Q2 2022 Occidental Petroleum Corp Earnings Call
Good afternoon, and welcome to Occidental's second quarter 2022 earnings conference call. All participants will be in listen only mode should you need assistance. Please signal conference specialist by pressing the star key followed by zero.
After today's presentation there'll be an opportunity to ask questions to ask a question you May Press Star then one on your 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 Jason.
Good afternoon, everyone and thank you for participating in Occidental second 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 at.
The presentation includes a cautionary statement on slide two regarding forward looking statements will be made on the call. This afternoon I'll now turn the call over to Vicki. Thank you. Please go ahead.
Thank you, Jeff and good morning, or good afternoon, everyone.
We achieved a significant milestone in the second quarter as we completed our near term debt reduction goal and activated our share repurchase program.
At the beginning of this year, we established a near term goal of repaying an additional $5 billion of debt before further increasing the amount of cash allocated to shareholder returns.
And that we completed in May brought the total debt repaid this year to over $8 million, surpassing our target at a quicker pace than we had originally anticipated.
Our near term debt reduction goal accomplished we initiated our $3 billion share repurchase program in the second quarter and have already repurchased more than $1 $1 billion of shares.
The additional allocation of cash to shareholders marks a meaningful progression of our cash flow priorities as we have primarily allocated free cash flow to debt reduction over the last few years.
Our efforts to improve the balance sheet remain ongoing but our deleveraging process has reached a stage where our focus is expanding to go to additional cash flow priorities.
This afternoon I'll cover the next phase of our shareholder return framework and second quarter operational performance, Rob will cover our financial results as well as our updated guidance, which includes an increase in our full year guidance for Oxy cat.
Starting with our shareholder return framework, our ability to consistently deliver outstanding operational results combined with our focus to improve our balance sheet have positioned us to increase the amount of capital returned to shareholders.
During current commodity prices.
Patients, we expect to repurchase a total of $3 billion of shares in <unk>.
Reduced gross debt to the high teens by the end of this year.
Once we have completed the $3 billion share repurchase program and reduced our debt to the high teens, we intend to continue returning capital to shareholders in 2023 real common dividend that is sustainable at $40, a debit ti as well as through an active share repurchase program.
Progress, we were making and lowering interest payments through debt reduction combined with managing the number of shares outstanding will enhance the sustainability of our dividend and position us to increase our common dividend at the appropriate time.
While we expect future dividend increases to be gradual and meaningful we do not anticipate the dividend returning to its prior peak.
Given our focus on returning capital to shareholders. It is possible that we may reach a point next year, where we returned over $4 per share to common shareholders over a trailing 12 month period.
<unk> and maintaining returns to common shareholders above this threshold will require us to begin redeeming their preferred equity concurrently with returning additional cash to common shareholders.
I want to be clear about two things.
Reaching the $4 per share threshold is the potential outcome of our shareholder return framework not a specific target.
If we begin redeeming the preferred equity that does not mean, there's a capital return to common shareholders as cash would continue to be returned to common shareholders above $4 per share.
In the second quarter, we generated $4 $2 billion of free cash flow before working capital our highest quarterly free cash flow today.
Our business is all performed well and we delivered production from continuing operations of approximately 1.1 million Boe per day in line with the midpoint of our guidance and with total companywide spending of capital of $972 million.
I'll stay calm reported record earnings for the fourth consecutive quarter with EBIT of $800 million. It's.
As the business continued to benefit from robust pricing and demand in the caustic chlorine in PBC markets.
Last quarter, we highlighted the responsible care and facility Safety Awards Oxy Cam received from the American Chemistry Council.
Oxy Ken's accomplishments continued to be acknowledged in may the U S Department of energy honored uptick him as a better practice award winner, which recognizes companies for innovative and industry, leading accomplishments in energy management Oscar.
<unk> received a rec and get recognition for incorporating an engineering training and development program that led to process changes, resulting in energy savings that reduce C. O two emissions by 7000 metric tons annually.
Its achievements like this that makes me so proud to announce the modernization and expansion and what of Oxy counts keep lab, which will detail in just a minute.
Turning to oil and gas I'd like to congratulate the Gulf of Mexico, Jim and celebrating first oil from the new discovery filled Horn mountain West.
The new build was successfully tied back to the Horn mountain are using a three and a half mile dual flow lines.
Project came in on budget and more than three months ahead of schedule.
The Horn mountain West tie back is expected to eventually add approximately 30000 barrels of oil production per day and is an excellent example of our ability to leverage our assets and technical expertise to bring new production online in a capital efficient manner.
I'd also like to congratulate our L Hudson in Oman genes.
The husband and achieved a recent production record following the first full plant shutdown is a part of a planned turnaround in the first quarter.
Obviously, the Mam team celebrated a record daily production at Oman, North block nine which has been operated by Oxy since 1984.
Even after almost 40 years Logmein is still breaking records with strong base production and new development wedge performance supported by a successful exploration program.
We've also been active in capturing opportunities opportunities to leverage our deep inventory of U S onshore assets.
When we announced our Midland Basin JV with Echo patrol in 2019, I mentioned, how excited we were to be working with one of our strongest and longest standing strategic partners.
The JV has worked exceptionally well for both partners with oxy benefiting from incremental production and cash flow from the Midland basin with minimal investment.
We were fortunate to collaborate with a partner who has extensive expertise and with whom we share a long term vision.
This is why I'm equally excited this morning to announce that oxy and Echo patrol have agreed to enhance our JV in the Midland Basin and expand our partnership to cover above approximately 20000 net acres in the Delaware Basin. This.
This includes 17000 acres in the Texas, Delaware, well utilized with infrastructure.
And in the Midland Basin, Oxy will benefit from the opportunity to continue development with an extension to the capital carry through the end of this agreement in the first quarter of 2025.
In the Delaware Basin, we have the opportunity to bring forward the development of high quality acreage that was further out in our development plans, while benefiting from an additional capital carry of up to 75%.
In exchange for the carried capital Ecopetrol will earn a percentage of the working interest in the JV assets.
Last month, we reached an agreement with sonatrach in Algeria to enter into a new 25 year production sharing agreement that will roll oxy is existing licenses into a single agreement the.
The new production sharing agreement renews and deepens, our partnership with Sonatrach, all providing oxy with the opportunity to add reserves and continue developing a low decline cash generating asset with long standing partners.
Even with 2022 expected to be a record year for oxy, Kim we see a unique opportunity to expand oxy Kim's future earnings and cash flow generating capabilities.
Best thing and a high return project.
On our fourth quarter call. We mentioned a feed study to explore the modernization of certain Gulf coast Chlor alkali assets from diaphragm to membrane technology I'm pleased to announce our battleground flat, which is adjacent to the Houston ship channel in Deer Park, Texas is one of the slides that we will modernize.
Battleground is oxy.
Just chlorine and caustic soda production facility wasn't ready access to both domestic and international markets.
The project is being undertaken impart to respond to customer demand for chlorine chlorine derivatives and certain grades of caustic soda that we can produce with newer technology.
Also result in increased capacity for both products.
The project is expected to increase cash flow through improved margins and higher product volumes, while lowering the energy intensity of the products produced.
Modernization and expansion project will commence in 2023 with a capital investment of up to $1 1 billion spread over three <unk>.
Years.
During construction existing operations are expected to continue as normal with improvements expected to be realized in 2026.
The expansion is not a prospect to build as we have structurally advanced contracts and internal derivative production to consume.
The incremental whoring volume, while caustic volumes will be contracted by the time, the new capacity comes online.
The battleground project represents the first sizeable investment we've made in oxy, Kansas the construction and completion of the four CPE plant and ethylene cracker that were completed in 2017.
It's high return project is just one of several opportunities would have to grow off against cash flow over the next few years.
Ducting similar feed studies for additional Chlor alkali assets and plan to communicate the results when complete.
I'll now turn the call over to Rob who will walk you through our second quarter results and guidance.
Thank you Vicky and good afternoon in.
In the second quarter, our profitability remains strong and we generated a record level of free cash flow. We now from adjusted profit of $3.15 per diluted share and our reported profit of $3 47 per diluted share with the difference between the two numbers, primarily driven by gains on early debt extinguishment and positive mark to market adjustments.
We were pleased to be able to allocate cash to share repurchases in the second quarter.
We repurchased over 18 million shares as of Monday August one for approximately $1 1 billion for a weighted average price below $60 per share.
Also during the quarter approximately $3 $1 billion publicly traded warrants were exercised bringing the total number exercise to almost $4 4 million with $11 5 million $111 5 million remaining outstanding.
As we said when the warrants were issued in 2020. The cash proceeds received will be applied towards share repurchases to mitigate potential dilution to common shareholders.
As Vicki mentioned, we were excited to enhance and expand our relationship with Echo patrol in the Permian Basin.
J B amendment closed in the second quarter with an effective date of January one 2022 Macs.
To maximize this opportunity we intended to add an additional rig late in the year support the JV development activity in the Delaware Basin.
So activity is not expected to add any production until 2023 as the first Delaware JV wells will not come online until next year.
Similarly, the JV, it's not expect to have any meaningful impact on our capital budget. This year.
We expect the Delaware, JV and enhanced Midland JV to allow us to maintain or even lower industry, leading capital intensity in the Permian in 2023 onwards, we will provide further details when you provide 2020 production guidance.
Even though January one 'twenty, two effective date and related working interest transferred to our JV partner in the Midland Basin, we have adjusted our full year Permian production guidance down slightly.
Separately, we are reallocating a portion of that capital earmarked for the OBO spending this year for our operated Permian assets.
Keating capital operating and <unk> will provide more certainty in our west delivery for the second half of 2022 and the start of 2023, while also delivering superior terms, given our inventory quality and cost control.
While the timing of this change the slight impact R 22 production activity relocation in the second half of the year.
Developing resources that we operate is expect to result in even stronger financial performance going forward.
Activity slide in the earnings presentation Appendix reflects this change.
The shifted OBO capital combined with the JV working interest transfer as well as various short term operability matters. All contributed contributed to a slightly lowering our full year Permian production guidance. The operability impacts are primarily related to third party issues, such as downstream gas processing interruptions, our EUR assets in.
Other unplanned disruptions at third parties for.
For 2022 companywide full year production guidance remains unchanged as a Permian adjustment is fully offset by high production in the Rockies and the Gulf of Mexico.
Finally, we note that our Permian production delivery remains very strong with a growth of approximately 100000 Boe per day, when comparing the fourth quarter of 2021.
<unk> production guidance for the fourth quarter of 2022.
We expect production in the second half of 'twenty two to average approximately one 2 million Boe per day, which is notably higher than the first half of the year higher.
Higher production in the second half of the year has always been unexpected outcome of our 2022 plant in part due to the ramp up activity and scheduled turnaround in the first quarter.
Companywide third quarter production guidance includes continued growth in the Permian, but considers the potential for tropical weather impacts in the Gulf of Mexico, combined with third party downtime and production decline in the Rockies Humira lower activity set as a result about relocating a rig to the Permian.
Our full year capital budget remains unchanged, but as I mentioned in our previous call. We expect capital spending to come in near the high end of our range of $3 nine to $4 3 billion certain areas that we operate in especially the Permian continue to experience higher inflationary pressures in others.
Port activity and the 2023 and address the regional impact of inflation, we are reallocating $200 million of capital to the Permian. We believe our company wide capital budget is sized appropriately to execute our 2020 plan at the additional capital for the Permian will be reallocated from other assets that have been able to generate higher than expected capital savings.
We are raising our full year domestic operating expense guidance of $8 50 per Boe.
Which accounts for higher than expected labor and energy costs, primarily in the Permian as well as continued upward pricing pressure on our Wpa index via purchase contracts and the ER business.
Oxy Kim continues to perform well and we have raised our full year guidance to reflect the exceptional second quarter performance as well as a slightly better than previously expected second half of the year, we still see the potential for market condition to damper on where we are today because of inflationary pressures over the long term fundamentals continue to remain supportive and we expect third and fourth quarters to be strong.
<unk> by historical standards.
Turning back to financial items and September we intend to settle $275 million of notional interest rate swaps.
Net liability or cash outflow required SLE swaps will be around $100 million of the current interest rate curve.
Last quarter, I mentioned that the Wpa averages $90 per barrel in 2022, we would expect to pay approximately $600 million and U S federal cash taxes.
Oil prices continue to remain strong increasing the possibility that WTS may average, even a higher price for the year.
WTO averaged $100 in 'twenty going to we would expect to pay approximately $1 $2 billion in U S federal cash taxes.
As Vicki mentioned year to date, we paid approximately $8 $1 billion of debt, including $4 $8 billion in the second quarter exceeding our near term goal of our paid $5 billion of principal this year we.
We have also made meaningful progress towards our medium term goal of reducing gross debt to the high teens.
We began repurchasing shares in the second quarter further advancing our shareowner return framework as part of our commitment to return more cash to shareholders.
We intend to continue allocating free cash flow towards share repurchases until we complete our current $3 billion program.
During this period, we will continue to view debt retirement, Opportunistically, and we'll likely retire debt concurrently with share repurchases.
Once our initial share repurchase program is complete we intend to allocate free cash flow towards reducing our face value debt to the high teens, which we believe will accelerate our return to investment grade when we reach this stage, we intend to reduce the emphasis of our allocation of free cash flow from primarily reducing debt by including initial items on our cash flow priorities we can.
Continue to make incremental progress towards achieving our goal of returning to investment grade since our last earnings call interest signed a positive Alec to our credit ratings all three of the major credit rating agencies right. Our debt is one notch below investment grade with Moody's and Fitch, having assigned positive outlooks.
Over time, we intend to maintain mid cycle levered at approximately one times debt to EBITDA or below $15 billion. We believe this level of leverage will be appropriate for our capital structure as we will enhance our equity returns while strengthening our ability to return capital to shareholders throughout the commodity cycle I will now turn the call back over to Vicki.
We're now prepared to take your calls.
We will now begin the question and answer session to ask a question you May Press Star then one on you touched on phone.
If youre using a speakerphone please pick up your handset before pressing the keys.
To withdraw your question. Please press Star then two please.
Please limit.
Questions to one primary question and one follow up if you have further questions. You may reenter. The question queue. At this time, we will pause momentarily to assemble the roster.
The first question comes from John Royall from J P. Morgan. Please go ahead.
Hey, good afternoon, guys. Thanks for taking my question.
So can you talk about the various moving pieces in the Capex guidance I know that you are you raised the Permian number but kept the total the same so.
What are the areas that were the source of funds for that race and then.
Any early look into some of the moving pieces for next year with this new effort for <unk> in men.
The change in structure with like a patrol just maybe you could give us on kind of the puts and takes going into next year would be helpful.
I'll, let Richard cover they are the changes in the Capex and then I'll follow up with the additional part of that question.
Hey, John This is Richard.
Yes.
You may be in pieces.
As we look across the U S onshore.
And as we look at it a couple of things occurred during the year I think first from an OBO perspective.
We had a wedge assumed in our production plan in early in the year that became a bit slower in terms of delivery and so we went ahead and made the move to reallocate some of that capital into our operated.
Which which did a few things one it secured debt production wedge for us, but it also added resources for the back half of the year to give us some continuity on the back half of the year, we liked that we did that.
As Rob mentioned in his comments these are high return projects.
Very good so that was a good move and then securing some of those resources early in the year in terms of rigs and Frac core.
It has played out well in terms of our timing to manage inflation and improved performance as we hit this ramp up for the back half of the year.
Other piece of that so step two is really a reallocation from from oxy and so part of that is coming from LTV. We can talk in more detail now if we need to but that's really.
We hit the back half of the year, we'd look to be coming in closer to midpoint for low carbon ventures, that's really just more certainty around the direct air capture development in some of the CCU.
<unk> hub work that we've got in place.
And so that plus I think some other savings around the rest of oxy really contributed to that.
That balance so if you think about that extra 200.
I'd say, 50% of that is really around.
Activity adds so we were a bit front end loaded and our plan for the year. So that allows us to take that capital and keep continuity, especially across drilling rigs, which will give us optionality as we go into 2023 and then the other the other piece is really around inflation.
We've seen that pressure on that.
<unk> been able to mitigate a large piece of that but we our outlook to an additional 7% to 10%.
The outlook compared to plan.
The year, we've been able to again make up.
An incremental 4% of that in our operation savings So pleased with the progress against that but we did.
Hard to see some inflationary pressures come out and so that capital helps address that uncertainty I would call. It for the rest of the year.
Now, let's say on a capital for 2023 is still way too early for us to determine what that would be but the echo patrol JV would fit into the resources allocation and we will compete with our with the capital within that program.
Okay, great. Thank you and then.
Switching over to chemicals, if you guys could just talk a little bit about the fundamentals in that business.
Coming off of it.
Strong <unk>, but a big step down in guidance for the second half. So if you could just give some color on the source of the strength in <unk> and what you see changing in the second half.
Sure John I would say conditions in both the vinyls and caustic soda business that are largely the ones that determine how we form overall and chemical they were obviously very favorable in the second quarter and.
And when we see both conditions, both businesses and favorable points you have the significant earnings impact leading to the record performance we had in the second quarter.
If you go into the third quarter.
I would say the extreme tightness that we've been experiencing for quite some time in the vinyls business has become more manageable and that's really from improved supply.
And some softening in domestic market.
While conditions in the caustic soda business remain.
Very strong and continue to improve.
I would say the macroeconomic conditions are still indicative.
When you look at interest rates.
Housing starts GDP, there are kind of trending unfavorably, which is why we've talked about a softer second half relative to the first half.
But we're also entering a very unpredictable time of the year.
The latter part of the third quarter here in terms of weather, which can certainly upset.
<unk> or demand either way and so this is it's very difficult to look out very far as we entered the very beginning of hurricane season, or the peak of hurricane season, and the other thing I would say that has impacted the business a bit that we're trying to incorporate into the outlook is the Chinese shutdowns related to COVID-19 and sort of a no COVID-19 tolerance policies is <unk>.
<unk> up their demand in terms of needs for chemicals, and pushing other Asian chemicals into other parts of the world, including impacting exports from the U S and so there's a bit of a softening their effect, but again. These are all things that can be modified relatively on a short basis.
Something were to change in either of those but because of that.
Macroeconomic trends and our normal seasonal declines you would see in the fourth quarter and the business we are projecting.
A softer second half a year up to the first half of the year, but again, what we're projecting is quite strong by historical standards, even the guidance for the third quarter as it is now what have been historically a decent year in many years, so the chemical business, let alone a quarter.
But overall when you look at the business on PBC, we're still seeing growth year over year.
Domestic demand is up almost 6% through June .
PVC demand.
Including exports from the U S. Total demand is up about four 5% Mccoy.
The chlorine side of the business, we're still seeing growth, 3% to 4%. This year all those market sectors remain strong there's still a lot of pent up demand as you can imagine coming off of the last two years, but those are all areas in durable goods et cetera, where we can see impact from interest rates inflation disposable income etcetera. So again part of it is is trying to just to.
<unk> forecast what that might look like.
During the same year. We also is doing right I'm trying to gauge the depth of a potential reception of a recession and the impact on demand, but overall still a very favorable conditions in the business, but just not as favorable as they were in the second quarter.
The next question is from Rafael Dubois from Society generate please go ahead.
Thank you for taking my questions.
First one is related to Algeria.
Now that you have signed this 25 year contract extension I was wondering if you could maybe.
Give us some better color on what is the production potential for Algeria, and whether there is a change in the mix between liquids and gas that we should be expecting.
Currently under the agreement that we signed were still will be producing.
Basically oil production with associated gas and primarily from the fields, we've already been developing just extending those out but I'd say that from the standpoint of our production outlook.
Currently it is going to be look a little bit lower next year than it looks this year because of the structure of the contract, but but our cash flow is going to be approximately the same. So it's just based on the terms and we we have a lot of potential we believe in the existing fields to continue to develop those out. So the remaining reserves are that we will be able.
To add as a result of just the contract extension will be about 100 million barrels.
Other than that there's there's a lot of potential for further evaluation. So we've included the treaty three D. Seismic survey as a part of the evaluation. So that we can start to better increase our recoveries from those conventional sales because.
All are relatively low decline and and supported with gas injection and potentially ultimately some C O two injection.
Gas is not a part of what we're developing over there yet that could be in the future should.
Should there be a an opportunity for us to just find it a commercially competitive with the other projects that we have internally.
Great. Thank you and my follow on question would be about the kidney Coors.
This battle ground.
<unk> project that you have announced.
You said that you would have a more planes that you will consider for modernization.
When could we hear about the next one to be modernized and could you may be remind us.
The capacity, but total grown so that we can either fuel for the capex intensity.
Such project and what we could be expecting Greenfield world for other projects.
Sure Rafael.
So we have talked about potential conversions beyond the battleground project. So at this point we've.
We've made the decision to move forward with.
The battleground conversion at the end.
Indicated in the remarks, we will continue to operate the facility throughout the construction process. There may be some short period jewelry to take very short outages for important connections between existing infrastructure facilities or confidence throughout that process. We can build inventory and continued low product noted about our customers and so.
As you think about the battleground processes should not.
Assume any loss of sales or margin during the actual project itself.
So when you look at the other facilities once we can convert the battleground facility.
We already have.
Membrane technology, and Polyrhythm X, which is a non asbestos type diaphragm technology at our Wichita Geismar facilities and we're in the process right now of making a conversion change at our <unk> facility at <unk>.
So the announced project that will not only.
Convert battleground, but increased its capacity by 80% will only leave our combat in ingleside facilities utilizing this best diaphragms and will begin the conversion studies on those as we get further underway with the actual battery got conversion, we'll do them sort of in the series together, we won't wait for one to be completed to make a decision on the other but what sort of.
Stagger them together, but obviously, what we're going to do with those facilities is in this part and that has been moving forward. The battleground project right now.
And so from a capital intensity standpoint, we don't provide individuals capacities of our facilities.
I would say, though is is that the amount.
Cost of $1 $1 billion that we've included in the slide deck I would not use that as a proxy necessarily that for the other two facilities.
Yeah.
The facilities are all individually unique.
And we're not only from different sizes and capacity in the facilities, but they all have different equipment and associated inside and outside battery limits. They are different conversions will go on with them. In addition that at this stage no as we mentioned the battleground facility expansion is.
Determined also with existing contractual obligations, we have secured for the chlorine side of the business the derivative side of the business moving into the project, we're not expanding the project hoping to get additional demand for those molecules are already sold in the future.
At this time, we don't have.
Needs to expand either our convent facility or Ingleside facility. So at this stage. If we proceed with the NFIB decision on one of those it would simply be a conversion of a process change and so it would be difficult to take that and certainly wouldn't multiply that number times three and come up with a number for.
Are those two the other two projects to be included in that and so as we get further along with the battleground project.
We will start sharing ideas subsequent changes in the future, but this time. They wait decision. We've made is to actually move forward with battleground one.
Hey, Raphael This is Jeff I had one thing to what Rob said the EBITDA number we provided would be the way I'd look at that as more of a mid cycle EBITDA not at current pricing or current market conditions.
So you can use that for your estimates.
The next question comes from Devin Mcdermott from Morgan Stanley . Please go ahead.
Good afternoon, Thanks for taking my questions.
So I wanted to ask on our low carbon ventures, one of the moving pieces in the guidance. This year was LCB spend coming in toward the midpoint I was wondering if you could just talk a little bit more broadly about the progress you've been making towards some of the milestones that you set forth earlier this year and as part of that the inflation reduction.
Act. That's recently been introduced has some supportive.
Language in there for carbon capture and also direct air capture if you could talk about if that were to move forward how that might impact the cadence of investment over the next few years.
Hi, Devin I'll start and then pass it over to Richard and while we're on the inflation reduction Act I just wanted to cover a little bit more about what's in there. There's a lot of things in there ranging from alternative fuel to renewable energy.
E D hydrogen methane emission reduction in carbon capture and sequestration, but some of the things that impact us are the on federal land.
Oil and gas royalty rates are increasing increase minimum bid rates for releases increases in annual rental rates, but not excessively and increasing bond requirements.
Also offshore royalty rate increases.
And then one of the good things is that it does require oil and gas lease L. Ahead of granting right away is to wind and solar it requires royalties at all gas produced.
Ever achieved for unless it's all firing for safety reasons are used for the benefit of the lease.
But one of the interesting things about the the act is that it reinstate the lease sale 257 from the Gulf of Mexico in which we had gotten some key leases and so that's really important for us as a company. The other thing is that its required.
Resumption of the scheduled lease cells for.
For the gone from 2017 to 2022.
And with respect to carbon capture which is probably.
Probably the most impactful to US is there there are a lot of things around the enhanced up to 45 Q.
And when you look at the Gulf of Mexico.
Benefit to us and you look at the requirements for the methane emissions and emission reductions and that sort of thing which are things we already were doing this.
This is a this is turning into for us.
A very positive bill should it get a pass so I'll turn it over to Richard So he can give you a little more color on what the 60 U S enhancements are.
Hi, Devin let me start with just a few kind of progress points on both our director capture in six U S. And then get a couple of specifics on like.
Vicki said, how this could.
Could potentially help our development plans I think from director captured the critical pieces are continue to move well I think from a technology and engineering standpoint.
We were able to finish speed.
We're on track and plan to begin construction by the end of this year and we're really taking that feed and working hard on putting together specific bid packages and being very thoughtful about the supply chain behind that as we go into the end of the year. So we are spending.
Spending time with that from a market support continued to have very strong.
Support from the carbon dioxide removals in terms of the sequel.
C O two off takes and so continue to see good movement on that obviously the policy support couples with that to help really backstop. Our development plan and then in terms of capitalization as we continued to de risk we are.
Thoughtful on how to think about capitalization not only for plant one but beyond and.
<unk> continued.
Continue to see and know that those partnerships will be meaningful.
And so really.
That piece for the end of the year again looking to start construction finished detailed engineering.
And then work our innovation work streams and we've got our innovation center with carbon engineering going seeing really good progress there lots of <unk>.
Pieces and learning again for one, but I think one of the things we picked up in that facility is really thinking about how do you continue to reduce the cost of capture for the life of a plant and so it provides lots of opportunity for that.
Briefly on the six U S hubs, we continue on our three really focus areas on the Gulf Coast, we've been able to secure now over 100000 acre target for poor space developments very pleased with that lots of great.
Engagement with emitters, and then we had the announcements I think we picked up on the last quarter with our midstream partnerships to be able to retrofit or think about moving that C. O two efficiently within those hubs. So that goes well expect more updates on both of those as we go into the year lots of <unk>.
Amex I'd say over the last quarter and so we'll put that into plans for 2023 and beyond that we'll communicate so just lastly on the terms of.
Some of the policy that plays our way.
You know for US we think about that we communicated in our LCB update it's really an acceleration capability for us it give certainty and some of the.
The revenue to allow us to build this development, which is good because the important part of making this business work is really on US we've got to improve the technology, we've got to lower the cost and we've got to develop our manufacturing and project development success and so having certainty.
To be able to accelerate that development plan, we believe allows us to reduce those cost quicker and it creates a sustainable business sooner and so when you look at both our business and emissions reduction over the next several years. We think this can be very meaningful.
Longer runway.
To be able to develop that scale was contemplated in the language.
You know obviously increased.
Value support that aligns with a lot of seats U S work done.
Collectively around the world to kind of pick what needs to happen to create this catalyst and so very thoughtful alignment there and then the final thing is I think importantly recognition for all sources, so point source from industrial or power sector emissions, but carbon removals and direct air capture specifically rare.
Ignite and then for the collective six U S community recognition of small and large sources.
I think it's important and so they were very inclusive.
To capture both the small and large and that's good for us and what we're doing but that's good for other developers and so I think it really does create the economies of scale that we hope hope and plan for to make those commercially successful.
And just to conclude on that just to conclude on that I'd say that the federal leasing onshore offshore on the methane emission reductions in carbon capture all we talked about what it does for oxy is very good for our industry lots of companies will benefit from this and will provide jobs and and it'll help the the.
Meet the goals that the president has set out for emission reduction.
Okay. Thanks for all the detail on a lot of positives to look forward to there. My second question just on inflation you may.
And in the prepared remarks that you'd be able to take some steps to offset inflationary pressure I was wondering if you talk a little bit more on the underlying inflationary trends and then also the offset initiatives that you have in place.
Yes, we had originally assumed $250 million for our 2020 based.
Based on our 2020 actuals that incremental $2 50. This year. Our current assessment is $3 50 to $4 50, and unfortunately for Richard It's all falling in his area, but Ah, but theyre dealing with it very well pass to him to give you the details.
Yeah perfect. Thanks, Vicki Yeah, just to walk through that.
Couple of things.
Certainly.
I have seen that 7% to 10% incrementally for us this year, but in our base plan, we had assumed a 2% offset and we're now up to six and so part of our strategy and I'll talk through a couple of pieces on this whole thing with securing quality resources.
If we get into the production cadence for the second half of the year that delivery schedule and performance is very important and so working with the right vendors to secure that has been been important for us.
But let me just rattle off a few like most people one CTG has seen some of the highest.
Sort of inflationary pressures.
We worked with one key supplier and one distributor for that and so when we think about sort of inflation. If you think about what is the supply security and then what is the pricing and the supply security we feel good out a year and really have work that hard over this year developing and core <unk>.
Areas like we do gives us a lot of <unk>.
Ability to do that and then pricing we secure out about six months and so we feel good going into the end of the year and then into 2023 that were timing that fairly well in terms of how that looks rigs and frac cores I mentioned earlier, securing some of those operated resources.
Shifting the OBO dollars allowed us to get in front of that and get again, the right rigs and Frac horse for that.
We're contracted with.
A little over 50% of our rigs through the first part of next year and our Frac cores similar.
As we look out and so feel good about that but we've really narrowed again to the core.
Frac and rig providers that we feel like can secure performance and then finally sand.
Again, we've worked a lot on that.
Think one we've gone to more integrated frac providers and they continue to help us on logistics and sand supply, but then our sand supplier, our logistics facility and <unk> has allowed us to get.
Head on that and so we feel like supply is secured and.
And most of our price is secured through the through the second half of the year. So.
Those have been the big areas that have moved up for US. It has definitely been drilling and completion focused facilities has seen a lot less.
Five 5% Opex.
A lot less as well so.
Hopefully that provides some detail in terms of what we've been doing.
The next question comes from Doug Leggate from Bank of America. Please go ahead.
Thanks, Good afternoon everybody.
Thank you Rob I Wonder if I could go back to the discussion around potentially being a bit more aggressive than a full dollar cash return in 2023.
And I guess my question is where where do you see.
The.
I guess the flexibility regarding.
Trying to pay down the preference burden I guess, the $10 billion versus continuing to pay down debt. What's the tradeoff between those two if you could try and frame it for us I guess I'm trying to understand how much more than $4 per share you'd be prepared to go.
Doug It really depends on the macro right now we are really trying to we can't even forecast from one hour to the next or even minute by minute to the next but prices are going to be so a lot of our strategy around the preferred would depend on the macro because as you know the terms of the deal.
Our are challenging.
It's not planned.
Planned out in a way that enables you to take advantage of the trigger point so so.
So currently we're really trying to assess what the macro like and we're gonna be prepared to make the best value decision whether that.
Continued debt reduction.
Along with preferred.
Along with common but right now the reality is that.
From our capital framework, we have always had a priority to reduce debt. We will continue to do that and we'll do it we'll do that at a faster pace than than the maturities. We just don't know how fast we'll do it and with respect to the preferred it really depends on what we see getting through the end of this year and looking.
Into next year, what the macro will be whether the recession. If there is one will be short or long or deep.
And what the other opportunities may look like from a debt perspective and that could depend on what inflation does.
I appreciate the answer Vicki and I'm going to stay with you if I may as a quick follow up so before things got crazy over the last couple of years you.
You had talked about low single digit growth in production and of course, the priorities all changed with the balance sheet. So as you kind of get line of sight too.
The balance sheet and back to perhaps where you want it to be.
What are you thinking now in terms of what.
Hopkins to the the growth element of prioritizing in terms of where you're relatively prioritize capital and I'll leave it there. Thanks.
The good thing is what we see that we have today is a great opportunity and that is that we don't have to grow our cash flow right now and we have an opportunity because of the valuation of our stock right now and to continue to make that a key part of our value proposition going forward, we'll do a little bit of.
Our dividend increase will certainly.
Mature our debt faster than what the current schedule is in terms of maturity because we wanted to accelerate that.
But we will also.
Buyback a significant volume of shares or at least we hope to over the next few years and we don't feel the need to grow production until we get beyond that point, because we felt like the one of the best values right now as an investment in our own stock.
The next question comes from Neal Dingmann from Truest. Please go ahead.
Good afternoon, maybe just to follow on that last one on.
On M&A are you, saying that sort of given the current upstream midstream oxy.
Hum.
We stand Pat with either you don't need to divest anything in still the best spend all the money is in livestock with would it be fair to say the.
The biggest M&A might be coming from the low carbon area.
Yeah, I think that the only M&A that we see that would make sense for us as well we have been doing and that's just to get bigger in the areas that we are so increasing our working interest.
<unk> trading acres for bolt ons to where we are right now in the resources business and then the ALR business. So there are opportunities to do that we picked up a little bit offshore. So that's the those are the kind of M&A. So we're not talking big M&A here, that's not something that we feel like we need to do but with respect to low carbon debenture.
<unk> that is a bit of a different story, because we're growing our business there and the what we're doing there is looking for technologies that fit within our strategy and that support our strategy, we're not going to take the shotgun approach, where we're putting dollars into.
100 different a little small tech companies, we're looking for technologies that make our strategy better and where we find those we're going to make equity investments then we feel it's a part of what we want to build ultimately I think the team has spent with just about $200 million they have gotten us into.
Two technologies I really think a revolutionary one is net power, which generates electricity at a fairly low cost lower than <unk>.
Traditional gas plant with carbon capture so this power technology generates electricity, but also captures the emissions. So there are no emissions and know volatile organics or anything like that that power is really important for us and then direct air capture.
And back to net power, it's going to be revolutionary I believe for the for the electric general power generation industry around the world. So that's the technology that is critically important direct air capture is too.
And we're looking at some other technologies. There are few things that we're putting money into that we believe has a real chance to improve our business and those are that's the way we kind of look at investments in AR and low carbon opportunities.
Okay, and then one lesson.
Robert maybe just on the preferreds has there been any conversation that maybe just correct.
Purchases always given obviously the same per mine, obviously, a lot of equity in the company I'm. Just wondering is there or is that just going to be southern power.
Buying back as you would.
Not at all.
It's really going to be a part of a a more comprehensive evaluation as we go forward. So we'll look at that.
As time passes and.
We'll certainly keep you guys updated that but what we intend to do is make the best value decision and and proceed with the capital frameworks that we've laid out.
The next question comes from Jeanine Wai from Barclays. Please go ahead.
Hi, Good morning, good afternoon, everyone. Thanks for taking our questions.
Our first question I guess may be heading back on cash returns and a follow up to a couple of the other questions.
Plan for 2023, plus now with to retire debt maturities as they come due or looking at your debt schedule and Theres really nothing more than like $2 billion coming due in any one year. So super manageable until 2030, you've got cash building on our model to call. It like 12 billion on stream by the end of the year so lots of <unk>.
Ken you had some helpful comments on the macro governors on how youre going to allocate capital over the next year or two do you have an updated view on your reserve cash level, we realize there's a lot of reasons total cash above that but that's always a helpful number for us.
Yes, before I pass it to Rob for the answer to that question I, just want to say that you're right about our debt maturities.
Two we expect this year to be able to lower our debt based on what we see from the macro by another two to $2 $5 billion, which would get us close to 18.
Then to get us down to the 15 that Rob mentioned in his in his script is that we would have those maturities would come do all of them before August end of August of 2025, we don't want to wait three years to get our debt down to $15 billion. So we would expect to assuming the macro allows.
To to cut that considerably we do want to get to the 15 sooner rather than later, so we will we'll sit that in and one that is still a priority for us I'll pass it to Rob now for the other.
Yes, Jeanine and so certainly based on what you just said and the fact, we'll target. So we should be able to do well beyond the $1 $9 billion left we have for the balance of the year on the share repurchase program, assuming the macro is consistent relative to consider the strip prices right now.
And part of targeting that will be some of those maturities you listed off.
So, but we've been able to opportunistically balanced between short and long term debt maturities people who've done year to date, it's about 45% and the current decade about 55% later in the day to dogs and so we will continue to be opportunistic between knocking out.
Near term maturities, including ones that are higher interest rate coupon ones now because of the way they'd come down or interest rates, but also achieving discount on longer dated bonds.
You can expect that mix to stay together as far as cash reserves, certainly with a very manageable debt maturity profile, we have been holding.
Our cash levels. Historically, we ended last year about $2 5 billion.
I think we'd be comfortable with something closer to one and a half by mid of this year, providing another $70 billion of cash to work with this year.
Just from the reduction.
<unk>.
Okay, great. Thank you. That's that's very helpful. Maybe if we could turn to operations and the Permian.
Alright provided some really helpful color on the Q3 Permian guide them in your prepared remarks, and the implied for Q Permian guidance calls for I think I think we calculate a 12% increase quarter corner to hit the midpoint and it sounds like from your comments. There are some third party stuff that's going on that May come back online in Q4, which are.
But any comments that you have around kind of how you try to stack the deck in your favor on execution in Q4 in the Permian that would be really helpful. I'm, just because I think a lot of people are looking at the Permian at the end of the year and trying to figure out implications for next year. Thank you.
Yes, I appreciate it.
Walter a few pieces, you're exactly right when we thought about sort of this bill.
Building security in our production delivery for the year.
There are several pieces that were important to us. So if I go back even to where we started and entered the year.
From a rig count perspective, we've added if you go back second half of 'twenty, one and we went from about 11 five rigs to the first half of this year over 15.
Second half of the year at 19, and so being able to secure those operated rigs early just to get the performance was really important to us. So same thing in the back half of this year. If I look at first half versus second half, we look to add about 78 more wells online compared.
Compared to the first half so a tremendous step up in activity.
We're able to utilize our frac cores more efficiently with the with the development plans that we've put together we're adding.
One additional in the second half of this year, but we're really creating much more.
Smooth operations with with what we've done in transition with that OBO capital and I guess the.
Pieces I'd point to what's been important to us operationally.
Getting back to performance.
Most of the capital for the second half of the year and the production deliveries in the Delaware and we have about 80% of those wells that are coming online our third bone Springs Wolfcamp, a so a derisk a lot in terms of that production delivery. We've added lateral length, we're a 1000 foot or longer compared to.
Last year for when they look at the second half of this year are 24 hour IP is about 14% better.
And then the first half of last year and so all of that is add added in terms of derisking. The second half of the year drilling and completion efficiencies improved our feet per day is up.
Quarter to quarter about 10%, our nonproductive time is reduced about 7% in the Delaware and so what we've seen as we've added these rigs we've been able to work his operational team. The performance continues to improve and we were looking at the second half of the year expecting about a 10% time to market improvement.
With those with those operations so.
So put a lot of pieces in place in the first half of this year now we just need to go execute.
But really the plan.
You know has been built to achieve that production growth you noted and we're well on our way.
The final question comes from Neil Mehta from Goldman Sachs. Please go ahead, yeah. Good good afternoon team. The first question is just the path to investment grade can you provide any color in terms of the milestones that you get to in order to achieve that.
How are how should the investment community think about timing recognizing it's out of your control and what would getting to investment grade I mean to your business.
Yeah, Yeah Neal Sir.
So you know year to date as we mentioned, we paid $8 $1 billion of debt certainly far beyond the 5 billion initial target we established for the year and included in that in the second quarter, we knocked out 60% of what I would call the annual but risk associated associated our zero coupon bonds was occurring every October and if you look back to July of last year.
Our June of last year, we retired almost $15 billion of debt, so very meaningful progress that in.
The debt reduction side of it but in addition to the.
The debt reduction all three agencies have their own other metrics I'll call them the return on it.
And so theyre, all sitting IV discuss one notch below.
Our forecast that we have internally have us exceeding the majority of these criteria before the end of the year or in many cases, we're actually ahead of now on a last 12 month basis, but the conversations we're having with the agencies were suggesting I just want to get more comfortable with that.
A different oil price environment and all of the agencies have long term oil prices well below current oil prices.
They would be comfortable that we would not slip back into being a high yield type credit.
But again like I say southern it takes like Moody's for example, they want to look at retained cash flow to adjusted debt to be greater than 40%.
And essentially the retained cash flow.
<unk>.
For our dividends.
Adjusted that does include a half of the Berkshire. So the Berkshire does factor into that and so we're well ahead of that forecast.
And even though we're adjusting for Moody's price forecast relative to ours.
And in the case of Fitch I give you. An example that you know they also look at our sort of.
Mid cycle funds flow from operation. This is coverage above five five times.
The preferred is excluded from the funds flow, but is included in interest expense.
Going to be well over five five times certainly this year by year end and so I think on a lot of these statistics, we are passing through these very rapidly probably much more rapidly than we suspected or the agency's perspective, we're having very constructive conversations with them and making sure. The decisions, we're making are contributing towards that as.
As you said, we don't have ultimate control over when that occurs.
But comfortably looking at all of the various metrics that they've thrown at us relative to our financial policy and metrics I feel confident that we would be in good stead with all those before the end of the year.
We have a gap with S&P as expectations on a reported that but that's really the only one that we are when we have a significant gap at right now, but certainly with Fitch and Moody's on confidence on those two agencies and what they've laid out for us explicitly on terms of metrics that we can meet those for the end of the year.
In the interest of time. This concludes our question and answer session I would like to turn the conference back over to Vicki <unk> for any closing remarks.
Just wanted to thank you all for your participation in our call today and have a good day. Thanks.
Conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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