Q1 2022 Occidental Petroleum Corp Earnings Call
Good afternoon, and welcome to Occidental first quarter 2022 earnings conference call. All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero.
After todays presentation, there will be an opportunity to ask questions.
I asked the question you May Press Star then one on your Touchtone phone 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.
Thank you drew good afternoon, everyone and thank you for participating and Occidental's first quarter 2022 conference call on the call with US today are Vicki <unk>, President and Chief Executive Officer, Rob Peterson, Senior Vice President and Chief Financial Officer.
And Richard Jackson, President operations U S onshore resources and carbon management.
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.
We're especially proud of our results this quarter as our strong operational and financial performance enabled us to generate our highest reported and adjusted earnings in over a decade.
And an annualized return on capital employed of 21% when calculated with adjusted earnings.
We also reported a record level of free cash flow for the fifth consecutive quarter.
The increase in free cash flow compared to last quarter was achieved as we began executing on our 2022 capital plan and support our cash flow and longevity.
We will detail in a few minutes, we made meaningful progress towards our near term goal of retiring $5 billion of debt.
We remain focused on reducing debt this year as we advance our shareholder return framework, we repaid over $3 $6 billion of debt as a part of the near term goals, we announced last quarter to repay an additional $5 billion of principal and lower net debt to 20 billion.
Once the $5 billion target has been achieved we are focus will expand to the $3 billion share repurchase program.
When this first phase of our shareholder return framework is complete we will continue to focus on debt reduction until we have achieved the face value of our debt to the high teens.
When we have line of sight on reaching this milestone we will detail. The next phase of our shareholder return framework.
During our most recent earnings call, we spoke about the importance of lowering our interest expense to support a dividend that can sustainably grow throughout the cycle continuing to lower debt combined with managing the number of shares outstanding will enhance the sustainability of our dividend while positioning us to increase it at the appropriate time.
This morning, I will cover our first quarter operational performance and Rob will cover our financial results as well as our updated guidance, which includes an increase in guidance for oxy, Kim and midstream 2022 earnings.
Our first quarter results are a great example of how our teams operational excellence and asset portfolio position, our shareholders to benefit from a high commodity price environment in the first quarter, we generated $3 $3 billion of free cash flow. This is more than twice what we generated in the first quarter of 2021, which at that time was our highest.
Free cash flow in over a decade.
Our strong financial results were driven by our business delivering exceptional performance, while practicing disciplined capital allocation and cost control combined with the benefits of an improved financial position and higher commodity prices.
Switching to operational performance, we delivered first quarter production from continuing operations of approximately $1 1 million daily per day in line with the midpoint of our guidance and with total companywide spending capital spending of $858 million.
Our international operations successfully completed their scheduled turnarounds in the quarter and production has returned to normalized levels compared.
Compared to the first quarter, we expect international production to increase accordingly in the second quarter.
Higher prices are expected to lower our full year international guidance under our production sharing contract we expect the impact to be fully offset by outperformance in our Rockies and Gulf of Mexico businesses.
As I mentioned during our last call, we expect companywide production to grow from the second quarter through the end of the year as our targeted capital investment to sustain 2022 average production in line with the previous year.
<unk> performance continued to exceed your expectations as the business benefited from robust pricing in the caustic chlorine and PVC markets.
Once again delivered record earnings this quarter, which we expect to contribute to 2022 being another record year for the business.
Following several consecutive record quarters, we see the potential for market conditions to death and slightly in the second half of the year.
Long term fundamentals continue to remain supportive.
I'm very proud of Oxy Kim's workforce, who recently received 13 responsible care and 15th the facility Safety Award from the American Chemistry Council for their 2021 performance.
Midstream and marketing as outperformance compared to guidance in the first quarter was primarily driven by higher margins from gas processing and sulfur sales and our ability to optimize gas transportation in the Permian and Rockies and the timing of export sales.
Well short term opportunities in the commodity markets are difficult to predict our midstream team excels at finding and taking full advantage of such opportunities when they arise.
I'm pleased to say that our first quarter results continued to demonstrate how the quality of the assets the talent of our teams and our improved financial position serve as catalysts for strong financial result, and provide a solid foundation for our free cash flow generation.
Our teams didn't like an excellent job of managing the planned turnarounds and maintenance projects. This quarter, we completed turnarounds in Algeria all of those.
In Dolphin and a series of maintenance projects in the Gulf of Mexico.
Putting these planned projects increase the reliability and efficiency of our assets.
All those in turnaround involved the first full plant shutdown during which time, we safely completed over 500 titles related to the expansion project.
The expansion is progressing as planned with the capacity increase is expected to be online towards the middle of next year.
Our Rockies team brought online their largest pad ever with 23 wells and drilled our longest lateral to date at over 15000 feet.
That business continues to perform well with strong well productivity and higher than expected NGL yields driving first quarter performance.
Our team in the Midland Basin had similar success, bringing online the 12, well 15000 foot development, we mentioned on our most recent earnings call.
And in Algeria, we drilled and completed Oxy first development well in 2022 the time to market for the completion and hook up significantly significantly exceeding prior performance.
These are just a few of the many operational achievements. Our teams continued to deliver each quarter. In addition to focusing on operational improvements, we continue to pursue new and resourceful ways to reduce emissions for.
For example, in the DJ and Permian basins, we successfully trialed a new in house methane detection system that will help us on our net zero pathway.
We also plan to build on the success of our water recycling partnership by developing similar system and additional locations this year.
And now I'll turn the call over to Rob who will walk you through our first quarter results and guidance.
Thank you Vicky and good afternoon, our cash flow priorities continuing to direct free cash flow allocation in the first quarter as we repaid an additional debt in April and paid the first distribution of our increased common dividend.
On our last call, we detailed our near term debt reduction targets, including repaying $5 billion of debt and reducing net debt to $20 billion, our progress toward creating these targets advanced significantly in the first quarter.
We repaid approximately $3 $3 billion of debt and ended the quarter with net debt of $23 3 billion, reflecting.
Reflecting the face value of our debt of $25 two in the unrestricted cash balance of $1 $9 billion.
You're paying $3 $3 billion of debt in the first quarter was accomplished through a combination of a $2 $9 billion tender offer exercising the call provision on that note and open market repurchases.
Following quarter end, we retired approximately $300 million in additional debt you didn't open market repurchases lowering gross debt to approximately $24 9 billion, which is about today.
It is reasonable to expect that we could meet our near term debt targets and then initiate our share repurchase program during the second quarter.
Once we complete our near term debt reduction targets and repurchased $3 billion of shares we will continue to allocate free cash flow to repaying debt, if we lower gross debt to the high teens and billions, we believe reducing debt to this level will speed, our return to investment grade and better position us to sustain a greater dividend at lower prices.
When we reached the stage, we intend to transition from proactively reducing debt primarily addressing maturities as they come due.
Our debt reduction efforts continue to receive positive recognition.
Our last earnings call Moody's upgraded our credit ratings.
One with a positive outlook.
All three of the major credit rating agencies narrowing our debt is one notch below investment grade, which we view with recognition of the burnout and ongoing improvement in our credit profile.
Our consistently strong operational result in combination with the current commodity price environment are driving improved profitability on top of our already robust free cash flow generation.
In the first quarter, we now have an adjusted profit of $2 12 per diluted share our highest adjusted core EPS in over a decade.
Reported profit of $4 65 per diluted share.
The difference between our adjusted and reported profits for the quarter was mainly driven by the legal entity reorganization described in our most recent 10-K and 10-Q filings. Following the completion of our large scale post acquisition divestiture program and a portion of the existing tax bases with reallocate the operating asset.
Thus, reducing our deferred tax liabilities by approximately $2 6 billion, which.
Which was recognized in our reporting reported earnings for the quarter.
We resumed paying U S federal cash taxes in the quarter ahead of our earlier expectation. This was due in part to the strong earnings generated in the first quarter combined with our expectation for commodity prices and earnings over the remainder of the year.
Given current commodity price expectations, we now expect to exhaust our U S net operating losses, and most of our general business credit Carryforwards. This year.
However, the Nols and credits that we currently have remaining are expected to limit the amount of cash taxes paid. This year. For example, we would expect to pay approximately $600 million and U S. Federal cash taxes, if wty averaged $90 per barrel in 2022.
The increase in commodity prices has certainly been at but benefited us during the quarter as demonstrated by our strong earnings and free cash flow generation.
Any price environment.
Compared to the previous quarter also resulted in higher accounts receivable balances, which contributed to a negative working capital change.
Negative working capital change was also driven by typical first quarter payments such as semi annual interest payments annual property tax payments and payments under compensation plans.
As was the case in 2021, we see the potential for the working capital change partially reverse over the remainder of the year if commodity prices are stable.
Google payments accrued during the year being made subsequent first quarter.
We are pleased to be able to update our full year guidance for midstream oxy, Kim reflecting strong first quarter performance and improved market conditions.
Our revised full year guidance for Oxy can now includes the expectation of a fourth consecutive record for quarterly earnings in the second quarter.
We recognize the possibility of soccer product prices later in the year, but still expect the third and fourth quarters to be exceptionally strong by historical standards.
As Vicki mentioned, our Rockies business continues to perform well our expectation of continued strong well performance over the remainder of the year provides us with confidence to raise full year guidance for the Rockies by 5000 Boe per day.
On previous calls we've discussed how we've been working closely with Colorado communities and regulators and implementing the state's new permitting process.
All of our drilling permits we have in hand are sufficient to run a single rig for the remainder of 2022.
It is no longer feasible for us to run a multi rig program for Colorado. This year given the current pace of state approvals as a result, we plan to reallocate activity from the Rockies to the Permian in the second half of the year. This activity change will not impact our 2022 production and is included in the domestic onshore activity slide in the appendix of our earnings presentation.
We plan to submit the development plans in the coming months that will cover over 1100 rig days, we were hopeful that as Colorado's new permitting process matures. It will continue to become more efficient regulatory certainty early on in the process would provide us with the option to add activity back in the Rockies in future years, given oil and gas development plans, we expect to submit for this year.
Sure.
While our company wide full year guidance is unchanged as Vicki mentioned, we have included a 6000 Boe per day downward adjustment to our full year international guidance, reflecting the impact of higher oil prices and our production sharing contracts.
Our original budget included our forecast of $73 for Brent while our revised guidance reflects the Brent average price of $95 for 2022.
Inclusion of these activity changes our 2022 capital guidance remains at $3 nine to $4 $3 billion. We mentioned on our last call that our 2022 capital guidance incorporates approximately $250 million of inflation compared to 2021.
The cost of materials and services necessary for our operations, especially onshore in the United States has continued to increase we are working to offset inflationary pressures through additional efficiencies put in price increases continue we may spend near the top end of our capital guidance. This year certain pricing pressures such as labor and our W. T I index to you.
To purchase contracts and EUR business have become pressing leading to a slight upward adjustment in our full year guidance for domestic opex.
We are pleased with our strong start to 2022.
One full quarter behind us we've completed scheduled turnarounds continue to pay down debt establish a shareholder return framework provided a comprehensive update on our low carbon strategy and set new quarterly record for earnings and cash flow.
We will continue to focus on delivering value for shareholders. This year and beyond I will now turn the call back over to Vicki.
Thank you Rob.
I would like to thank our shareholders for voting with the board at our recent annual meeting and defeating a proposal that if approved would have been counterproductive as we work towards achieving our net zero ambition.
Quantitative short medium and long term goals for scopes, one two and three emissions are directly aligned with the goals of the Paris agreement, our competitive strengths as a as a carbon management leader and our strategy to achieve net zero before 2050.
But our journey towards net zero fully underway, we presented a market update in March on our low carbon business strategy. We provided details of the market opportunity and our plans to deliver climate and business solutions that leverage our assets and capabilities in carbon management, including C. U S.
We are advancing the technological solutions that can deliver large scale and rapid emission reduction throughout our value chain. Additionally, our low carbon strategy creates value for our existing businesses. While at the same time, helping to accelerate the path to net zero for ourselves and other leading companies in multiple industries.
I'll now open the call for your questions.
We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.
If you're using a speaker phone please pick up your handset before pressing the keys to withdraw your question. Please press Star then two.
Please limit questions to one primary question and one follow up.
If you have further questions you may reenter the question queue.
At this time, we will.
Pause momentarily to assemble our roster.
The first question comes from Michael Schiavone with Stifel.
Please go ahead.
Hey, good afternoon everybody.
Rob you mentioned that you could potentially commence the buyback this quarter.
Wanted to see as you look beyond this year based on where.
Where the strip prices are right now can you give any indication.
Of what Youre thinking in terms of free cash flow free cash flow priorities are for the longer term.
Yeah, Michael Thanks for the question. So we haven't provided any guidance for 2023 and beyond at this point I think what we've indicated in the notes was that as we complete the $5 billion and the $3 billion. This year and then apply the balance I mean additional cash on the balance sheet.
Driving that.
Gross debt down into the high teens that we would anticipate translating less of the debt reduction as being the priority and more attractive debt on a as it comes to insurers basis.
So that would imply in the in the 2023 and beyond of re shifting of our priorities such that shareholder returns and other priority to move towards the higher end of the scale.
Okay understood.
I know your hedges have rolled off at this point do you see any need to protect any of the debt reduction targets were the buyback program or.
So over the longer term if you you know the dividend.
It becomes part of the the free cash flow.
To shareholders and you need to.
Uh huh.
We instituted a hedging program to protect any of those things.
So Michael our history as a company has been fairly hedged burst no. Our belief is that our shareholders will ultimately receive and the company will receive the best value for the commodities, we produce and sell if we just move with the cycle throughout the entire cycle, we did deviate from that.
In 2020 due to the amount of maturities, we had coming due at the time.
Since then the combination of the troughs driving now the moving out of certain maturities are paying off and sort of introduction that we've talked about and the combination of creating a sustainable business at a much lower price as.
As we remove some of that and also I would say that you know there's other pieces to it but our chemical business, our midstream business International business.
We're a little differently than some of those price environments race other built in hedges towards that and so I don't see us going towards hedging to try and attempt to mitigate.
Mitigate any of those risk I mean, we have a pretty manageable debt profile now, particularly for the balance of the decade.
With the work that we did in the first quarter. We only have two years 25, and 26 that have any maturity towers or exceed.
$2 billion and that'll certainly be a focus as we move forward. So I don't really see the need for hedges to mitigate any of our.
Any of the risk moving forward and as Vicki outlined in our last call. The dividend approach is meant to be sustainable at low prices.
The share repurchases will make that dividend that much cheaper at low prices for us.
So I think we're doing the right things to protect from low price environments, and the business without having to artificially trying protected with hedges.
The next question comes from Jeanine Wai with Barclays. Please go ahead.
Hi, good afternoon, everyone. Thanks for taking our questions.
So maybe we can just start back with either Vicki on your prepared remarks about them about whats going on next so we just wanted to clarify the sequencing of further debt reduction and incremental shareholder returns. It sounds like from your commentary that further gross debt reduction beyond the first 5 billion that'll.
B ahead of additional cash return beyond that $3 $3 billion buyback and not in parallel and so I guess, you know reducing gross debt versus net debt, it's pretty different logistically that that's pretty easy given your free cash flow. So do you have any color on how long you think it'll take to achieve the high teens gross debt target.
What you see in the market for tenders and what you see in the market for open purchases.
Yes.
Good question, Janine I think that the.
As we laid out.
Last quarter, and what I tried to convey in my remarks was we would complete the $5 billion of debt reduction and then initiate share purchases I think that based on being at $3 six where we are today and as we demonstrated we have a combination of.
Uh huh.
Open market repurchases tenders are make whole provisions et cetera, all that are attractive in the current environment simply because of the rise in treasuries.
<unk> that is not going to be a heavy lift in the quarter and we anticipate proceeding with share repurchases during the quarter is reasonable to expect during Q2.
So the timing of how long it takes to complete the share repurchases is gonna be really dictated by.
The pace at which we're able to retire that and bring those shares in.
The stocks, obviously very liquid.
We have at our disposal lots of different mechanisms to actually acquire the shares we're going to do it in a way is most constructive and bring most value to the shareholders.
And if we do have cash available beyond that which the current pricing environment was really suggest we would have cash well above.
Those two.
He says that $8 billion between the two of those programs, we would presume applying that back to the balance sheet.
And the process for them.
<unk> a year.
Okay.
I was.
I was referring to getting to that high teens gross debt, but we can take it offline. That's okay. Thank you for that clarity and our second question, maybe just on growth. How are you thinking about production growth beyond 2022 given the medium term gross debt reduction target is it kind of like an either or on growth.
And paying down debt or is the price environment is it constructive enough on the balance sheet has improved enough that you can do both thank you.
Well, yeah, I think that by the time, we get to 'twenty twenty-three certainly our balance sheet. We believe is going to be very very healthy versus where we at least started so as Robin mentioned, we expect to have the cash to be able to go beyond the $8 billion. This year and every every dollar above the 5 billion. That's the 3 billion.
Of including the 3 billion of Hum.
The share repurchases and that 8 billion. So any free dollar above that would go to debt reduction. So we do expect to make significant progress with that this year with respect to mm two production increases increases for 2023.
We are going to increase throughout the rest of this year and going into 2023. The production that we have as always a a result of the programs that we've put in place and so it's going to determine the development programs that are in place by the end of this year heading into 2023, and what we see as the appropriate pace to.
Deliver the most net present value and we've said before that that could be between no growth and 5%, but as we look at the macro toward the end of the year and lay the uncertainties that we see today.
We'll be able to finalize that and as you as we always do let you know towards the beginning of next year.
The next question comes from David Chuckled Baum with Cowen. Please go ahead.
Yeah.
Hi, Thanks for taking my questions Vicki I appreciate the time I wanted to to ask an additional question around growth into next year.
Specifically to the Permian Your guide, obviously implies that you'd be ramping towards.
Oh, almost 600000 barrel equivalents a day there by the end of 'twenty two.
Should we think about 16 gross rigs being sufficient to continue growing in that profile into 2023.
Yeah.
Hi, David This is Richard let me, let me start with that and I think well I'll try to answer that is kind of talk to the cadence of how we entered the year and maybe how that translates to a second quarter into the second half of the year. So very pleased with really where we landed in the in the first quarter, we had a at a b for the onshore.
U S and specifically.
In the Rockies, but also a part in the Permian, but really that was a bit of uncertainty at the time, we provided that guidance around final recovery of the weather event and then certainly.
Contemplating some of the supply chain challenges that the that the industry saw in so we are very pleased where we landed in the first quarter you know from our activity ramp up plan, we're able to add add the rigs that we started in the fourth quarter into the into the first quarter. So really are at or near activity level for the rest of the year were.
About 17 rigs and five frac water in the first quarter I think importantly, as we think about this is the time to market was on pace and so you know we actually finished two wells online better than the first quarter and increased our totally your outlook by 10, and so that was very important for us to continue to deliver that time to market on pay.
Yes.
But as you think about sort of this inflection of growth going into the second quarter and then the back half of the year March was 24000 barrels a day better than February .
And I think below that 62% of the first quarter wells were online and more to really late March. So again very pleased with that sort of ramp up and then transition.
I'll go back into last year. It was really you know I think we've talked about on the last call a lot of transition from duck, which ducks in the Rockies, which carried a lot of production into what I would consider a much more steady state drilling and completion cadence you know really in the second quarter of this year into the back half of next year. So we expect to really.
Benefit from that and so when we think about really.
The second quarter.
We hit this you added a couple of rigs as you mentioned in the Permian to hit the 2016 and really 18 overall, our net rigs really not a big change because net rigs stay about the same with the drop of the Rockies in the back half of the year.
But but you can start looking at the Delaware is a really important area for us to deliver this growth. We have 30 wells that were online in the first quarter are really a second quarter that goes to about 40, and then the back half of the year that increase was about 50 per quarter.
So fuel.
Feel good about that delivery schedule and the Delaware.
Again going back to last year, we had about seven and a half rigs in the second half of last year in the Delaware in the first half of this year will be at 12, and so again as we went from docs to drilling that was really the next stage of this steady state recovery.
Then we will enter in the fall.
<unk> sort of completion online scheduled for the back half of the year and so.
The good news is those those wells are coming online very well I think of all the wells in the a pulled out to this one in the Texas, Delaware like we had 23 wells online in the first quarter that average they all average over 4000 barrels a day on a 24 hour IP.
So time to markets in line productions in line and then the final thing I would say as we think about the back half of the year is really protecting that base and I think part of the Rockies beat we were real pleased with or about 2% better on based on what we are.
What we had in our plan and so being able to protect that base production makes it a lot better. So when you look at time to market look at well performance and then you look at sort of our takeaway position and flexibility in the portfolio and we feel really good continued to work with Wes on strong uptime and sort of operability been able to look beyond 2020.
Two and so you know that.
The final component of really Derisking, what we're trying to do.
It's very important so I think where we are.
So kind of a land on where you ended your question I think you know we feel really good about where we are this year I think we've got flexibility in the back half of the year as Vicki said Theyre just activities.
And really hit what is the right capital and development program for next year to hit you know really what the plan needs to be given the macro conditions and what we're trying to do as a company.
Thanks, Richard I got my values worse, what that questions I appreciate it.
Robert This is Mike.
Follow up would be and I'm, sorry to belabor the point, but I wanted to ask another question around the timing of return of capital and debt pay down.
If we understand the sequence correct.
Once you get to another tranche beyond the buybacks, where you're looking to get that down into the teens.
Would that then preclude any incremental return of capital via buybacks and dividends.
Or should we think about it as once you get through that next tranche of debt pay down and then get that into the mid teens would you be agnostic as long as you're sort of delivering call. It like 50% of free cash back to shareholders on how quickly you might be triggering a pay down of the preferred notes.
Yeah. So.
Yeah.
The preferred so that obviously the preferred if you look at the $3 billion of share repurchases and add into that.
The dividend at 13th.
I assume that those are flat for the course of four consecutive quarters of three consecutive quarters et cetera, you're still not going to quite be at the level of triggering the $4 per share.
Berkshire.
Trigger and so as we've indicated once we go beyond.
The $8 billion, we what we've laid out for debt and share repurchases, we would intend to continue reducing debt again with the goal being to get that gross debt down into the high teens, we're based on our conversations with the three rating agencies. It's one of the key way points, we need to do to achieve investment grade. There are several other metrics they provide to us that we are.
Doing very well on relative to.
We certainly know that theyre getting.
All of these metrics are in place today based on commodity prices and so continuing to make that progress will help those metrics further to be constructive even at a more moderate price environment. So that's the reason why we're talking about going back to the debt beyond the share repurchases. We do think it's very important for us to achieve that investment grade status or get to those investment grade type metrics.
So I would look at the Berkshire.
More of the potential of the Berkshire is more a product of the strategy, we're going to be this year as a potential to work more than being a driver of the strategy. This year and so we find ourselves in a constructive commodity price environment. We've achieved those debt targets. We've talked about we've got those investment grade type metrics and we're having constructive discussions with those agencies.
About being investment grade then I think you are in a position as both Vicki and I laid out in our comments that you could see a transition for us away from being that being the.
Predominant consumer of cash that we're generating beyond making it to the business into being something more targeted towards shareholder returns and for us as we discuss we laid it out before that.
Favorable way of returning value to shareholders beyond the dividend is through share repurchases because it does increase the sustainability of the dividend and lower price environment. We also have outstanding warrants. We know there are sources of dilution. We also issued is common shares as part of the acquisition. So it's it's a it's a prime way for us to reduce that and if we do make a nominal.
Greece and share repurchases in that 12 month period, it will automatically trigger the provision of targeting the Berkshire. So it's not a a choice of do you want to trigger the Berkshire. Its if we prospect for our threshold. We will begin the process of the carbon return and the return and the reduction of Berkshire preferred.
So sitting.
Sitting here today in May you know set eight months away from January of 2023, you know we're not in a position to forecast for our cash flow is going to be in the first quarter or should it be at but if we can accomplish these goals. It puts us in a position where you want the optionality optionality, Richard describe and discuss production exiting the year of being able to be in a position where do additional shareholder returns we would treat.
Or Berkshire and begin reducing the principal of the Berkshire at in the process of doing that and so we.
We have some ground to hold to get there the commodity price environment is very constructive for US right now the current certainly the strip prices suggest this is very achievable.
And we're doing the right things in the business in terms of driving cost out and keeping costs down in the process. So the combination of that the chemicals business performance our portfolio. We're all figuring this out to be successful in that we're not very big on forecasting out cash flow in subsequent quarters or what we can do whereas away from us, but I think we've provided you with what our expectations are.
<unk> to do with cash in the balance of the year and if all those things happen. It puts us in a position where to increase shareholder returns we would be.
Wait after their principal on the Berkshire at that point.
The next question comes from Matt Portillo with T. P. H. Please go ahead.
Good morning, all and thank you for taking my questions.
Maybe just to start out on the D. J I was hoping you might be able to provide a little bit more context around the permitting process and maybe some of the delays youre seeing in there.
I was curious if you hold one rig into 2023, what that might mean from a well count perspective for you all.
Yeah, Matt I'll, let Dr. Richard take that.
Hey, Matt.
So thinking about the DJ This year and then next year.
We feel good about the progress we're actually making.
With our permits I think the decision to move.
Move the rig to.
You know allocation to the Delaware is really allowing us to get our development plans in place for 2023.
We've got I think we mentioned it in the in the prepared comments, we've got permits approved to take that one rig into next year. We've got another 50.
Sort of wells that are that are across a couple of pads that are in various stages of approval, but we feel good about where they're at and then we have another 200 that are a part of a larger sort of program that we're working through the system I would say you know.
<unk> got a lot of engagement, obviously over the last year thinking about this we've got a lot of.
Improvements in technology, and some things that I think will really fit well into the permitting expectations, both locally and at the state level. So really as we go into next year you know we would.
B b capable of of really getting to back to that that two rig level and perhaps even more so from a well count perspective. It could look very similar to where we started this year for the D. J in terms of count, but the challenges for US is to obviously develop responsibly work.
With the local communities work with the states put together the best claim we can book, but when we do that we want to be prepared to develop because those are those are some very good wells for us.
Within our portfolio.
Perfect and then as a follow up operational question just wanted to see if you might be able to spend a little bit of time talking about the Gulf of Mexico development plan from a tie in and development perspective over the next couple of years and what that might mean for production. It's obviously, a great free cash flow generative asset for the comp.
So just was hoping to get a little bit more context around how you are feeling on that front moving forward.
Yeah, we still feel really good about what we're doing in the Gulf of Mexico for the next few years as you know we've talked recently about the fulfilled a development look at that all the structures and the opportunities and high graded isn't that we've now already started now working on a subsea subsea are.
Subsurface.
<unk> system that will enable us to increase production also we're doing some additional work around rescheduling some of our development opportunities based on the exploration success that we've had and that we see so I think certainly we we have the assets we have.
The the permitting capability there to continue to maintain that cash flow over the next few years.
Beyond that it depends on some of the success of the exploration that we'll be executing this year and early next year.
The next question comes from Neil Mehta with Goldman Sachs. Please go ahead.
Thank you Oh I have a couple of questions here around supply chain and Vicki in early March yet you had made the comment that it gets cut some press that the supply chains in the U S. We're in relatively dire shape as it relates to the U S producers and that would be a constraint on U S growth and a lot of that has proven out especially around pressure.
We're pumping so can you just talk about your latest views around the constraints as it relates to the U S shale and how you see this evolving from here and tie that into your view of the oil macro.
Yeah. My comments on that was was definitely related to those who don't already have their plans in place and didnt already have their their materials lined up to purchase so anybody trying to increase activity at this point not only in the Permian, but also worldwide would have been very difficult.
I'm being able to do that and with respect to the macro I I really don't think there's been a time since I've been in our industry, where inventories and spare capacity are both very low and then you couple that with the supply chain challenge, but I think that there are a lot of headwinds to increasing production worldwide and.
Theres never.
There's never been a time I don't think either that companies had been trying as hard as they can to increase production, but we can't destroy value and it's it's almost value destruction. If he tried to accelerate anything now and some of the longer term projects I just can't I can't get started because of the the cost involved.
Now for those of us that have plans in place and there are other companies that have done this too but for those of us that had plans in place.
And had those plans in place early enough, we have been able to mitigate some of the impact of the inflation I'll, let Richard detailed some of that.
Sure ill just give you a few details from the U S onshore perspective.
Where we had factored this into our plans like Vicki said, if you remember if you go back really our first quarter message, we had up to 10% contemplated in our upstream capital budget and we certainly.
Scene that we feel good still with our capital outlook because of those plans and sort of what we had.
Factored in for uncertainty.
Within that that range, but I'd say a couple of things one I'll speak quickly on inflation mitigation, but importantly for us most importantly for us maintaining those operational efficiencies in that time to market wells online schedule was very critical and so you'll continue to hear us talk a lot about what we're trying to do to work with.
Our service partners to protect that but from an inflation perspective, I mean, the two big ones.
Oil country tubular goods, we knew going into the year see that and we have we've had some <unk> over 100% and.
And that's meaningful it's about 7% of our capital.
So that's been meaningful are the one that had a little bit more dynamics I think from an industry perspective.
The U S. In the Permian was really sand, but felt.
Good.
<unk> worked through that well in the first quarter and good where we're at today.
We think about sort of waters price and where is supply and we feel good about our our supply situation we didn't have any.
Disruptions in the first quarter that impacted that wells on line Schedule's wherever the maintain schedule. There part of that is design, we've been able to work with our development teams to be able to manage.
Really both white and regional sand into our designs based on that supply. The other is our primary sand supplier in the use of <unk>. So again that facility became very helpful for us in terms of storage and last mile logistics.
In terms of what we're doing and and so that was really good.
The last thing around sand it I think played well for us and we appreciate again our service partners with this we move back to a bit more of an integrated strategy.
With our Frac providers and so you know that included sand being almost supply sand, but it also included trucking and fuel and so both from a trucking perspective in terms of moving sand for that last mile logistics, we were able to get some help from our frac providers and then from a use of our tier two.
For dual fuel perspective that fuel supply and so that played out very well for us we feel like we're in a good position and feel like we are.
No mostly locked in on price for the rest of the year, but that.
Sort of decision and work we did with our service partner played out very well.
Yeah.
And then the follow up is just around the Cam side of the business I see the guidance bump here in terms of pre tax income guidance.
Just talk a little bit about how you see the trajectory of profitability through the year. It sounds like you are at.
If I understood.
The comments still a strong year, but might be some downward pressure on pricing as we think about the plan for the year playing out so any color around that would be great.
Yeah sure Neal I guess.
I can answer your question by for a lane, where we are today.
And as you as you indicated in for more complex conditions are still very strong and our vinyls and caustic soda business.
No we don't from our personal sales the Russia, Ukraine impact is really escalation of prices in Europe , and Asia, which is impacting their chlor alkali operations and coin greater production and leading them to not only reduce operating rates, but also increased prices accordingly, that's benefiting both side.
To the business because of that and so but not only that domestically. The business remains very strong on the vinyl side of the business and so we would estimate.
Date market operating breakthrough Mark these lag a bit but were reported by the industry to 81, 6% year to date, which is.
Not as high as you might think it might be but there's been a lot of controls in that due to.
The outages that occurred during the industry during the first quarter, which is pretty typical but domestic demand in the first quarter.
It was up about 10% versus last year and in fact domestic demand in March.
The U S was the highest single month for domestic demand in over a decade.
Just reflecting that pent up demand for construction and despite what is relatively.
Based on historical value high prices for PVC.
Demand is still there and its been pulled right because of the building products. So that's great for the business exports are about seven 5% higher than were this time last year through March last year.
Selecting the fact that there's opportunities to sell PVC internationally in some ways. The PVC is is exporting U S gas and ethylene overseas into places that are being impacted by the higher prices or availability. So that's all it is very constructive for the business in a week. So we see that demand being very resilient.
Certainly the first half of the year.
A favorable housing sector et cetera.
Export business being open for as long as it's available simply because of the you know the U S advantage on gas ethylene and energy et cetera versus rest of the world. So PVC feels constructive obviously interest rates rising impact housing starts et cetera, and demand on that business and so that's one of those uncertainties, we're not seeing anything that would suggest it's falling.
Off earning fractures in the strength of PVC or sitting here in the month of May and watching the news like everyone else is regarding the fed it you know getting more hawkish towards interest rates can have a corollary impact on.
Housing starts in demand at some point and so we're just a little bit less clear on the trajectory in the second half of the year. So you see a little more cautious outlook.
The business side or on the cost side of things.
It's been a we don't get operating rates and where is the industry because of the amount of people that participate in it and so but we would estimate a range of somewhere in the low eighties.
All producers had scheduled and unscheduled downtime the majors during the first half part of the year so far.
There's been several downstream consumers that have had issues and production issues.
We're obviously dealing with some railroad logistics issues as an industry and other industries right now and so but the core.
Sectors, just like home construction and durable goods transport et cetera, they're all very strong right now improvement in travel.
Customer spending is still there and obviously just like in the PVC business. We're taking advantage of the fact that we're the energy advantage in the U S versus rest of the world right now from a pricing standpoint, despite being high here is nowhere near as high as it is in Europe , and Asia, which opens up opportunities and will lead some consumers of our products to produce products here versus overseas.
<unk> and export those products and so again similar to the PVC business the coffee business in the second half of the year and it was very strong through the first half of the year is just a little less.
Clear the trajectory in the second half of your only because of those overhanging potential impacts to the economy and the associated GDP, which typically drives a big part of the business and so I wouldn't say that we're pessimistic towards the second half of the year. If you look at the.
Guidance range, we gave and looking at the core of what we're doing for the second quarter and look at slide 33, which set a historical view of chemical performance, we need the second quarter guidance alone would have been a great year by many standard for many years prior to 'twenty, one and 'twenty two.
And then if we look at the second half of the year, even if you reach or our guidance mid year.
You are talking ranges. It also be close to $1 billion on the high end of our range certainly if things are more constructive on the high end of the range I think thats the.
<unk>.
The feeling that we have right now and we'll get more clarity that we're really in a zone right now what we're trying to understand what might be the impacts of rising interest rates in the business.
But all the demand factors a day are still very constructive for supply demand and the longer that supply demand balance remains tight on the two sides of the business. The higher we're going to go towards the high end of that guidance and will potentially revise that guidance at some point, maybe youre, obviously once we see in the second quarter turns out.
But our guidance that we provided for the year.
The Q2 guidance just takes into consideration that uncertainty we have in the second half of the year, just because of what's going on not only in the U S, but globally in the economy.
The next question comes from Doug Leggate with Bank of America. Please go ahead.
Oh. Thanks, I appreciate you taking my questions everybody.
But I hate to do this but I'm going to go back to the capital structure of the company.
And I wanted to ask two questions related to accept some insurers.
One of the nuance I'm, just a little bit if I may.
So my first question is you talked about absolute net debt targets you don't talk about.
The capital structure, including the Prefs. So if I include the effects of the debt for example.
One could argue with that.
Once you get back to investment grade.
Your cost of debt is going to be.
A substantial potential offset to the premium you would need to pay for the Prefs. If you chose to raise debt to buy the press, but I mean, 8% money on perhaps let's say four 5% money on when the debt even with a 10% premium that would make sense why would you not do that.
Yeah.
Why would we not retired the prep is that what youre, saying.
Yes.
Sorry, Yeah, what why is that not an option because it seems to me that the premium is worth paying.
You can reduce the cost of overall money, which is what you would do it you know four or five for some debt.
Oh go out and borrow to actually fun fun the retirement of the Berkshire. Once you get once you hit investment grade yet.
Yes. The challenge with it is is this is not just the premium. It's also the return to the shareholders too and so it's it's not just considering the premium on the Berkshire of the 10% through 2029. It's also that there's got to be an equivalent value returned to the shareholders.
At the same time and so.
Versus retiring the debt like we're going to the balance of this year, where every dollar that goes with that reduces our gross debt going into when we were trying to Berkshire will reduce shares by an equivalent amount, but will also reduce typically split bifurcated into the two and so $1 half of it goes towards shareholders and half of it goes towards.
Berkshire.
No.
I think once we achieve.
And the ability we start retiring the Berkshire will certainly going to want to deviate input whatever cash were applied to debt reduction will be going towards the Berkshire, which the way that our maturity as laid out today.
It is not very difficult for us to do I mean, we don't have any maturities of any meaningful size.
Until the second half of 2024 at this point, even that isn't very large in scale and so we have the ability to allocate all the cash that we have available to us if we want to towards shareholders in the Berkshires return up or doing that point without having retired the debt because we don't have any maturities over that period of time.
Okay, well I apologize for asking I just wanted to understand if it was a crazy idea or if it's something we would absolutely consider it.
My second question is even if you don't mind me going down this route bump.
Oh I'm sure obviously does not have a vested interest in a better share price for all these reasons and fill up a very large position in your stock and 8% money on the Prefs is obviously still pretty expensive.
Is there any.
Consideration likelihood discussion or anything else you might want to share with us.
Could ultimately see you swap out of the Prefs.
Favorable terms for ordinary equity with Berkshire, given that they've already built during the loss position just curious took off as a consideration.
Yeah, we don't share the discussions that we have with other shareholders as you know, but I can tell you that.
Always consider ways to add value to our shareholders and we'll continue to do that but we really can't disclose it.
Private conversations with other shareholders.
Yeah.
The next question comes from Phil Gresh with Jpmorgan. Please go ahead.
Yes, hi, good afternoon.
With respect to capital spending in the past you've talked about sustaining capex of $3 2 billion at $40 W. T I and obviously.
We're in a much higher environment, probably for longer so I'm curious if you'd have another way to think about that in particular.
Was the Capex do you think could be required to sustain this 2022 exit rate you're talking about that should be somewhere around $1 2 million barrels a day.
And I'm looking at this in the context of <unk>.
Capex guide for the year would seem to imply.
For Brexit rating, maybe in the high fours on Capex, but.
But it would just be interested in any color there.
Yeah. This year, we we did have some things that we needed to catch up on as you know we were at $2 9 billion last year and that didn't sustain some of our lower decline assets. So we are that's part of the reason that we have a little more opex and Permian that is too.
To restore some C O two to some of our C. O two floods and also to do some workovers to get some wells back online. So as we're going toward forward and looking at what's the optimum level of capital for the these assets to deliver the most value we are taking into consideration.
What should we do where should we allocate capital to even the assets that earn a sustainability scenario would be lower capital. It's just that the Dol or decline assets take a little longer to catch up but then they they don't decline as quickly.
So if I'm understanding your question to get us to where we would continually be at a at a higher rate should happen going into next year I think that will be where we need to be to have every the capital into every asset that we have optimized.
So just to clarify for exit rating.
Call It <unk>.
Four eight or something like that in the fourth quarter on Capex. We would you would you be saying then that there's.
Maybe still some catch up spend that was embedded in that.
Or is that actually the sustaining capital rate.
I would say that that is the that is probably a little higher than the sustaining rate.
But it's the rate that we feel is appropriate on a go forward basis to optimize the development within each of the portfolios. Our sustaining capital is still at that 3.2 in a $40 environment. So we have the you know the increase in prices that are that comes with not being in.
That $40 environment I should say, we have on the on the waterfall. We show you a little deflation as costs go back down to a cycle that looks more like 40 than where we are today. So there's an uplift in cost associated with that and then there's the the 250 million that we put into the Capex for this year that's.
Well related to inflation and albeit we were trying to offset $50 million of that but that's also dollars that are that are not going into delivering incremental oil. It's just to pay the cost to do it to inflation. So it it.
Is that the rate that I'm going into next year would be at a rate that should deliver year over year, a little bit of an increase in production.
And the last questioner will be Paul Cheng with Scotiabank. Please go ahead.
Yeah. Thank you.
Afternoon.
Maybe that's the first one is for Rob.
I know that it's too early that you guys haven't decided what is your program Guantanamo plan for next year, but can you tell us roughly what it.
San off you'll work may have already have some kind of fixed price contract for 2023.
And maybe some.
Given that how do you see that program are likely higher inflation on your inflation will continue pushing as high as some kind of maybe any insight you can help us.
And second question, Yes, we have quite an anda.
Midstream.
Full year guidance seems to suggest.
Second half you are going to say go back to one loss.
Yes that we need is just being conservative on what that that's some identify items.
And they do believe the second half of the REIT. So yeah, it's going to be much worse than what can be seen in the second quarter or what you are guiding too. Thank you.
Hey, Paul This is Richard maybe I'll start with just a little bit of the sort of U S contract.
Talked around it in terms of inflation, we can start start there to kind of give you a view Howard is going into the back half of this year and into 2023 I think from some of the critical components like.
Rigs and Frac core.
We have flexibility going into the back half of the year, we have some contracts that do not extend into 2023. So again as we sort of a land on what the final 2023 point as we've got.
Some flexibility there we also want to make sure we've got the highest performing crews and rigs that we can again from a from an Otis CTG and sort of sand supply I think one of the real advantages we have beyond what I mentioned earlier is that we're operating most of our activity within five core development plans. So we.
Got this year about 80% to 90% of our activity within five areas and would expect that to continue into next year.
And that that those designs being locked in gives us the advantage of being able to schedule out things like sand delivery and tubular so both of those.
Well, we'll order out six months in advance we will be able to secure the pricing that we can.
Those represent really the biggest uncertainties in terms of of inflation going into next year. The rest you know, we obviously work contracts globally. So work with Ken whether it's Gulf of Mexico internationally to be able to work with our service providers as best we can to sort of do that that globe.
View in terms of our needs. So we feel good.
Again, where we stand this year in terms of supply and price and we will be looking at in the back half of this year to get that firmed up into into next year.
Now I'd tell you Paul on the midstream business because of all the uncertainties in the world and.
There are a lot of those we've taken a very conservative approach on our forecast for pricing of sulfur and Ngls mainly.
And with that I want to say I very much appreciate all the calls today and and I want to thank our employees for their commitment and their exceptional performance that's been able to help.
Help us resume our delivery of return on capital employed and of capital to shareholders.
Have a good day. Thank you.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Okay.
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