Q3 2021 Occidental Petroleum Corp Earnings Call

November 5, 2021

Good afternoon, and welcome to the Occidental's third quarter 2021 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 today's presentation, there will be an opportunity to ask questions. To ask a question you may press star then one on your Touchtone phone. To withdraw your question, please press star then two.

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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.

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

Thank you, Eileen. Good afternoon, everyone and thank you for participating in Occidental's third quarter 2021 conference call. On the call with US today are Vicki Hollub, President and Chief Executive Officer, and Rob Peterson, Senior Vice President and Chief Financial Officer. This afternoon, we will refer to slides available on the investors' section of our website. The presentation includes a cautionary statement on slide two regarding forward-looking statements that will be made on the call this afternoon. I will now turn the call over to Vicki. Vicki. Please go ahead.

Good afternoon, everyone and thank you for participating in Occidental third quarter 2021 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 afternoon, we will refer to slides available on.

The investors section of our website. The presentation includes a cautionary statement on slide two regarding forward looking statements will be made on the call. This afternoon I will now turn the call over to Vicki Vicki. Please go ahead.

Thank you, Jeff and good afternoon, everyone. Our strong operational and financial performance continued in the third quarter. Consistent with prior quarters this year, we generated a record level of free cash flow before working capital, which we applied toward reducing debt and strengthening our balance sheet. Operationally, our business has excelled driving our robust financial performance.

Our strong operational and financial performance continued in the third quarter.

With prior quarters. This year, we generated a record level of free cash flow before working capital, which we applied toward reducing debt and strengthening our balance sheet.

Operationally our business has excelled robbing our robust financial performance.

OxyChem had its strongest quarter in over 30 years in our Permian Rockies Gulf of Mexico in Oman teams set new operational records and efficiency benchmarks. As was the case last quarter, our cost structure and capital intensity leadership served as catalysts for our strong financial results and provided a solid foundation for free cash flow generation.

So generation.

Our Gulf of Mexico, and [Oxy] operations were impacted during this quarter by a hurricane Ida. Our primary focus was the safety and wellbeing of our employees and contractors. And we were relieved to hear that our people remain safe during the storm.

Our primary focus was the safety and wellbeing of our employees and contractors and we were relieved to hear that our people remain safe during the storm.

We are working closely with those that were impacted and I could not have been more pleased with how our teams overcame challenging events triggered by the storm.

The Gulf of Mexico, and OxyChem operations that were affected by order are back online with no lasting impact.

I'd also like to pass along our best wishes to our co-workers and Oman's capital Muscat and to all the people of Oman as they recover from the devastation recently caused by cyclone Shahen.

This morning, I'll cover our third quarter operational performance and divestiture progress. Rob will cover our financial results and balance sheet improvement as well as our fourth quarter guidance. Our guidance for the fourth quarter and full year include an increase in production and an improvement to earnings guidance for midstream and OxyChem.

Our guidance for the fourth quarter and full year include an increase in production and an improvement to earnings guidance for midstream and oxygen.

The commodity price environment continued to be supportive in the third quarter as our focus remains on generating free cash flow and maximizing margins. This is the third consecutive quarter that our operational success and capital intensity leadership had produced a record level of free cash flow.

In fact, our third quarter free cash flow was the highest it's been since at least the turn of the century. As you know that timeframe included several periods of significantly higher oil prices.

As you know that timeframe included several periods of significantly higher oil prices.

Total production for the quarter reached the high end of our guidance, which is a noteworthy accomplishment considering the extended downtime in the Gulf of Mexico.

Hurricane Ida has impact on third quarter production and the cost associated with safely shutting in production evacuating and then restarting the platforms and ongoing projects, resulted in higher than expected domestic operating costs for the quarter.

Our fourth quarter domestic operating cost guidance reflects normalized conditions and it's relatively in line with our previous expectations for the year.

On our last earnings call, we highlighted obstacles, many strengths and consistent free cash flow generation. OxyChem's third quarter earnings were the strongest since 1990 and are a great example of what the business is capable of delivering.

<unk> third quarter earnings were the strongest since 1990 and are a great example of what the business is capable of delivering.

Hurricane Ida disrupted third quarter operations, the impact of OxyChem's Louisiana based facilities was temporary.

The storm reduced production capacity in the period, one market inventories were already fairly tight by historical standards. OxyChem continued to benefit from supportive [CBC] and caustic pricing, resulting in stronger than anticipated earnings.

<unk> continued to benefit from supportive PVC and caustic pricing pricing, resulting in stronger than anticipated earnings.

Our midstream and marketing business benefited from the timing of export sales during a rising crude price environment and a healthy market for the sulphur produced [inaudible].

The marketing team was able to capitalize on natural gas price volatility during the quarter by directing gas towards transportation solutions, yielding the highest spreads.

In summary, our team was once again able to utilize existing contracts and their expertise to maximize margins by delivering product to the markets that needed it the most. We continue to make notable progress in reducing debt and strengthening our balance sheet. We exited the third quarter was approximately $2.1 billion of unrestricted cash following the repayment of $4.3 billion of debt and the settlement of $750 million of notional interest rate swaps.

To the markets that needed it the most.

We continue to make notable progress in reducing debt and strengthening our balance sheet. We exited the third quarter was approximately $2 $1 billion of restricted cash following the repayment of $4 $3 billion of debt and the settlement of $750 million of notional interest rate swaps.

We are pleased to have delivered such a sizable reduction in debt in a single quarter. In a healthy commodity price environment, we expect to continue reducing debt in future quarters, as we deliver and take the necessary steps to move towards returning additional capital to shareholders.

At healthy commodity price environment, we expect to continue reducing debt in future quarters, as we delever and take the necessary steps to move towards returning additional capital to shareholders.

Our oil and gas teams continued to demonstrate a consistent drive for efficiency, as we never tire of setting new operational records are generating record levels of free cash flow.

I'll continue to be impressed by how our global teams are able to deliver outstanding results. And I want to highlight several of the examples of operational excellence in the third quarter.

And I want to highlight several of the examples of operational excellence in the third quarter.

I'll start in the Permian, where we drilled our first 15000 foot lateral wells in the Midland Basin and did so with impressive results.

One of the first wells was delivered in less than 10 days from spud to rig release. In the Delaware Basin year to date, we're drilling 16% faster than we were just a year ago.

In the Delaware Basin year to date, we're drilling 16% faster than we were just a year ago.

The efficiency gains that our teams are recording extend well beyond the Permian. Our Rockies team set a new oxy daily drilling record in the DJ basin with over 9700 feet drilled in 24 hours.

In the Gulf of Mexico, we set a new cycle time drilling record in our hosting platform achieved its highest production in 10 years.

10 years.

In Oman, we set new multiple drilling records and completions efficiency records as our teams continue to leverage new technologies and drilling techniques to improve performance.

Another significant milestone reached by our international business was dolphin delivering its 10th [TCF] of natural gas in the third quarter. The impressive efficiency gains we have highlighted on the last few earnings calls are translating into tangible financial results.

The impressive efficiency gains we have highlighted on the last few earnings calls are translating into tangible financial results.

Our innovative approach to drilling and completion techniques, coupled with supply chain optimization will enable us to deliver higher production than initially planned this year. Now I want to point out we are accomplishing this all while maintaining our commitment to capital discipline.

No what I pointed out we are accomplishing this all while maintaining our commitment to capital discipline.

We continuously seek new ways to work with our partners to lower cost in a socially and environmentally responsible way and we're pleased to have been able to do that in the third quarter.

Through our partnership with a leading midstream company, we increased by about 30% the capacity of the water recycling plant that supports our Midland Basin, South Curtis ranch development.

This expansion has enabled us to recycle and utilize higher volumes of water from the plant. In addition to lowering costs, we have not dispose of any water at the South Curtis ranch development since August.

In addition to lowering costs, we have not dispose of any water at the South Curtis Ranch development since August.

Across our US onshore assets are transitioned to using dual fuel frac fleets and drilling rigs as saved over 6 million gallons of diesel year to date lowering cost and reducing emissions.

When Colorado's new permitting process became effective at the beginning of this year, we worked closely with regulators to adapt to the new process and requirements.

As members of the communities where we operate, our goal is to serve as a resource and educate stakeholders on Oxy's approach to responsible development. Our inclusive approach has been helpful in securing DJ permits.

Our inclusive approach has been helpful in securing D J permits.

In September, we were pleased to see the process move forward for Oxy, but the approval of additional permits in Weld County. Our engagement with and support from communities remained strong.

Our engagement with and support from communities remained strong.

As is our commitment to responsible development as we work to secure additional permits. The momentum that our oil and gas business has generated throughout 2021 has helped to position us for a strong start in 2022.

The momentum that our oil and gas business has generated throughout 2021 has helped to position us for a strong start in 2022.

We recently completed our large scale divestiture program with the sale of our Ghana assets for $750 million. As many of you know, we had been working closely with our partners in Ghana to complete this divestiture and have successfully closed the transactions with both buyers.

In the Ghana divestiture we have completed our goal of divesting $2 billion to $3 billion post Colombia, marking the end of our large scale ongoing divestiture and divestiture program.

We have now divested approximately $10 billion of assets since August of 2019, and including the debt that was repaid in the third quarter, we have repaid approximately $14 billion of debt.

As we maintained our focus on shareholder value, we will continue to seek opportunities to optimize our portfolio. We will continue to complete acreage trades or bolt on acquisitions is that create value for our shareholders.

We will continue to complete acreage trades or bolt on acquisitions is that create value for our shareholders.

I'll now hand, the call over to Rob who will walk you through our financial results for the third quarter and guidance for the fourth quarter.

Thank you Vicky. in the third quarter, we generated a record level of free cash flow as commodity prices remained healthy and our businesses performed well. We exited the third quarter of approximately $2.1 billion, while restricted cash on the balance sheet after repaying $4.3 billion of debt in the quarter.

Third quarter, we generated a record level of free cash flow as commodity prices remained healthy and our businesses performed well we exited the third quarter of approximately $2 $1 billion, while restricted cash on the balance sheet after repaying $4 $3 billion of debt in the quarter.

Through September 30, we have repaid $4.5 billion of debt and retired $750 million of notional interest rate swaps. W estimate this will reduce interest and financing cost by $170 million per year going forward.

Estimate this will reduce interest and financing cost by $170 million per year going forward.

Our consistently strong operational results in combination with current commodity price environment are driving improved profitability on top of our already robust free cash flow generation.

In the third quarter, we announced an adjusted profit of 87 cents and reported profit of 65 cents per diluted share. Following on a return to profitability on an adjusted basis in the second quarter.

In our reported profit of <unk> <unk> per diluted share following on a return to profitability on an adjusted basis in the second quarter.

Similar to previous quarters this year, our reported results were less than our adjusted results primarily due to the mark to market impact of derivatives.

As commodity prices improved throughout the third quarter, we made payments of $14.2 million under remaining oil hedge position and $24.1 million under our gas hedges. We recognize that shareholders appreciate our leverage to oil prices and the recent uplift in natural gas prices. Our current oil and gas hedges will expire by the end of this year and we have not added any new hedges for future periods.

not added any new hedges for future periods.

As Vicki mentioned, the sale of our Ghana asset marks the completion of our large scale divestiture program. These asset reclassified as discontinued operations or our financial statements. So there'll be no impact on ongoing production.

We will apply the cash in this divestiture any cash generated from future portfolio optimization quarter, our cash flow priorities, which are currently focused on reducing debt.

We have raised our full year production guidance to one 1.155 million BOE per day for 2021, while our full year Capex guidance of $2.9 billion remains unchanged.

Last quarter, we raised our full-year production guidance shortly before hurricane Ida temporary disrupted our Gulf of Mexico production. Even take into account the impact of the sizeable storm, we met the high end of our company wide production guidance for the third quarter.

Even take into account the impact of the sizeable storm, we met the high end of our company wide production guidance for the third quarter.

Our fourth quarter capital spend is expected to be higher than prior quarters this year, primarily due to the timing of maintenance activities in all three of our business segments.

In oil and gas for example, a portion of the capital spend in the Gulf of Mexico was moved from the third to the fourth quarter due to hurricane Ida where we plan to accelerate the start of two rigs in the Permian, which I'll touch on shortly. Companywide fourth quarter production is expected to be 1.14 million BOE per day, which represents a 5000 BOE per day increase from the guidance provided on our last calls. Our fourth core guidance, which is slightly lower than our third quarter result takes into account production sharing contract price sensitivities, planned maintenance interactivity schedules. We expect to exit 2021 with approximately the same average quarter production as we exited 2020.

Companywide.

Fourth quarter production is expected to be 114 million Boe per day, which represents a 5000 Boe per day increase from the guidance provided on our last call. Our fourth core guidance, which is slightly lower than our third quarter result takes into account production sharing contract price sensitivities planned maintenance interactivity schedules, we expect to exit 2020.

approximately the same average quarter production as we exit 2021.

We have updated our activity slide to include two additional Permian rigs that were originally scheduled to start early next year, that will now begin operating a fourth quarter in the Texas, Delaware and New Mexico.

Merchant activity change, we announced last quarter. This adjustment will be fully funded through cost savings and optimization of capital projects gain through efficiency improvements and we will not increase our 2021 capital budget.

Texas, Delaware and new Mexico are two of our highest return assets. And introducing activity in the fourth quarter, we will place us in a stronger position for 2022.

We expect that the market dynamics, which drove midstream and marketing performance in the third quarter will continue in the fourth quarter. We have increased <unk> guidance to reflect improved differentials benefiting the gas marketing business and robust sulfur pricing at a holding.

We've increased earning guidance for occupancy and for the third time this year, reflecting year to date performance and continued strong product demand. Not only do we expect 2021 to be a record year for OxyChem. We also anticipate the fourth quarter will be even stronger than the record third quarter.

Do we expect 2021 to be a record year for Rocky Kim We also anticipate the fourth quarter will be even stronger than the record third quarter.

We believe that the market recognizes and appreciates the value being delivered to shareholders through debt reduction and balance sheet improvement. At the worker pay additional debt, we expect the shareholders will continue to benefit in several key ways.

First, we expect that additional debt reduction will translate into share price appreciation. We acknowledged at healthy commodity prices have played a role in the improvement of Oxy the enterprise value over the last 18 months, assuming an enterprise value of our company remained stable or improved, equity will become a larger portion of enterprise value over time as debt is reduced.

We acknowledged at healthy commodity prices have played a role in the improvement of oxy the enterprise value over the last 18 months, assuming an enterprise value of our company remained stable or improved equity will become a larger portion of enterprise value over time as debt is reduced.

The interest in financing cost saved on a go-forward basis lowers our cash flow breakeven. We expect a lower cash flow breakeven will result in additional discretionary cash available to allocate towards our future cash flow priorities, including returning capital to shareholders.

As we stated previously, we want to ensure that returning additional capital to shareholders, including any increase in the dividend is sustainable and rateable throughout the cycle.

Reducing the amount of cash committed interest payments today places us in a stronger position for the sustainable return of capital in the future.

Finally, lowering fixed costs in the form of interest or interest rate swap payments improves our flexibility optionality at any point in the commodity cycle.

Our balance sheet improvement efforts that place us with a clear runway for the next few years, we are taking a thoughtful approach to repaying additional debt in a manner that is opportunistic for Oxy.

Executing additional tenders or exercising attractive make whole provisions are just two of the solutions we are considering. We may also choose to retire the remaining interest rate swaps, which are in uncollateralized value of approximately $400 million and could be another opportunity to improve cash flow by approximately $45 million per year at the current interest rate curve.

As we advance our capital priorities, we expect Oxy's financial position to strengthen aided by our deleveraging efforts and our strong liquidity position. As we near the end of 2021, we are preparing for the year ahead with an unrelenting focus on safe responsible operations and financial discipline, which we believe will create value for our shareholders. I will now turn the call back over to Vicki.

Thank you, Rob. We understand that there's a high level of interest in our 2022 plan, which we'll announce in our next call, but now we'd be happy to take your calls for this segment of the call. We will now begin the question and answer session.

We understand that Theres, a high level of interest in our 2022 plan, which we'll announce in our next call, but now we'd be happy to take your calls for this segment of the call.

We will now begin the question and answer session.

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To withdraw your question. Please press Star then.

Please limit questions to one primary question and one follow up. If you have further questions you may re-enter the question queue. Our first question today comes from Jeanine Wai with Barclays.

If you have further questions you may reenter the question queue.

Our first question today comes from Jeanine Wai with Barclays.

Hi. Good morning, good afternoon, everyone. Thanks for taking your questions. Our first question is perhaps on the balance sheet and growth.

Our first question is perhaps on the balance sheet and grow.

When do you see Oxy getting to the net debt about 25 billion for that marker? Depending on oil prices our models suggest that you can achieve that by year end. And if that's the case, is it just a matter of waiting for the macro to give you the all-clear sign in order to begin layering some growth capital?

<unk> 25 billion for that marker.

Pending on oil prices our models suggest.

That by about year end and if that's the case is it just a matter of waiting for the macro to give you. The all clear sign in order to begin layering some growth capital.

Certainly. We are achieving a line of sight towards getting to that net debt target of $25 billion.

Achieving a line of sight towards getting to that net.

Net debt target of $25 billion.

So we're going to get there sooner than we expected, but in terms of what we would do with the cash flow after that, we will follow our commitment to our cash flow priorities and the the next in line would be to start to increase our fixed dividend. So that would be in between in terms of orders of priority our next target.

To start to increase our our fixed dividend so that would be in between in terms of orders of priority. Our next.

Our next target.

We really don't feel like we need to provide growth at this time from a from the standpoint of where we are today with respect to our cash flow generating capability.

So future growth for us really is would be in support of growing a dividend, not growth for growth's sake.

And Jeanine. I'll add to Vicki's comments on that, just as we get to that and we've discussed feathering in the dividend at $25 billion. We're not going to stop our debt reduction at that point, we will continue to put cash flow into our debt reduction priorities beyond our other priority of maintenance capital.

We're not going to stop our debt reduction at that point, we will continue to put cash flow into our our debt reduction priorities beyond.

our other priority of maintenance capital.

Okay, and then maybe we can pivot to a different kind of growth. The role of carbon capture it's going to be absolutely tremendous and the energy transition and Oxy clearly has core competency in this area. And Vicki in the past I think you've sized the potential of Oxy carbon capture business is rivalling that maybe of your other businesses over time. So if you have any comments or update on that that'd be great.

The rollout of carbon capture it's going to be absolutely tremendous and the energy transition and oxy clearly has core competency in this area and Vicki in the past I think you've sized the potential of oxy carbon capture business is rivaling that maybe of your other businesses over time. So if you have any comments or update on that that'd be great.

And if overall you can just discuss your updated view on Oxy's future as a corporate management company.

We used to do still believe and are moving towards becoming a carbon management company, we think that that's going to be needed for the energy transition. And we're actually filling a gap with what we're doing as you know with respect to what others are doing.

That that's going to be needed for the energy transition and we're actually filling a gap with what we're doing as you know with respect to what others are doing.

There's a lot that really needs to happen in this energy transition for us to be successful. Global warming of 1.5 degrees. So there are some companies in the oil and gas industry that are moving more towards renewables and that's very much needed.

Global warming of one five degrees. So there are some companies in the oil and gas industry that are moving more towards renewables and that's very much needed.

And there are others that are working very hard to mitigate all of their emissions from current operations. We're working on both of those but not the renewables, we're working on reducing our current emissions from ongoing operations, but we're also as you know taking advantage of our core competence we have with CO2 and the handling of CO2 for enhanced oil recovery. So we believe that that's a gap that nobody else is selling and the reason that GAAP is necessary is for several reasons. First of all. There has to be CO2 removed from the atmosphere, there's nobody in the world that disputes that so direct air capture is going to be critical.

We are working very hard to mitigate all of their emissions from current operations. We're working on both of those but but not the renewables, we're working on reducing our.

current emissions from ongoing operations, but we're also as you know taking advantage of our core competence we have with CO2 and the handling of CO2 for enhanced oil recovery. So we believe that that's a gap that nobody else is selling and the reason that GAAP is necessary is for several

<unk> first of all.

There has to be C O two removed from the atmosphere, there's nobody in the world that disputes that so direct air capture is going to be critical.

For that to happen. So with direct air capture not only can we remove CO2 from the atmosphere, but also that helps us to develop and produce oil that's either a net zero or net negative carbon. So that enables us to provide the hard to decarbonize industries, such as aviation or maritime with fuels that are our net zero carbon. So there are two reasons to build direct air capture. And first of all, for the removal from the atmosphere the provision for providing those net zero carbon fuels. And the things that makes it very versatile is you can build it anywhere. So we think that because of the magnitude of that impact around the world and the need for thousands of these to be built it provides us the opportunity to be a big part of that then to actually be a leader in developing the technology.

oil that's either a net zero or net negative carbon. So that enables us to provide the hard to decarbonize industries, such as aviation or maritime with fuels that are our net zero carbon. So there are two reasons to build direct air capture. And first of all, for the removal from the atmosphere the provision for providing those net zero

To build direct air capture and first of all for the removal from the atmosphere the provision for providing those net zero.

Carbon fuels and the things that makes it very versatile is you can build it anywhere. So we think that because of the magnitude of that impact around the world and the need for thousands of these to be built it provides us the opportunity to be a big part of that then to actually be a leader in developing the technology.

So we think we will transition. The transition will take some time, but over the next 10 to 15 years I think we will make a lot of progress towards becoming that carbon management company and a go-to company for those that need to C02 offsets.

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

Thanks. Good afternoon, I guess it is not. Welcome to the end of earnings week with Vicky. I've got a couple of questions specifically around the return of cash comments and if you don't if you can indulge me for a minute. I would like to kind of lay out my thinking here. Your share prices is lagging pretty badly today.

Good afternoon, I guess it is not.

Welcome to the end of earnings week for Keith Thanks for ice for closing as I guess.

I've got a couple of questions specifically around the return of cash comments and if you don't if you can indulge me for a minute I would like to kind of lay out my thinking here.

Your share prices is lagging pretty badly today.

Despite extraordinary free cash flow yield in our numbers on a clear line of sight to deleveraging. So it's something the market has not acknowledging obviously.

And our feedback I guess is that you are the only company not giving meaningful cash returns back to investors. So my question is how do you think about the right level or the appropriate mechanism to return cash when your stock is such a high free cash flow yield? Let's assume that persist. That's my first question. My second question is pioneer New G. One has practically no net debt.

How do you think about.

The right level or the appropriate mechanism to return cash when your stock is such a high free cash flow yield let's assume persist. That's my first question. My second question is pioneer New G. One has practically no net debt.

The other is targeting no net debt, where do you think the right level of debt is once you sort of parse your 25 billion dollar target? Where do you want it to be? So first question mechanism for cash returns. Second question. The long term mid cycle appropriate level of your balance sheet.

So as you know to get to around $25 billion net debt was our target. And as Rob mentioned earlier, now that target is is in line of sight and again much sooner than we expected. So once we have actually achieved that then we'll begin to layer in some of the other things that we can do with our with our cash most notably and primarily would be to grow a fixed dividend and then beyond that again I don't see capital growth.

some of the other things that we can do with our with our cash most notably and primarily would be to grow a fixed dividend and then beyond that again I don't see capital growth.

Until we've gotten to a point where we need to make that happen. I think we've talked about over the last couple of years that we feel like it's very important to keep our breakeven around $40. So as we establish our fixed dividend and move forward, we would grow our cash flow to match the growth in the in the dividend rate.

<unk> gotten to a point, where we need to make that happen I think we've talked about over the last couple of years that we feel like it's very important to keep our breakeven around $40. So as we establish our fixed dividend and move forward, we would grow our cash flow to match the growth in the in the dividend rate.

It will happen it will happen over time with respect to the other considerations for the use of cash, it will really depend on the circumstances that we're in when we when we actually have established or actually grown the existing fixed dividend that we have.

For the use of cash it will really depend on the circumstances that we're in when we when we actually have.

Establish or actually grown the existing fixed dividend that we have.

Yeah, Doug I guess I'd add to that. What we have done is consistent with what we've been messaging every since we got into this deleveraging process. We indicated the market as Vicki said that we were going to get into that $25 billion net range before we considered increasing value return to shareholders.

We have done is consistent with what we've been messaging every since we got into this deleveraging process. We indicated the market is that he said that we were going to get into that $25 billion net range before we considered.

Raising.

Increasing value return to shareholders.

So we do have line of sight, it's obviously hear a lot closer than we anticipated it would be because of the combination of all the work we did this trip out cost. Commodity prices are much stronger than we anticipated and if it continues that way, it's not that far away that we'll reach that target.

<unk> of all the work we did this trip out cost.

Commodity prices are much stronger than we anticipated and if it continues that way, it's not that far away that we'll reach that target.

But we aren't there yet and that's the reason why we're not increasing value return to shareholders. Because we are sticking to our messaging and the plan we've set out in front of our shareholders.

So for us to prematurely deviate from that plan, bringing inconsistency that messages, we certainly don't want to bring to the marketplace.

Okay, got it guys, just as a quick follow up. I'm looking at the Apache example, we've come out and basically given a framework where they were seeing essentially like you guys the free cash flow yield is extraordinary. And so we're going to buy back a bunch of stock. So that's really what I'm driving like your capacity for potential buybacks is pretty material. Can you offer us offer any kind of thoughts as to why that might not be the case and what the limitations are around preference shares as it relates to whether share buybacks would be practical? Thanks.

John Paul Smith.

I'm looking at the Apache example, we've come out and basically given a framework where they were seeing essentially like you guys. The free cash flow yield is extraordinary and so we're going to buy back a bunch of stock. So that's really what I'm driving like your capacity for potential buybacks, it's pretty material can you offer us offer any.

as to why that might not be the case and what the limitations are around preference shares as it relates to whether share buybacks would be practical? Thanks.

Thanks.

I would say, Doug, we're not at the net debt of 25 billion yet. And we want to see what the macro conditions are, and what's happening with our stock at that point. So since we're not there it's really hard to provide any any direction right now on which but while we would do.

Yes.

Provide any any direction right now on which but while we would do that.

The one thing we can tell you is that we will follow our cash flow priorities, which is the fixed dividend first before we would do and consider anything else. The share repurchases are a longer term possibility for us.

Share repurchases are a longer term possibility for us but.

But not the nearest term. The nearest term would be the growing the dividend.

Growing the dividend.

Our next question comes from Neil Mehta with Goldman Sachs.

Good afternoon, team and Vicki. The first question is just around sustaining capital recognizing you're going to provide a little bit more clarity on '22 here in the coming months, but can you just talk about how you see that trending as we move into '22? And what are the tools that you have in place to mitigate the natural cost inflation that should arise as oil prices stay at elevated levels?

Vicki. The first question is just around sustaining capital recognizing youre going to provide a little bit more clarity on 22 here in the coming months, but can you just talk about how you see that trending as we move into 'twenty two and what are the tools that you have in place to mitigate the natural cost inflation that should arise as oil price.

His stay at elevated levels.

I'll take the second one first. Our teams have worked hard to try to establish the right kind of contracts and business situations with service providers of materials. Providers to mitigate inflation.

Our teams have worked hard to try to establish the right kind of contracts and business situations with.

Service providers of materials.

Providers to mitigate inflation.

We don't think necessarily we would mitigate all of it. We're just not sure right now what inflation will be. But we know that our efficiencies and our established relationships in business situations will help to mitigate some of it.

Business situations will help to mitigate some of it.

We're hoping to continue also to further improve our efficiency. So that we can mitigate more than what we would see today. But that there is a lot of work going on around that and especially with respect to how we manage our supply chain and then the strength of our position not only in the in the US, but around the world. So we're leveraging that as well. With respect to the sustainability capital, I'll say that inflation whatever amount we can't mitigate would be certainly on top of what we have today.

So that we can mitigate more than.

Then what we would see today, but that there is a lot of work going on around that and especially with respect to how we manage our supply chain and then the strength of our position not only in the in the U S, but around the world. So we're leveraging that as well.

With respect to the sustainability capital.

I'll say that inflation whatever amount, we can't mitigate would be certainly on top of what we have today.

And the only thing that I could really point to in terms of what we said before about this is in 2022, we won't have as many docs to complete as we did in 2021. So there is a difference there. We completed about a 100 docs in this year.

We completed about a 100 docs in.

This year.

In addition to that we're going to have some capital investment that will need to make in and two other areas, both of which we've mentioned before al Hogan will begin the expansion of that in 2022. So we will have that cost will also have the incremental cost in the Gulf of Mexico. So it will be higher than the $300 million we had this year because the golf is a little bit lumpy in terms of capital investments.

Some capital investment that will need to make in and two other areas both of which we've mentioned before al Hogan will begin the expansion of that in 2022. So we will have that.

That cost will also have.

the incremental cost in the Gulf of Mexico. So it will be higher than the $300 million we had this year because the golf is a little bit lumpy in terms of capital investments.

And the $300 million, we had this year because the golf is a little bit lumpy in terms of capital investments.

So we'll have those things to consider when we are putting together our final plans for 2022.

That's helpful, and just the follow up is the composition of the portfolio as you evaluate the different upstream buckets, the Permian Rockies Gulf of Mexico Middle East. How do you see that evolving over time?

Buckets, the Permian Rockies Gulf of Mexico Middle East.

How do you see that evolving over time is there.

Is there an area where you see is going to represent a disproportionate amount of the incremental capital beyond what you've already laid out?

The incremental capital beyond what you've already laid out.

The Permian will always where you see the.

Bigger portion of the growth capital or even the maintenance capital than anywhere else as we're as we're starting to earn continuing to offset declines there may be some of our areas that do decline that would be made up usually by the Permian basin, but all of our areas.

Play a role in and what we're doing in fact, the for example, the middle East that's a.

That area for US is very helpful to continued development there because the.

The contracts provide us some protection in a.

In a down market.

<unk>. So <unk> is important to us from that respect.

We do have a low cost of development, there and we get our cash back fairly quickly. So that's the good part of Oman and delivers good returns.

Hogan as a as a low decline asset for us.

Plays that role we want to continue building on our our low decline assets, but that will be a lot of the growth for that will be going back to <unk> at some point too.

To start.

Building there as we get this anthropogenic cotwo so EUR in the Permian will play a bigger role in the future, but low decline assets are important to us.

The bulk of.

Our dollars beyond sustainability ultimately we'd go to the Permian.

Our next question comes from Rafael do Blah with Society Generale.

Hello. Good afternoon. Thank you for taking my questions. The first one is a follow up on the shareholder return. Can you remind us why you think it is more appropriate to start by increasing your dividend instead of starting shareholder return by a large buyback program? Considering I think we all agree that's somewhat undervalued. So wouldn't it make more sense to start by a large buyback program? Thank you very much.

Skunks by increasing the dividend instead of starting shareholder return by.

A large buyback program considering I think we all agree that's wrong.

What undervalued so.

Make more sense to sell.

But your last buyback program. Thank you very much.

Reality is that there are multiple things that we could do with our cash. We believe that restoring the dividend is the, and how restoring it to the prior level, but continuing to increase it over time into better and more predictable value creator for our shareholders. We have always been a dividend paying company, it's important for us to get back to that and make it a more. And get it to a level where it's more meaningful to our shareholders, but we always want to evaluate buybacks and so I'm not saying that we would never do it are never consider it.

As our cash.

We believe that restoring the dividend is the is the and how restoring it to the prior level, but continuing to increase it over time. And more predictable value creator for our shareholders. <unk> has always been a dividend paying company, it's important for us to get back to that and make it a more. Get it to a level, where it's more meaningful. Shareholders, but we always want to. And evaluate buybacks and so im not saying that we would never do it are never consider it.

And more predictable value creator for our shareholders. <unk> has always been a dividend paying company, it's important for us to get back to that and make it a more. Get it to a level, where it's more meaningful. Shareholders, but we always want to. And evaluate buybacks and so im not saying that we would never do it are never consider it.

<unk> has always been a dividend paying company, it's important for us to get back to that and make it a more.

Get it to a level, where it's more meaningful.

Shareholders, but we always want to.

And evaluate buybacks and so im not saying that we would never do it are never consider it.

We're just not at the point now where we have all the data to be able to make that assessment. For example, today, we're not at $25 billion net debt now when we get there.

We will take a look at all of those things that are available to us to do.

But starting to grow the dividend we have today is a high priority because of the fact that we did have to reduce it significantly.

To start restoring it but anytime we look at cash we would have cash beyond that available and then we would just do the value calculation to determine whether it makes sense given the other opportunities for us to buy back shares that's always a consideration.

Great. Thank you very much for.

So this himself.

One extra question on the Oxy Kim the results in Q3, we have.

<unk> in your guidance in Q4 is nothing short of amazing considering there is always seasonality.

And usually Q4 is not a screen. That's Q3. So can you maybe tell us a bit more above the market dynamics.

In terms of supply and demand.

When do you think we should expect some sort of normalization.

Fewer of your clinical business.

Yes, sure happy to discuss it Rafael So I would say what we see today in the chemical business is still very strong conditions in our vinyl business.

And steady improvements in the coffee business and you are correct typically where normally entering into a seasonally slower period of time, but we're just not seeing that thus far because if you step back and look at the year the industry, which already was pretty tight on supply to begin the year lost almost two months of production because of the freeze we had in the Gulf.

States in February and then the impact of items that we had in the third quarter. So the combination of those two is kept.

Coupled with the demand being as strong as overall products is kept the supply demand balance much tighter than anticipated are typically historically, how many here.

Those are the two main drivers on slide 31 of the deck. We included obviously the main profit driver for the business.

Earnings are going to come from both the PBC business and the caustic soda business.

The operating.

Operating rates year to date or over 80% in the PVC business. Despite the.

<unk> are the two storms in the last months of production.

And domestic demand is up over 13% versus this time year to date last year.

And that's even when we started picking up the demand post COVID-19 last year.

The other thing I would say is that the construction sector much like it has with our building products remains very strong with inventory levels still very low.

And you can tell that inventories are very tight because exports are really soft spill compared to historical levels and what you have is with exports being down over a third versus prior year, even prior to COVID-19 year, that's because of the discretionary resident is just not available and so what youre exported PVC.

Revenues really destined for.

Long term contractual sales from U S based producers have relationships overseas.

Youre not seeing that spot resin flow of the market, which means people are still just trying to get enough RASM for the domestic market. We're just going to keep prices elevated and margins elevated through that period of time and so that's kind of atypical for this time of year, but we do see it continuing through the balance of the year does it continue always the winter construction necessarily has to slow during.

The winter, but when we don't have a flavor for is how much are people going to want to restock inventories to be ready for what looks like another strong spring construction.

Which will return pretty early in the year next year on the Chlor alkali side I'd say corrine is extremely tight as producers are still trying to seek the highest value for the outlet because we're oxy <unk> vast portfolio of derivatives and that gives us so much strength versus many others. Because we're not just making PVC were making all three parts of the vinyls chain.

We're also selling into a domestic market that gives us exposure to polyurethane markets, the tier two markets et cetera. And water to be under the water treatment and others have traditionally think of at our own chloromethane business. And so all of those we're seeing strong demand and supply demand balances are very tight.

Et cetera on water it beyond just water treatment and others have traditionally think of.

At our own chloromethane business and so all of those.

Seeing strong demand and supply demand balances are very tight.

And we will see more than likely on the backside of another difficult operating over the industry. Our continued effort to rebuild.

Inventory is not only in supply chain, but there is also we're seeing a lot of pent up demand still coming back as.

Things somewhat return to normal on the backside of the pandemic, particularly caustic soda demand globally. We will continue to improve as manufacturer activity is restored in both South America and Asia and in Europe.

So what we're seeing on the caustic side is again steady improvements was we're not seeing record prices on the caustic soda out like we are in PBC, but some of the prices in Asia have risen to levels that haven't been seen before and so both businesses are very strong right now we will see a seasonal slowdown in caustic domestically because you're no longer able to transport.

Caustic up the Mississippi River once it for the winter.

But we don't see it really impacting industry. It up just because inventories are so tight.

So I still think January February we will continue to be slower months for the industry, but it's going to be such a narrow period with us what the tight inventories will probably hit the ground running pretty quick in the spring again.

Our next question comes from Neal Dingmann with truly securities.

Hey, good afternoon, thanks for the time thank.

Can you just share maybe just broadly how you're currently thinking about sort of just on the strategy growth versus capital discipline today in light of.

No Rob just had some minor comments on just adding some Permian rigs, but I just maybe if you could share your thoughts on where you sit with that today.

Yeah, I would say that for us growth production growth is not a priority for US right now because if you look at our cash flow generating capabilities and with our strategy around that going forward is to.

Its to basically.

When we get to our net debt target of 25 billion, that's not where we will and as Rob mentioned, we want to continue working to reduce our debt beyond that.

But the need to do so.

And a bigger level is just not there we get to the 25.

We'll share more information as we get there about what our next target would be with respect to debt reduction and then again its too.

To start growing our dividend again, and the only point at which we would really need to start growing our our.

<unk> would be down the road, where we want to continue growing the dividend, we don't need additional growth from production right now to be able to increase the dividend over the next couple of years.

Because again with what we expect the macro to be and the level of increase in our dividend we believe that we can we can do that without any production growth over the next at least couple of years. So it would be it would be continuing to maintain our facilities our operations our production level and then these occasional projects that are beyond the sustainability capital, like the [inaudible] there could be those over the next couple of years, but other than that it's been going to the dividend and further debt reduction.

And the.

Level of.

The increase in our dividend we believe that we can we can do that without any production growth over the next.

Last couple of years, so it would be it would be.

Continuing to.

To maintain our facilities our operations our production level and then.

These occasional projects that are beyond the sustainability capital like the <unk>.

I'll holds in there could be those over the next couple of years, but other than that it's been going to the dividend and further debt reduction.

And I assume your low decline helps with all of that. Pardon me. Yes, and that's why it's important to have these low decline projects that enables us to to execute on this strategy.

Pardon me.

Yes.

Yes, and that's why it's important to have these low decline projects that enables us to to execute on this strategy.

Absolutely and then one last one if I could you've mentioned I think maybe even on the last call or maybe the prior in the past about maybe hopes to get more than just Q45 tax credits can maybe help you and others potentially expedite some of your plans in that low carb area I'm just wondering.

Is this still something you think is needed to help you and others expedite plans and low carbon and if you did end up.

I need this would that come at the expense of.

Cash going towards the upstream business.

I would say that the world absolutely has to have.

Acceleration of direct air capture not just our dock facilities that carbon capture and retrofitting industry. It has to happen. So the only way that it can happen and at a pace that's needed for the world.

As for the U S to get onboard with supporting it and the U S has the strength and the capability to do that in the best way to do it is through 45, Q and direct pay 45 Q. So you are right on that.

That's incredibly important to us otherwise.

U S will not achieve the targets that we've set.

With even the prior Paris accord much less what's happening in.

Glasgow right now so 45, Q has to happen and really needs to be direct pay otherwise.

We're going to struggle to be successful, but with respect to what we're doing.

There is going to be a price for carbon because theres a lot of commitment from corporations now too.

To get to net neutral.

The body I think realizes at some point that that.

And if we don't achieve our goals through the incentives like 45, Q and theyre going to have to be some price mechanism on carbon to make it happen.

So what we're seeing is a lot of corporations are trying to get ahead of that.

Corporations are starting to fill just see that there is a social license to operate in that to have that there has they have to proactively start seeking.

Two credit offsets too.

Students, who offsets to become net neutral United has been one as you know that we've announced that.

Wants to do that and they're proactively committing $2 to the building as the direct air capture Plaza.

The purchase of.

The oil that would be the net.

Zero oil.

Corporations are calling us we're getting a lot of incoming interest and the direct air capture because of that so.

I do believe that.

That there is going to be sufficient growth and commitment to.

To make what we're doing here in the next in the initial phases work, but beyond that again.

It's going to require a much more acceleration in that.

Our next question comes from Phil Gresh with J P. Morgan.

Hey, good afternoon.

A follow up question just around the <unk>.

Dividend situation you talked about.

I need to have a $40 wty breakeven and I just wanted to get some clarification of how you would calculate where we are today and then.

It sounds like you would want to go out multiple years up to the $40 <unk> breakeven as opposed to all at once so just clarification around that please.

The clarification is right now were in the probably upper thirties.

On a breakeven, but that's not that's.

Assuming that's without the preferred so.

So we're really close to where we want to be, where we want to stay. So as we grow that as we restore the dividend at a moderate level, we will do it in a way that enables us to grow it over time. But probably not at the pace that we've done in the past. So it will be moderate growth, but it'll be a material dividend as we as we've always tried to maintain.

So as we grow that as we restore the dividend.

At at.

At a moderate level, we will do it in a way that enables us to grow it over time, but.

Really not.

At the pace that we've done in the past so it will be moderate growth, but it'll be a material dividend as we as we've always tried to maintain.

Okay. So are you willing to go below $40 WJ breakeven towards the dividend or you wanted to keep the dividend within that just to be clear.

Ultimately, we want to keep it within that now there is going to be.

Some discussion and some evaluation of.

But how do we start out that.

<unk> growth, but we'll we'll determine that when we get to the $25 billion net debt, we'll see again.

<unk> will be supported by mid cycle, what would be supported by a $40 breakeven.

Got it and then just one follow up for Rob.

Do you have a sense that you could share with us around U S cash taxes. What your situation is there when you would become a full U S cash taxpayer.

Yes, I think Phil flow standpoint, certainly this year, where you don't anticipate any material cash taxes base.

Based on our viewpoint 2022, we don't see that happening again also we see ourselves depending upon certainly the macro conditions, becoming a U S cash taxpayer in a meaningful way in 2023.

Our next question comes from Paul Cheng with Scotiabank.

Hey. Good afternoon, guys. Vicki, two questions, please. [Our show has just sold here]. Just want to see if you see that as maybe additional opportunities for you guys to work with a different partner and seeing either apex swap or other opportunity associated with that? Or do you think that it's just business as usual given that you are the operator and that doesn't really change anything? That's the first question.

Good afternoon guys.

Ricky to question Pizza hut. So that's just so there.

Permian all set to call Nicole.

Just want to see.

See that as a hub.

May be additional opportunities for you guys to work with a different partner and.

The opex swap or auto opportunity.

Associated with that or do you think that it's just business as usual given that you are the operator and that doesn't really change anything.

That's the first question.

On the second. Second question I think.

Second question I think.

Cause has been everyone nothing New York on when Youre going to increase your capex.

The oil and gas sector.

It makes it very clear.

Anytime soon.

But how about in the chemical and chemical you guys have a very unique position you are not in the <unk>.

Co all is unchanged.

And that with the housing.

<unk> has been very strongly.

We have been doing quite well much better than before.

So.

Do you have any intention to expand and grow that business.

And that May also be good.

In terms of energy transition.

I want to see that what is your view.

In terms of public quote prospect standpoint for that thank you.

Okay, I'll start with the shell assets and we're always looking for opportunities to core up while we operate. And so asset swaps have been a big part of helping us to increase our working interest in the areas that we already operate over the last few years and that's been very successful and we will continue to try to do that.

We're always looking for opportunities to core up while we operate and so asset swaps have been a big part of helping us to increase our working interest in the.

In the areas that we already operate over the last few years and Thats been very successful and we will continue to try to do that and we will.

We'll be working with Conoco and any other partners that are in our current operations and our nearby well we have to to make swaps that work because those are always better for for each company. Those are win win scenarios. So those are something that's really important for us to do. We'll continue that, the second part of the question is OxyChem. Vicki, before that, have you already reached out or has Conoco already reached out and talked to you, between you and Brian? Or is this something that you guys are going to do?

That are in our. Current operations and our nearby well we have to to make swaps that work because those are always better for for each company. Those are win win scenarios. So those are something that's really important for us to do we'll continue that the second part of the question is oxygen vacate accurate that'd be bought that have you already.

Current operations and our nearby well we have to to make swaps that work because those are always better for for each company. Those are win win scenarios. So those are something that's really important for us to do we'll continue that the second part of the question is oxygen vacate accurate that'd be bought that have you already.

With that I'd call, Nicole ready, which I talked to you between you and volume at that what that this is something that you guys are going to do.

Well, we had been in conversation with shell for a long time and we certainly have had conversations our teams worked with Conoco on other things and so we have had contact about potential swaps.

We think it would be best for both of us to be open to that and pursue that so just as we had done with shell, where we're doing the same with Conoco.

So with respect to the oxygen business. Rob knows better than I do but OxyChem has been very opportunistic in the path to ensure that they mitigated market risk by working out with partners opportunities to build and to grow.

Rob knows better than I do but <unk> has been very opportunistic in the path to ensure that they mitigated market risk by.

Working out with partners opportunities to build and to grow.

But again without taking market risk. I would just add to that Paul. If you look back the history of projects, whether it was the Chlor alkali plant is adjacent to the <unk> by other cracker that we built at Ingalls side of that venture together.

I would just add to that Paul.

If you look back the history of projects, whether it was the Chlor alkali plant is adjacent to the <unk> by other cracker that we built at Ingalls side of that venture together.

Already the relationships, we have what we've been able to do is build long term partnerships with our downstream customers that gives us sort of a pseudo integration in the markets that otherwise, we don't want to build it into like <unk> two.

Two are polyurethane etcetera and partner with the leaders in those industries and so we're always evaluating that but to <unk> point, it's going to be something we're going to structure around where we're guaranteed a return on and of the capital necessary to continue to fund the cash from that towards.

The rest of the nature of the business as a cash flow sources. So I think we're constantly evaluating that like anything else, there's probably a dozen projects that end up on the drawing board that get one good one that works out.

But you're right that there's a lot of growth in the chloro vinyl sector.

Building product and the advantage of the United States has versus rest of world with feedstocks is pretty significant.

We'll continue to evaluate those and something comes.

Together, we'll be happy to share it with the market.

And you're right all in that.

Is really an important part of our transition story oxycontin will be a key player in that and certainly we're open to opportunities from any of our existing partners and new partners to help with that.

They can then Mark do you guys foresee growth capital into the Oxy Cam also at the next one or two years or so maybe a bit longer time.

Yes, it's hard to say, Paul I mean, I think it depends on timing of investments and what the opportunities are out there and so we're constantly evaluating that and what integrated in our portfolio. If it makes sense, but I would be purely speculating to give timing on when you might make the next significant investment not became.

Okay.

Our final question today comes from Leo Mariani with Keybanc.

Hey, guys, wanted to follow up a little bit on one of the prepared comments that you guys made. I think you've commented there could be some some boltons in the future.

I think you've commented there could be some some bolt ons in the future.

Just wanted to get a sense in general of what Oxy is appetite might be for doing those type of things just given that you've had a pretty prolific asset sale program for the last couple of years.

Yes, we would only do if it was a very strategic and something that fill the gap that we currently have. There are situations where picking up some acreage would enable us to drill longer, lateral. There are situations where we have the opportunity to increase working interest in something that we already own.

Fill the gap that we currently have.

There are situations where.

Picking up some acreage would enable us to drill longer.

<unk> are situations where.

Where we have the opportunity to increase working interest in something that we already own.

So those are situations that when they do come along you almost need to do it otherwise you may not get the chance to do it again.

And when they do come along you almost need to do it otherwise you may not get the chance to do it again.

Okay that makes sense and then just also wanted to ask you guys is there any update that you might have on the funding situation for your direct air capture projects. I think you guys were seeking kind of external off balance sheet financing for that.

We don't have an update currently but our plan is still to hold.

<unk>.

And LCD day or event.

In the first quarter of next year by then.

A lot of what we're working on right now we hope to be able to talk about publicly.

Okay. Thank you.

Do you.

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

Thank you all for your questions and for joining our call and have a great day.

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

Q3 2021 Occidental Petroleum Corp Earnings Call

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