Q2 2019 Earnings Call

Good morning, and welcome to the Occidental, its second quarter 2019 earnings Conference call.

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

Thank you all.

Good morning, everyone. Thank you for participating in Occidental Petroleum second quarter 2019 conference call.

On the call with US today are Vicki Hollub, President and Chief Executive Officer.

Cedric Burgher, senior Vice President and Chief Financial Officer, Ken Dillon, President International oil and gas operations, BJ Bear President Oxy, Cam and Oscar Brown, Senior Vice President strategy business development and integrated supply.

And just a moment I will turn the call over to Vicki.

As a reminder, today's conference call contains certain projections and other forward looking statements within the meaning of the federal Securities laws. These statements are subject to risks and uncertainties that may cause actual results to differ materially from those expressed or implied in these statements are more fully described in our cautionary statement regarding forward looking statements on slide two.

Our earnings press release, and Investor Relations supplemental schedules and our non-GAAP to GAAP reconciliations and the conference call presentation slides can be downloaded off our website at www Dot oxy dot com.

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

Thank you, Jeff and good morning, everyone.

Before covering our second quarter highlights I would like to mention an organizational update and congratulate Robert Palmer.

Robert was recently appointed to the position of President domestic oil and gas operations with operational responsibility for Oxys domestic onshore oil and gas assets.

Robert was most recently senior Vice President of technical support he is an engineer and has operating experience in the U.S. true Oman in Russia.

He'll play a key role in integrating anadarko's domestic operations and ensuring that our combined assets deliver the highest returns for our shareholders.

As many of you know we expect to close on our acquisition of Anadarko One week from today. The combination of our two companies will strengthen our long term strategy and position us to drive profitable growth.

And return excess cash to our shareholders.

We are truly excited about the many benefits that the combination of the vaccine Anadarko will bring to our shareholders and we're encouraged by the feedback we've received from shareholders regarding the transaction in our discussions over the last few months.

We also look forward to providing quarterly updates on synergy capture de leveraging and the integration process.

I'd like to start this morning, with the excellent operational and financial results that our core businesses delivered in the second quarter of 2019, along with some other key accomplishments.

The strength of our integrated business model confidence in our future performance and commitment to returning cash to our shareholders enabled us to increase our dividend for the 17th consecutive year.

And we're committed to continue to increase the dividend.

We returned approximately $600 million to shareholders in the quarter, representing 33% of cash flow from operations before working capital.

We remain focused not only on returning capital to shareholders, but also on generating high returns on capital.

Our ability to achieve best in class returns through investing in our high quality assets continues to be evident as we generated a top tier annualized cash flow return on capital employed of 22%.

Our Permian resources business broke another oxy record in the second quarter by bringing our company's best Permian will ever online in the greater sand dunes area.

Across the Delaware Basin, we delivered 26 of the top 100 wells on a six month cumulative oil production basis, well drilling only 7% of the total wells.

Our enhanced subsurface models enabled us to more precisely design the fracs and those taught wells to use much less profit than any other wells in the top 100.

Continually delivering the best wells enhances our position as a premier operator of shale in our industry.

We are applying a proven targeted scientific approach to each development unit to optimize productivity at the lowest capital intensity to maximize reserves and returns.

We have implemented an old hedging program for 2020, and hedged 300000 barrels per day, representing almost 40% of our combined companies all production Cedric will cover the details in a few minutes.

And we're pleased to welcome Robert sure to our Board Bob joined our Board on July 10th and brings valuable skills gained from more than three decades of investment experience and a track record of creating significant value for investors with a focus on high quality dividend growth stocks.

His commitment to dividends is consistent with our long term strategy.

We're also excited to have announced a new joint venture in the Middle Midland Basin with Echo Petro one of our strongest and longest standing strategic partners.

The acquisition of Anadarko increased our development potential in the Delaware basin by more than 50%, which extends our development horizon in the Delaware by at least another decade, as well as providing significant infrastructure synergies.

As we develop our Delaware operations to predominantly drive our production growth over the next few years. This joint venture is an excellent opportunity to bring forward. The net present value of our middle and assets without sacrificing any of our current production or cash flow.

The joint venture will develop.

We'll develop 97000 net acres of Oxys Midland Basin properties.

Ecopetrol will pay $750 million in cash at closing plus an additional $750 million that's carried capital in exchange for a 49% interest in the new venture.

Oxy will own a 51% interest and operate the joint venture during the carry period Ecopetrol will pay 75% of Oxys share of capital expenditures, allowing oxy to accelerate our development plans in the Midland Basin, where we currently have minimal activity.

We will also retain production in cash flow from our existing operations in the middle.

This transaction, which is expected to close in the fourth quarter of 2019 is just one example of the innovative ways to which we can maximize the value of our assets while de leveraging.

We are pleased to have delivered another successful quarter, but at the same time, we're never satisfied and creating shareholder value continues to be our number one priority.

As you can see on slide six we have an unwavering dedication and long track record of returning cash to our shareholders.

I'll now hand, the call over to Cedric, who will walk you through our financial results and updated guidance.

Thanks Vicki.

For the second quarter, we reported core earnings of 97 cents per diluted share and earnings of 84 cents per diluted share as all of our business segments continued to perform well.

The difference between reported and core income is due to onetime costs incurred with the Anadarko Trans acquisition.

Also in the second quarter, we returned approximately $600 million of cash to shareholders through our dividend and as Vicki mentioned increased our dividend for the 17th consecutive year to an annual rate of $3.16 per share.

Over the past 17 years, our track record clearly demonstrates our commitment and ability to consistently grow our dividend and to ensure returning capital to our shareholders remains a top priority.

Oil and gas core income increased in the second quarter compared to the prior quarter, reflecting higher crude oil prices and volumes <unk>, partially offset by lower domestic natural gas prices and a negative non cash mark to market adjustment on carbon dioxide purchase contracts.

We are very pleased to have lowered our operating costs on a per barrel basis across the board both year over year and compared to last quarter.

These cost improvements reflect higher volumes improved downhole maintenance costs, and lower energy and surface operations cost.

So a big congrats to our field operations teams, who continue to excel and lead the industry with low cost operations.

Total second quarter reported production of 741000 Boe per day exceeded guidance due to the continued best in class execution, and well productivity in Permian resources, which exceeded guidance at 289000 barrels Boe per day.

And the international production exceeded guidance at 295000 BOE per day, driven by increased production in Colombia, due to new exploration wells coming online.

Oxy, Kim surpassed guidance with income of $208 million for the second quarter.

Income decreased from the prior quarter, primarily due to lower realized caustic soda prices along with fees received under a pipeline easement agreements executed in the first quarter.

Our midstream business came within guidance with the second quarter income of $331 million the middle into MGH differential of approximately $9 also came within guidance for the quarter.

Compared to the first quarter marketing results improved as the second quarter did not have the significant negative mark to market adjustment that impacted the first quarter.

The increase in midstream income was partially offset by lower gas processing income due to planned domestic gas plant maintenance.

Slide nine details our guidance for the third quarter and full year 2019.

For the third quarter, we expect Permian resources gross to slow compared to the substantial production increase realized in the second quarter.

This change is related to execution efficiencies accelerating our time to market in the second quarter, along with the timing of several significant section developments in the second half of 2019.

As a reminder, we entered 2019 at a higher capital run rate and we will begin to reduce activity during the second half of the year.

Full year international guidance remains unchanged, but we expect lower international production in the third quarter compared to the second quarter due to maintenance in Qatar in Abu Dhabi.

On a full year basis oxy remains on track to spend within our capital budget of $4.5 billion, while delivering annual production growth of 9% to 11%.

Finally, I'd like to mention our new hedging program that we have executed for 2020 as most of you know oxy has not historically hedged production, except when we have completed a major acquisition such as when we acquired vintage petroleum.

With the additional leverage from the Anadarko acquisition. These new hedges will strengthen our 2020 cash flow in a low oil price environment and provide additional or assurance that our dividend is safe well we are deleveraging.

I will now turn the call back over to Vicki.

Thank you Cedric now I'd like to share how oxy is uniquely positioned to extract the most value from this acquisition by applying our core competencies across the combined portfolio to maximize shareholder value.

We have proven ability in a decades long track record of Innovatively recovering more hydrocarbons from conventional reservoirs than others could.

We are continually improving and maximizing efficiencies are recovering hydrocarbons through waterflooding and enhanced oil recovery.

Today, we routinely recover more than 60% of the oil from large Permian conventional red reservoirs, and sometimes reach almost 70% recovery.

Doing this cost effectively has required the development of extensive automation advanced methods of artificial lift and materials expertise.

As well as downhole, so subsurface expertise.

These tools will serve us well to maximizing recovery from other less mature assets. This is a competitive advantage for us in the future.

More recently, we have applied a differentiated approach to utilizing advanced technologies and data analytics to further improve our expertise and shale development.

The resulting breakthrough techniques and our shale developments are delivered delivering a record setting high return wells in our core Delaware bit Delaware basin areas.

This success is transferable to the development of shale assets across our Permian acreage and also in other basins.

Additionally, where <unk> applying our technical expertise to developing a business model that will position us as a world leader in the capture and use of anthropogenic C O two for enhanced oil recovery.

We are investing in technologies that will not only lower our cost of C. O two for enhanced oil recovery in our Permian conventional reservoirs. So we'll also bring forward the application of C. O two enhanced oil recovery to shales across the Permian DJ and powder River basins and in our conventional reservoirs in our international locations.

Current industry practices recover only around 10% or less of the oil from unconventional reservoirs improving recovery from shell is a huge opportunity for the future and we have the expertise to be the leader.

And as you can see on slide 13, our expected financial metrics. Following the acquisition show, how our value proposition and ability to return excess cash to shareholders has been significantly strengthened.

We've added low cost future barrels in our inferred 2021 free cash flow yield based on today's share price is industry, leading and we'll have the ability to expand our cash margin considerably.

Combining oxy and Anadarko will create a diverse portfolio of high quality complimentary assets well suited for our core competencies as we apply our development approach to the combined portfolio. We expect this to be the low cost producer and all of the areas. We operate for example, along with the expertise I've already mentioned, we will apply our proprietary drilling process oxy drilling dynamics across anadarko's acreage to date Oxy drilling dynamics has reduced cost by at least 30% and all of the areas that we've applied it.

And we expect to achieve similar results in anadarko's onshore and offshore developments.

Most importantly, we believe that along with incredible assets. This acquisition provides us the opportunity to combine great employees best practices and innovative technologies from each company to ultimately deliver best in class returns for our shareholders.

We're looking forward to the best practices that the Anadarko employees will bring to our operations and this is upside we haven't yet taken into account.

As a combined company I believe we will have the best quality assets of any company in our industry, where in all the areas. We operate we have a competitive advantage due to our scale and or our unique operating and development expertise.

Investment in any of our operating areas will deliver double digit rates of return in our portfolio will be lower risk as most of our production and future growth potential will be in the U.S. and our international operations are in areas, where we have established operations and long term value partners.

We are a leading operator in the Delaware basin and are continuing to widen our lead the Anadarko acreage is perfectly positioned in the heart of the basin directly between our new Mexico, and Texas Barilla draw areas.

This proximity to our existing operations will allow us to apply our proven strategies and technologies directly to the new acreage.

Our geo mechanical and Petrophysical work flows, resulting customized development plans to maximize the value captured in each section.

And we can't wait to roll out these workflows to unlock additional upside with the new added with our new Anadarko teammates.

Furthermore, the on at Anadarko acreage is well positioned to utilize our haven't seen logistics hub, which will maximize the plane chain supply chain savings and our development.

Slide 17, reinforces our subsurface expertise and unique development approach that enabled us to deliver 26 of the top 100 wells based on a six month Q cumulative oil production.

And 20 of the top 100 wells based on 12 month cumulative oil production.

I'd like to highlight these results it that they are pulled directly from public sources no data manipulation.

All of Oxys wells on the six month chart, but at least 12 months of data are also on the 12 much art.

There are a number of additional wells on the six month chart that we expect to enter the the first year cumulative chart once once they've been online for a full year.

These tremendous results were accomplished all while using less profit than other operators and resulting in significant capital savings and again, while only drilling 7% of the total Delaware Basin wells.

Turning to slide 18, I want to emphasize the specific improvements in our Permian resources business that are adding significant value in 2019, we continued to enhance our subsurface expertise with the creation of the Nexgen frac models to allow for customized well designs that optimize landing and development spacing.

Well, resulting in minimal parent child impacts.

Our teams have a relentless focus on utilizing our industry, leading data to develop a deep understanding of the subsurface which leads to the highest economic value per acre.

Our subsurface modeling is now predictive in Threed calibration calibration can be applied to other basins.

To unlock additional value and performance improvements.

Highlighting this continued progress our Permian resources 90 day cumulative oil production has improved 22% year to date from 2018 and 220% from 2015.

The record setting well that I mentioned earlier as noted on slide 19, and had a peak 24 hour rate of 9495 daily per day.

Following these tremendous improvements in capability, we expect that our combined Permian business will be cash flow positive and 20 220 at a W.T.I. price of $45.

As I mentioned earlier, our low carbon business strategy will play a key part in reducing our enhanced oil recovery cost in our conventional reservoirs, which will increase our inventory of conventional seo to your projects.

In addition, it will help to make C O two projects in our unconventional resources possible and profitable.

Our conventional and unconventional C O two projects will lower our carbon footprint.

And will enable us to help other companies lower there as well.

It's important to note too that our low carbon business is also aggressively working with all of our operations to reduce all greenhouse gases not just C O two.

On slide Slide 21, you will find our near term cash flow priorities for our combined company.

The two highest priorities will remain unchanged and those are first to maintain our low cost production base and second to sustainably grow our dividend per share.

We've kept these two highest priorities for more than 17 years and currently our next priority is to de leverage.

While we expect to achieve this through asset sales, we want to assure you that we will shift to cash from our capital program to debt reduction. If we are not meeting our internal divestiture targets. However, with that said, we do expect to our asset sales will meet our targets, which will enable us to grow our production by 5%.

We won't resume share repurchases until our de leveraging goal is complete.

[noise] aesthetic highlighted we can and will protect our dividend in the event of any potential commodity price pressures, including during the transition phase of our integration.

And 2020, if we or are in a low 40, dollarss W.T. Rowe price environment, we will be able to cover our dividend with hedges in place and keep production flat with capital spending of $4.8 billion.

While remaining cash flow neutral.

In 2021, our breakeven position gets back down to $40 that'd be T.I. with an unhedged position and as we continue to grow cash it will drop below $40 W.T. <unk>.

We are confident in our plan because we have the track record it back it up we completed a similar program in the second quarter 2018, and finished six minutes or a six months earlier than originally planned.

As you may have heard us say before in the downturn when others chose to cut or eliminate their dividends or pay a script, we executed a breakeven plan to continue to grow and strengthen our dividend we did not our reduced our dividend then and our robust cash flow generation will protect and grow our dividend now and going forward.

And if prices go up our combined company will have significant cash flow generating potential for every dollar movement in oil prices, we will generate $255 million incremental and additional annual cash flow.

And 2021 with our Capex estimate at $6.6 billion and annual production growth of 5%, we will generate significant excess excess cash flows.

[noise] Anadarko shareholder vote is scheduled for August eight and.

We anticipate closing the transaction as soon as possible thereafter.

Following the transition transaction close we will ensure that our employees continue to operate our assets with an unyielding focus on safety and operational excellence.

We will begin executing on 100 day plan to bring our two companies together to create one culture that emphasizes collaboration and delivering results.

We have set targets to reduce capital spending by one and a half billion dollars.

Capture $2 billion in annual cost reductions and deliver $10 billion to $15 billion in asset sales to reduce debt.

We've already begun delivering on these targets and we'll provide updates during the remainder of the year.

By 2021, we will fully achieve our annual synergy targets.

But the games this transaction will bring to our shareholders will not stop and 2021.

While these there are those that focus on the short term our commitment to you our shareholders is long term value creation and it drives everything we do as we measure our success over the long term, we will have created a company with ample opportunities to efficiently allocate capital from a position of strength across our portfolio is sector leading returns.

We will have reduced our debt level strengthen our balance sheet and we will be positioned to return even more cash to shareholders.

In summary, our combined company will have incredible people with the technical expertise to operate and develop a unique set of high quality short to medium cycle assets. There are perfectly positioned to ensure we can be the low cost operator.

The cash flow that our teams will generate from these assets will enable us to strengthen our value proposition to generate significant returns on our capital investment along with return of capital to our shareholders.

We will initially accomplish that with continued dividend growth and with a more consistent share buyback program after delevering.

This combined with our differentiated low carbon strategy will ensure our success and sustainability long into the future.

In closing I believe we have a bright future ahead of us at Occidental and there's much to look forward to as we integrate our combined companies and continue to focus on delivering enhanced value for our shareholders.

Well now open it up for your questions related to our second quarter results and our acquisition of Anadarko.

Thank you.

We will now begin the question and answer session.

You ask a question you May Press Star then one on your touch 10 Fad.

If you are using a speakerphone please pick up your handset before pressing the keys.

To withdraw your question.

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At this time, we will pause for a moment to assemble our roster.

Our first question will come from Doug Leggate of Bank of America.

Please go ahead.

Thank you and good good morning, everyone. Good morning Vicki.

Good morning.

Vicki on page 23 of your.

Just like that.

The move to the 6.6 billion as I've talked to you.

But it looks like you know that at least gives us an idea of how to frame our thoughts going forward. So that the combined company was doing closer to 9 billion.

Even adjusting for the African assets less though suggests that.

The combined capital is already falling on your plan by substantially more than the 1.5 suggested so just wonder if you could speak to that on.

Leases, maybe speak to how the capital allocation.

On what you're thinking about those opposing the reefal, particularly in the Permian Basin I've got a follow up please.

Yeah. They combined capital was 9 billion and we had a committed to to reduce activity levels to to what would be the equivalent of one and a half billion, but when you consider the synergies that we'll achieve.

That gets that gets the 7.5 down closer to the 6.6.

As we achieve our $900 million of capital synergies.

So in terms of how that gets allocated in the Permian well, let me explain what's behind my question to the drilling activity.

The working interest the Anadarko had was only 40% on that acreage. So clearly dropping a rig there has a much lower implied plum topical them dropping a rig and hopes you. But then obviously has much better wells. So I'm trying to think about how do we how do we think about relative activity within my capital budget in the Permian Basin.

Well, we we view it from an investment level not a rig count per se. So.

Well, if you're developing on on wells that have a lower working interest for you. Then that's just more wells, you're going to drill potentially more wells, you'll run, but you'll get the same synergies.

So we look at it from an investment standpoint, not from a rig level standpoint.

Onsite almost under presumably you're going to squeeze of equal amount as we go forward. My follow up is obviously this deal with that could fall looks extremely capital efficient.

Line of sight on asset monetization. So I wonder if you could share any additional thoughts on specifically obviously everyone myself included this though.

What are you focused on how you deal with the midstream was not least because its giving you all better than $600 million income right now from the unit distributions to any any updated thoughts on those.

So some of those two let's say.

Thanks, Doug I'd say that from an overall perspective, the the good the other good really good thing about this portfolio is that we do have a lot more levers to pull with the combination of boxing Anadarko in terms of Monetizations.

So there are some things that we can do the the joint venture with Ecopetrol was one example of how we can do something creative without negatively impacting ourselves.

So, we'll we'll look at those kind of opportunities and and with respect to Wes.

We'll have to as after close when we can take a deeper dive into what's happening. There. We can we can make some analysis of that.

But I will say that the good thing about it and the reason we are so confident about our asset divestitures is that we have a lot of incoming calls about various things and and so we're able to we'll be able to high grade what we want to do overtime. The difficulty we have right now is that we can't signal really what we want to do because that would that would compromise our ability to negotiate.

That's when you can from the press speculation about whether or not you had hired to advise run was.

I know, we we always use advisors and so we have some advisors that are helping us with various things. So I think its I think that as we look at lots of aspects of our business will be bringing in advisers to to get their feedback that should not signal that signal anything in particular that were thinking right now, but because we have no decision made.

On that.

Understood. Thanks, so much.

Thank you.

Our next question will come from that then Mcdermott of Morgan Stanley . Please go ahead.

Good morning, and congrats on the solid results.

Good morning <unk>.

I wanted to start by actually following up on one of Dougs questions. Just on synergies and also some of the activity in capital reductions it with the deal closing now potentially next week its earlier than the initial target. So I was wondering if you could address how if at all that impacts the timing of synergy realization versus the initial plan and also on the 1.5 billion reduction in growth spending how quickly post close can that occurs that's when that happens fairly immediately or will it be staggered over time.

And where were those reductions occur if you can provide some guidance on that.

So you know we're going to meet our capital plan for this year. So we'll we'll meet the four and a half billion dollars for ourselves. This year, we'll have two after close look at what's happening with Anadarko to turn to determine.

What we do with the rest of their spending for the year, but the real.

The full one and a half billion dollar capital reduction in activity level will come in 2020.

And I would say that that getting that really depends on what we see after close and then certainly the acceleration of the closing date is going to help us get a jumpstart on on our synergies we had committed to 1 billion and synergies I'm in in 2020, so being able to do to get started here before the end of August when initially we thought it could be a month later than that that's going to be very helpful for us.

Got it great and then my second questions actually on the Opex side, just for proxy Standalone you had some nice reductions quarter over quarter. There. It looks like some of the drivers are a mix between lower downhole maintenance and lower energy costs I, just wonder if you could comment a bit on one a bit more detail on what's driving those cost reductions opportunities for further cost reductions over time, and how initiatives like utilizing solar power in that you know our business might drive costs down going forward as well.

Yeah, So our our resources business has been continuing to drive down opex as they as they get better with the artificial lift the artificial lift and these shale wells was really challenging early on because it's too deep to make been pumping the optimist optimized so too deep for that too shallow and the food production a little bit too challenging for U.S.P.s. So our team has worked really really hard to find the right kind of artificial lift to use and how to optimize it and as they do that they're beginning to two getting much better at selecting the right kind of lift and lowering the cost on that and of course energy helps and with respect to the to the E. All our business and the U.S. its our biggest cost or one of our big our two biggest cost and the you know our business is the purchase of C O two and energy in general.

So.

With respect to C O two are.

Low carbon business strategy, certainly going to help there because we're going to be able to ultimately install net power in the Permian basin, which will further reduce our electrical cost while also surprised supplying a pure stream of Seo too for use in our operation. So once we get that.

Started installing that in the Permian that that will help a lot but in the interim we put in so some solar already and plan to install a little bit more over the next year or so.

And the solar is really good to to reduce opex in our you know our operations and it reduces it at the most expensive part of the cycle. So that's very helpful. So it's going to take a combination of things over time to continue to reduce it but we do have a strategy to do it and I believe that that's going to be one of the key drivers to to helping us start to take off for the growth and the L., our business and in about three or four years.

Okay, great. Thanks, so much.

Thank you.

The next question will come from Roger read of Wells Fargo. Please go ahead.

Yeah. Thank you good morning.

Oh.

Coming back to some of your comments Vicki about the ability to evaluate the acreage decide where are you.

Want to move forward I'm just curious.

How long it takes to do that.

And as a second part or the second question really.

If we look at what's happening with some of the other players in the Permian today.

If you could give us a little bit of an idea tying that evaluation ended the performance you've had and how you've been able to.

Avoid some of these problems were seeing the.

Too much well density or the parent child issues. All that just maybe you know one big wrapper there around that whole package.

Okay, certainly I appreciate the question, but let me let me address the Opex one more point on that I forgot to give kudos to anadarko, because they're they've really managed their opex well they have a low opex and they they.

Her apparently doing a really good job to manage that so the combination bringing that expertise into us up for the types of wells that they're operating will will be helpful too.

But to your question.

It's going to it's going to take us a little bit of time, because what we have to do is the way we do our business with respect to our subsurface characterization is how we drill appraisal wells and that helps get us some data so we get some.

Petrophysical and geophysical data from the logs that we run when we drill the well we take that data and we combine it with our three D data three D seismic data.

Combining those two then we can perform data analytics on it and with the data analytics now we can take that even a step further with a paradigm shift we had a couple of years ago on how to look at the subsurface differently was with respect to how the Frac is gonna before performed and his own as you're trying to pump. It so not to say too much about that but that's but we went through that process to get us to where our productivity was a couple of years ago are about a year and a half ago now what we've done is we've been able to incorporate 40 40, frac designs, which is helping us to to more accurately understand what's happening with the Frac and then not only what's happening with the frac, but what's happening with the drainage area and that's all really key to just spacing and how you design your wells, where you land your wells and all of that so our subsurface models are much.

More sophisticated today than they were about three or four or five years ago and it's this you know the the kudos on that that goes to our subsurface teams that have worked really hard but also our business units, who watch these wells everyday figure out what's happening with them and collaborate with.

With our subsurface team too to really get down to trying to figure out what's happening in the subsurface you know we've we've seen.

Some operators that just do this on a statistical basis still but you really can't do that an optimize what you get from these wells in the value of these wells. This is this takes a lot of science and it takes science that it goes beyond what we've ever had to do with conventional reservoirs. So the companies that that only drill conventional reservoirs around the world. They haven't dealt with what we're having to deal with here I'm from a complexity standpoint.

We've we've conquered that but it's taken a it's taken a lot of data to do it is taken some patience and time and it's taken I'm getting it to the point, where you know whats working because now we can and we're predictive with it we can blind wells that we've drilled in the past and run the model and the model will tell us well match, what we've what we're seeing from the the well that we're producing that's why we're very confident that this model what we what we're using now will not only work in other areas outside the Delaware basin, but in other basins. That's why we're very comfortable that in the DJ and the powder, we're gonna see increased productivity there based on the model that were using and we think it's it takes a lot of science and it takes a patients. So that's why we've said that some of our synergies we can't get and 2020. Some of our synergies are going to come and 2021, because we were not going to spend.

Dollars to to do trial and error, we're really going to need to have our model and and that's gonna take drilling some appraisal wells and making sure that we have the three D to match it and data analytics around it.

But that's why it's going to take a little time to get all the synergies, but we're very confident that we'll get the get those synergies.

Jeff do you have anything to add to that hey, Roger the only thing I'd add Vicki did a great job covering that but I think and you know this that is our secret sauce. So I mean, we've been in like Vicki said advanced than that for years now and not only is there a secret sauce, it's a secret sauce worth having because of the value that creates an I mean, a couple of things that she had on that I think are really important to stress.

Not just the integration of the work close with Geo modeling Geo mechanics, Petro physics simulation reservoir simulation, but it's really the combination of the people tools and data because the thing we get asked all the time, but other people is how easy is this replicated and I think the important thing is have you remove one of those things to the people. The tools are the data. The other two don't work as optimal as they will you know if you have them altogether. So that's why we show on slide 18, 19, and the performance results. You know it's not just one thing that goes there you need all of those ingredients to really extract the value. That's what makes us. So excited when we look at other reservoirs and being able to apply it because we think it definitely works not just and you know the wolfcamp or the bone springs, but in all unconventional reservoirs.

Thanks build a better mouse trap anyway congratulations.

Thank you.

Our next question will come from well Atkinson of UBI <expletive> . Please go ahead.

Good afternoon, I was wondering if we could touch on the rationale for a joint venture or rather a rather than a complete divestiture.

Especially given the death of your inventory across the Delaware.

Yeah. The reason for a joint venture is we we like the acreage in the Midland Basin, it's quality.

Acreage quality assets, and we think over time again the.

We haven't built this into our near term model and we Didnt included in the and how we evaluated this acquisition, but the upside over time is to use our enhanced oil recovery to get more of the reserves and resources out of the wells.

So we we are preserving our opportunity to get significant upside in the Midland basin through the application of Cotwo enhanced oil recovery ultimately and we think the more that we have of this the more upside that we have over time and that we believe will give us an edge into the future on being able to get more out of existing wells rather than having to go drill new wells.

Perfect. Thank you.

Thank you.

Our next question will come from <unk> <unk> of Raymond James. Please go ahead.

[noise] yeah, thanks for taking the question.

As you think about de leveraging yeah, obviously, the the Ecopetrol deal Mark marks the first step are you seeing.

Are there.

Instances of this kind of rather unusual model, where a player that may not be in a particular geography that you're operating in is going to rely on you for skill set development then.

Yeah sort of you know that kind of active partnership beyond simply selling acreage.

Oh, you're giving me an exciting opportunity to talk about our our low carbon business strategy and that we are getting calls from all over the world with people wanting our help to to help them also figure out how to capture C. O. Two from industrial sources, and then what to do with it and oil reservoirs. We have you know the processing capability, we have the ability to design it and we're the largest sandler of C. O two for enhanced oil recovery in the world.

So what's happening with with these calls that were getting for technical assistance is that in some cases, there there's been offers of allowing us to come in as a participant in the project. So these are not only opportunities to learn.

Some revenue for our low carbon, but ventures business through technical providing technical services and and valuations, but also to to look at projects around the world for possible participation. So that's one way that's one unique and different thing that that we're seeing happening to our group now and that's that's really exciting forget because as we go forward.

There's going to be more pressure on companies to do something about their their climate change story and so that's that's making a lot of people getting much more interested and what were doing then than just a few years ago. So that's one example.

There we were always trying to look for ways to.

To monetize things, but without losing the potential eventual upside. So we are getting creative and continuing to look at ways to do that.

Okay, well finish you mentioned he is GE, let me, let me follow up on that I could not help noticing that your U.S. realized gas price in the quarter was 23 cents, yes, I do see some kind of one time.

Shifting there by the you know is there a point where you would.

I'll have to resort the flaring in the Permian, because the economics of selling the gas or just.

So lopsided.

We would not do flaring as a normal rent routine practice, we don't agree with that and we wouldn't do it. So we will always try to find a way to utilize the gas and the the net power concept that I just mentioned earlier I should probably explain that a little bit better our team last year or the or maybe it was the end of the year before invested in a.

A new way to generate electricity and it's called that power. What it does is it takes natural gas combines it with oxygen burns it together and that's what creates creates electricity and it creates that electricity at a lower cost, especially if you're using gas that that cost like 10, or 15 cents or 20 cents.

Which gives us a great opportunity because we're piloting that now we have a pilot project, where a part owner we've invested in it.

And with a strategic partner to eight rivers the group that develop the concept and put the pilot in place to start it. It's a it's in the pilot is just south of Houston here. So that's that's one of our solutions is to put that in the Permian it'll utilize our gas that that if we sold it would make nearly as much so it.

It'll not only will it give us a way to utilize that lower cost gas. It also as I said earlier provides that pure stream ASU two off of it for use in our enhanced oil recovery. So its a dual benefit of having a way to better utilize our lower priced gas and also create the opportunity to use C. O two to increase our oil production. It's a really unique way of dealing with the scenario that we have in the Permian that we expect to be able to have that installed over the next two to three years, it's a little bit out but in the near term a we don't see that we're gonna have have to flare we have the capability to get it out. It's just that it's certainly there there are other ways to better utilize our gas and to get more value for it then selling it for 23 cents.

[laughter] put out one other thing I'd add to Vicky's comment you are I mean, so injectant, we've been advancing me or not just with C. O two but also hydrocarbon gas and the cheaper the hydrocarbon gas the better the economics kick for you are because you're basically replacing.

No oil for gas. So that's another thing we continue to advance so that you don't flair, but you can extract value from it.

Okay very useful appreciate it.

Our next question will come from sale crash of JP Morgan. Please go ahead.

Yes, I think for taking my question first Vicki you made a comment in your prepared remarks, you expect the combined Permian business to be free cash flow positive at $45 WT Guy in 2020.

So I was just wondering for a little more detail on that.

First part with would be is that including you are or is it just more of the Standalone resources business and then what level of rig town and Capex and just underlying details to help us think about that in the context of this overall capex reduction plan that you have through 2021. Thanks.

So at 2021, it would be the resources business and it's at the capital level that we've projected for for 2020, so that would be that capital for us and.

2020 would would be at the 6.6 billion.

Pedal to have we given.

Have we given any additional them.

Okay.

Okay. So the run rate as the run rate of the 6.6. The actual 6.6 is in 2021.

Right. So so you're going from nine to 6.6 and I think you said in 2020 you expect.

Permian resources to be free cash flow positive at 45, right that's correct.

Okay and.

So that said I would be an equivalent level of cap resources capex baked into the 6.6 to get to that.

Right, let's say, the seven and a half make sure use the run rate of seven and a half before the synergies of 900 million, which will will be fully achieved in 2021.

Okay. Okay got it second question I guess, just on the balance sheet.

Cedrik any latest thoughts here I think your target all along has been to get the sub two times.

You've given numbers with and without Wes.

Obviously, you announced the JV today, but any new thoughts there about how quickly you can get to that leverage level and what other levers you might be willing to pull to to get there. Thank you.

Yeah. Thanks, Phil.

The.

Asset sales, obviously are the primary lever there we've given you kind of a timeline of you know 12 to 24 months, we think we'll be on the early side of that so.

And then also as Vicki mentioned earlier.

You know we have expect to have excess free cash flow and if need be if we for whatever reason hit a snag would direct more of that than planned to de lever de lever is at the very top of our list of priorities.

We don't expect to need to do that we think that.

That they ask the sales will get us there and get US there fairly quickly these things don't happen overnight, but.

But we think we can easily get there and the timeline weve allotted the second thing I would say is that our target. We've said that one and a half times debt to EBITDA $60 oil WT Guy by the end of 2021 is kind of our target and base plan.

And we're not we're not going to stop there.

That is a we know for our weight class, we have too much debt. It's <unk>, it's our highest priority knock it down we have the means to do it we have a lot of levers we can pull and so we're going to aggressively do that and we're not stopping at the end of 2021, but we expect to go through that and get down to much even lower level leverage levels beyond that time. So we expect to basically back to where we are or better from a credit metric standpoint.

Prior to the acquisition.

Okay. Thank you.

Yep.

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

Thank you good morning.

I had a follow up actually just a series of questions with regard to the slide 18.

Given the strong productivity gains shown there and in every year, but particularly 2019.

The first is if we looked at this on an oil only basis with the gap between 2018 and 2019 look the same.

Second what do you see as the longevity to continue to drive productivity gains on Oxys based assets.

And third is what is your base case I realize there's an appraisal process today that you need to go through but what is your base case for how anadarko's well performance in well costs will ultimately compare relative DOCSIS.

I'll take the second one and I'm gonna toss the first two to to Jeff Yeah, we really haven't gotten into their specific data well enough to know we we've seen the results of the wells, but what we want to do is dive a little deeper see what data they have and do our full analysis on it before we can answer a question like that but they will be doing that as quickly as we can unfortunately getting them to start doing that on a I'm on a deeper level here in about a week so.

I'll pass it to Jeff.

Hey, Brian I think I caught your first question was what would it look like on a oil basis.

It would look roughly the same and the reason I would say that it is if you look at our our oil cuts for Permian resources over the last two and a half years. We've got we've ranged from about 59 to 62. This year Weve been right around 60 last year were 61 to 62 the year before we were just a hair below 60. So that's the kind of variability you get on total resources oil cut.

So it wouldn't be materially impact our curve when you look at it now obviously this year has been.

Percentage point or so last and that's just a function of where we're drilling different reservoirs that have different gas oil ratios with them. It's not anything that's problematic or something we didn't expect but just where we're developing.

Great. Thanks, and then and then what was what was your other question, Brian I'm sorry, the lung do the second one was the longevity that continue to drive productivity gains just on the oxy assets in other words, how many more years in the tank.

Do you think you have faced on the process season that that you have a technology that youve talked about.

Yeah again I mean this one is so hard it is a it's always difficult to know we can see what the teams are advancing I mean every time, we talk to the teams working on advancing our performance I just get blown away at the things, they're thinking about and working on like we talked about the 40 models of Vicki talked about when you look at that our ability now to understand how Brett Frac geometry changes not only in a single well over time, but how it changes in a multi well section development over time two years ago I never thought we would be able to understand how frac geometry changes over time or how wells would enter relate with each other given the time component now that we can understand that we're able to figure out better landings.

Better placements better Frac designs that continue to propel the advancements so I would answer it is I don't know, how we will improve next year, but I guarantee you.

That the teams are going to figure out how they continue to make well performance better and they've done. It every year since 2015, when we really started aggressively to bell development. So it's hard to believe that's kinda stopping anytime soon I think it will just come from different areas different things will drive it just like different things drove it from 15 to 16 and 17 18 and so on.

But I do continue to think where we're going to get better and if you put this over and you focused on.

Value instead of rate I think that has even more running room.

Then just you know rate and volume performance, but on the value side.

Great. Thanks, and then lastly on that outside of the Permian can you talk about any key learnings in the Anadarko Gulf of Mexico, or DJ basin assets and any impacts that those have on your commitment to maintaining and retaining those assets in the going forward combined company and on the capital and growth outlook there.

I think he has been very involved in that will let Ken answer that one.

Yeah. Thanks.

We're looking forward to operate thing again in the Gulf of Mexico, I think one thing.

I have to say, we're operating as two separate companies at this time.

But I think we're really pleased of our former asset Horn mountain would totaling to oxy again, we were involved with the since the past our days, even before BP were involved in it.

We always believed that at long term potential. So I think I think we're looking forward to.

Picking that up.

I think our goal with Gulf of Mexico, So far as to fill that deliver long term stable cash flow through step out wells close to the existing facilities. So very similar to the anadarko's approach with Heartland come back I think we can see that potential running for some time.

Great. Thank you.

Our next question will come from Leo Mariani of Keybanc. Please go ahead.

Hey, guys just wanted to follow up a little bit on the asset sale.

Topic here just wanted to get a sense.

I see at this point really identified.

What they want to sell I know, obviously it'll be price dependent on ultimately what you sell but do you feel like you kind of have your your punch list, you know sort of down and have you guys integrated.

The rating agencies as well in in kind of some of these discussions as you look to hit your leverage targets over time.

I would say that we certainly we have a punch list of things that that we'd like to do.

And that's why we want to keep that quiet for a negotiating power, but we do have a punch list and every now and then those something comes up that's at that's unexpected and out of the ordinary M.. We look at those two so that's why we're really encouraged that we'll be able to achieve our targets and Cedric will address the the credit agencies. Yeah. We've had we've for years, but even especially this year had extensive ongoing dialogue with our the rating agencies we have.

Confidential arrangement with them. So we are able to share a little more information Oh I would really say, though is that you were so so they're they're very well informed.

On our plans and and you can see some of the actions we're taking to today. In fact has some of that information or news comes out, but but what I would say is that we've got a longer list than we have.

<unk> needs and so we think we can easily achieve our plans and.

And I think the agencies understand that.

Okay, I guess just yet.

We've all of that is there any update at all on the timing of the Africa, you know sale and then Additionally, Cedric obviously you got off the significant hedge.

Are you guys considering other hedges.

For for 2020, given that you know it was a portion of your production we still have significant remain oil production on hedged.

I'll take the Africa question, we really until after close wed we'd really cant make any comments on timing or anything like that would prefer to.

To get a little bit further down the road and we'll update you when we can.

Yeah. So on the hedging we're very pleased with what we're able to pull off and actually a very short period of time.

I was skeptical we'd be able to achieve.

What we've done but as Vicki mentioned earlier in her prepared remarks, you know weve hedged just under 40% of our combined company oil volumes. If you take anadarko's second quarter in our second quarter for oil volumes no just under 30%, 40%. There and then if you exclude P.S.C. volumes for US you get approaching almost 50% of our volumes hedged. If you look in on just a second quarter no basis. So very pleased with the position I'm not going to be speculating about future hedging doesn't help us to do that other than to say, we'll be opportunistic you know I would I would expect this to be primarily focused on when were.

In a more leveraged situation. This is giving us a great deal of additional support in a low price environment potentially in 2020.

But but beyond kind of the de leveraging that we've talked about we're not I'd expect us to kind of go back to the way. We've we've been which is a very little to no no hedging, but we'll be opportunistic and we could see ourselves putting on more hedges or possibly not not doing that as well.

Okay. Thank you.

In the interest of time. This concludes our question and answer session.

I would like to turn the conference back over to Vicki Hollub for any closing remarks.

Now I'd like to say, thanks to the oxy employees for operating safely and delivering great results and to say, we're excited to bring on the Anadarko employees looking forward to that and then it can't happen soon enough.

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

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