some things already in process around deciding how do you do this on a.
Net a faster pace than on a larger scale as we go forward. Some of that work is in place, but I do expect that there's a that we will begin construction at the end of next year and I don't see anything in the way of stopping that right now.
The next question will come from Leo Mariani with Keybanc. Please go ahead.
Yeah.
I just wanted to share it looks like your first quarter Capex could come in quite a bit below expectations and if you just annualize that number it looks like it's quite a bit below budget on the year just wanted to get a sense of what was driving the lower first quarter.
Capex in.
Just wasn't sure if maybe there were some some costs there are some centers that shifted from <unk> into <unk>.
Their quarters and kind of how you guys are feeling about this 2.9 billion dollar budget.
Part of it was driven by the ramp up and.
We will have our highest spend capital quarter next quarter. So if you average the two its going to that's going to be first half spending will be about the same as the second half spending maybe slightly less but generally speaking Lowe part. This is a part of the startup process.
And then we are we got a little bit of a delay on some of our activities as a result of the storms and some things moved from Q1 into Q2.
Yes, that's.
That's very clear what Vicki said when she said next quarter Q2, I'd say it would be our hi, Jeff.
I have spent and you can see how the Permian, where we only spent a couple of hundred million dollars in the first quarter of a $1 2 billion. So you can definitely see that.
Okay. That's very clear and then just a question on the midstream for the year, obviously, a very strong first quarter and he doesn't know moderated some of the reasons why in the press release.
Comments, but just looking at your second quarter Midstream guide, obviously nothing of Walker and look at it.
Not a big loss kind of a small one.
<unk> kind of the first quarter benefit in the second quarter law, you are expecting let's call. It roughly breakeven when I look at your full year midstream guidance, you're still expecting a very large loss kind of implying significant loss in the second half of 'twenty one.
Splitting a little bit the dynamic there in terms of what you might be expecting later this year.
Yes.
Charlie I think if I understand what youre, saying, if you look at the first quarter, we beat our guidance $234 million and then we raised our full year outlook 200 million. So basically you know last quarter to this quarter, we are expecting deterioration of about $34 million.
The remaining three quarters and basically what's driving that is our view on <unk>.
Gas differentials and on our oil export differentials. So if you look at and I think we.
Talked about this a bit before.
Differentials collapse that helps our upstream business, because realizations get better, but it hurts our midstream business and so that's the piece you have going on so most of the benefit of the Q1 rolls through to the year and then you get a little bit of change for the remaining quarters, primarily driven by.
That differential collapsing.
Okay. Thank you.
Yeah.
Yes.
The next question will come from Raphael Dubois, whether society Generale. Please go ahead.
Hello, Thank you very much for taking my question.
It's about the D. S E plant that you intend to if I D.
You mentioned a couple of quick scores a goal that you were benefits through books. Kim can you can you maybe share with us.
How what quantity of caustic soda will be required for these really true planes.
Looking forward do you think it could be.
Any issue to access caustic soda to deploy this technology.
Yeah.
Vicki Vicki and I can kind of attacking this a little bit, but I would say so first of all.
The working fluid in the direct air capture unit is caustic potash not coffee cocoa.
<unk> not <unk>, but we haven't disclosed utilization or you know what that first fill volume might be or like the first direct air capture unit moving forward.
Yeah, and just to repeat where we're still in the engineering phase of that and still optimizing it. So we probably would not have that information until the end of this year.
The other thing I had mentioned.
The other pieces of the majority of the infrastructure inside the actual direct air capture unit is also PVC, which obviously there is a synergy with the oxy Kim.
Business on the amount of PBC that goes inside the direct air capture unit.
Great. Thank you very much for the clarification.
Okay.
The next question will come from Paul Cheng with Scotiabank. Please go ahead.
Alright, thank you.
Good morning, guys.
Vicki in the Permian I think one of your competitors talking about there.
We're going to move more into the three months' Hawaii a warehouse.
I'm just curious that in your.
In your plan.
Is that something that you guys were trying to do or what that you don't think you suitable for you and also would you talk about onto C. O two putting in the unconventional side. So.
When we're looking at your pumps by inventory what percentage of your inventory that you think is applicable to you. So that's the first question.
The second question is that at some point.
That you would bring down your debt and once you reach that $20 billion range, what's the objective.
For your Oman.
Uh Huh al Tobia, and Gulf of Mexico Operation is that still trying to just maintain the production a relatively steady on you're trying to grow over day.
Thank you.
Hey, Paul could you just clarify for me when you were asking the first question you mentioned that our competitors are doing something and then you were asking if we were doing this time could you clarify what that was again at least one of your competitors is talking about they are drilling.
The lateral lengths are debt.
Three miles or 15000 feet a well.
So just curious that gift.
On your oil position, if that's something you guys bond debt yes.
Capital efficient and productive for us to push for the free miles or that you don't thing, yes applicable towards you.
I think that it's always important to not put yourself into a box to think that 5000 pizza right answer 10000 Pizza right answer I really think debt in all cases, you should do an engineering model you should really look at what is the day.
Right designed for maximizing recovery from the wells and what does your acreage position allow and what are the risk of drilling.
Drilling than they thought.
Ray miles versus one.
One mile or 10000 feet. So I think that there are cases, where there may be situations and scenarios where.
On a longer lateral than 10000 in fact, we drilled 15000 ourselves we did.
At least one or two of those and we've drilled more than 10000 in other cases. They didn't go all the way to the 15000, but I think it really depends on the reservoir and the all the things that you have to take into consideration that against your acreage position your full field development plan.
How you intend to complete it how you intend to what kind of artificial lift do you intend to use. So there are a lot of variables involved but I wouldn't.
I certainly wouldn't say that we would never consider.
Doing our 15000 foot wells again, it's always under evaluation not only just in the Permian, but anywhere we drill horizontal wells.
We wouldn't rule it out and with respect to <unk>.
M C O two.
Oh, two we expect to use them, both the conventional and the unconventional and conventional alone. There's 2 billion barrels of additional resources that could be developed with while we expect to be much lower or no cost C O two in the future.
And then the enhanced oil recovery of the cause of the shale as well. So we're excited about that.
In the interest of time. This concludes our question and answer session I would like to turn the conference back over to Vicki Holt for any closing remarks. Please go ahead ma'am.
Just wanted to thank you all for your participation and and your questions today. Thank you and have a great day.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Okay.
Okay.
[music].
Hum.
[music].
Sure.
Yes.
Okay.
[music].