Occidental Petroleum Corporation (NYSE:OXY) Q1 2023 Earnings Call Transcript May 10, 2023

Occidental Petroleum Corporation misses on earnings expectations. Reported EPS is $1.09 EPS, expectations were $1.24.

Operator: Good afternoon, and welcome to Occidental’s First Quarter 2023 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Neil Backhouse, Vice President of Investor Relations. Please go ahead.

Neil Backhouse : Thank you, Jason. Good afternoon, everyone. And thank you for participating in Occidental’s first quarter 2023 conference call. On the call with us today are, Vicki Hollub, 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 Investor section of our website. The presentation includes a cautionary statement on Slide 2 regarding forward looking statements that will be made on the call this afternoon. We’ll also reference a few non-GAAP financial measures today. Reconciliations to the nearest corresponding GAAP measure can be found in the schedules or earnings release and on our website. I’ll now turn the call over to Vicki. Vicki, please go ahead.

Vicki Hollub : Thank you, Neil. And good afternoon, everyone. The operational and financial successes we achieved last year continued into 2023, as I will detail in our first quarter call. Our operational excellence and disciplined approach to capital spending enabled us to meaningfully progress our shareholder return framework. Our continued efforts to strengthen our balance sheet culminated in regaining an investment-grade credit rating from Moody’s. This afternoon, I will begin by covering our first quarter performance, followed by an update on several accomplishments in our oil and gas business. In light of recent market volatility, I will then go over the cash flow priorities established during our last call and highlight the progress made in transferring enterprise value to our common shareholders.

Then Rob will detail the commencement and status of the preferred equity redemption before covering our financial results and guidance, including an increase to full year oil and gas production and an OxyChem pre-tax earnings. Our operational success, even in the first quarters lower commodity price environment enabled us to generate approximately $1.7 billion of free cash flow before working capital. Excess cash was primarily allocated towards approximately $750 million of common share repurchases in the quarter, accounting for over 25% of our $3 billion share repurchase program, and triggering the redemption of nearly $650 million of preferred equity. Operationally, we exceeded our production guidance midpoint by approximately 40,000 BOE per day, following a prolific first quarter across our Premier asset portfolio.

In the Gulf of Mexico, we achieved our highest quarterly production in over a decade. This outperformance was partially driven by higher uptime at the Horn Mountain and the outperformance following the successful Caesar-Tonga subsea system expansion project, which was completed in December. Our Permian production benefited from strong new well performance and higher operability primarily in the Texas Delaware. In the Rockies, strong base and new well performance and higher operated by other volumes in the DJ basin resulted in higher than expected production. Internationally, our businesses performed well. Most notably, Al Hosn gas expansion project is ahead of schedule, because of the team’s ability to integrate expansion work with annual turnarounds.

Their production ramp up has commenced earlier than anticipated, and has already led to a daily production record. These achievements demonstrate how our high-quality assets and talented teams provide the strongest foundation for free cash flow generation in OXY’s history. Our global oil and gas teams continued to perform exceptionally well in the first quarter, achieving several milestones and accomplishments. Domestically and our onshore unconventional businesses, we delivered strong well performance and established new operational records in the Rockies and Permian. Our Rockies team drilled the industry’s longest DJ basin well ever, at over 25,000 feet in just eight days. This will also set a new lateral length record for Oxy at over 18,000 feet.

In addition, we delivered a single well production record in the DJ basin by utilizing a new well design. We plan to rollout this enhanced design as we further develop our inventory across the DJ basin. In the Permian, our Delaware subsurface teams continue to optimize and unlock inventory as demonstrated by success as a deeper Wolfcamp horizon with a single well generating 30-day initial production rate of 6,500 BOE per day and an Oxy record for this interval. Our Delaware completions team also achieved a continuous pumping time of approximately 28 hours on another set of wells, far exceeding our previous record of about 22.5 hours. We expect that increasing efficiencies such as faster completions pumping will contribute to lower costs and a faster time to market.

So certain products and services utilized in our operations will likely incur price increases this year compared to 2022, we are seeing some early signs of tempered inflation. Our teams are working towards partially offsetting inflation impact through various operational efficiencies and supply chain competencies. For example, in the Delaware basin, we’ve optimized frac designs to reduce assets and water utilization for an average savings of around $240,000 per well. Our Rockies team has successfully integrated artificial intelligence into our [Indiscernible] program, helping to maximize base production and reduce operating costs. On a broader scale, our supply chain team is continuously pursuing opportunities to manage pricing across our business portfolio through partnerships that thoughtfully balanced contractual flexibility with cost management.

These capabilities are more important than ever in the current inflationary environment as we strive to continuously deliver value to our shareholders. With these points in mind, I will now review our 2023 cash flow priorities. As we discussed last quarter, our 2023 cash flow priorities incorporated and disciplined capital strategy largely agnostic to the short term volatility exhibited in commodity prices this year. Our 2023 capital plan remains on track and focused on sustaining our high-quality portfolio of assets, while securing our long-term cash flow resilience. We continuously monitor the macroeconomic landscape and Adyen to maintain our capital plan in the current environment. Due to sustained downturn and commodity prices occur, we possess the flexibility to rapidly reduce activity levels through our short cycle low breakeven projects.

We demonstrated our nimble approach during the last global downturn, and we’re prepared to do so again should market conditions dictate. If oil prices follow an upward trajectory, we do not expect notable changes to our cash flow priorities. So the pace of have our share repurchase program and the preferred equity redemption may be accelerated. We have previously spoken about how potential future production growth is expected to be in the low-single-digits. However, we have many opportunities to grow cash flow outside of production growth. We anticipate that the midcycle investments we’re making this year which will result in meaningful contributions to our future cash flow. For example, our new OxyChem projects are expected to contribute $300 million to $400 million in incremental annual EBITDA, with benefits expected to start in late 2023 and full project benefits expected in early 2026.

Additionally, near term investments in our low-carbon ventures businesses are expected to enable the commercialization of exciting decarbonization technologies with the potential to generate cash flow detached from oil and gas price volatility. We believe that the combination of our low cash flow breakeven high return assets and emerging low carbon businesses uniquely positioned us at the forefront of our industry to create value for our shareholders. Value creation for our common shareholders governs our cash flow priorities. The allocation of excess cash toward debt reduction over the past two years was key in positioning us to initiate the next phase of our shareholder return framework. Our balance sheet improvement efforts reduced interest and financing costs, which contributed to an increase in our sustainable and growing dividend and the completion of last year’s share repurchase program.

Building on this success, we’ve already completed over a quarter of our current share repurchase program, enabling us to trigger the redemption of approximately $650 million of preferred equity in the first quarter. As dictated by our 2023 cash flow priorities, we intend to continue allocating excess free cash towards share repurchases, which in turn, may trigger additional preferred equity redemptions. We expect that these measures will be accretive to cash flow on a per share basis. In combination, we believe that these actions will further our goal of continued enterprise value rebalancing or common shareholders and serve as a catalyst for future common equity appreciation. I’ll now turn the call over to Rob.

Rob Peterson : Thank you, Vicki. And good afternoon, everyone. I want to begin today by highlighting our March credit rating upgrade and positive outlook for Moody’s Investors Service. Gaining a Moody’s investment grade rating is a significant milestone, acknowledges Oxy’s recent financial transformation continue redemption at preferred equity combined with opportunistic debt reduction, which is a compelling deleveraging story that we hope will facilitate future upgrades. The execution of our cash flow properties over the last several quarters enabled us to begin redeeming preferred equity. We ever deemed or have given those redeem approximately $647 million of preferred equity so far this year, at a cost of approximately $712 million, including a 10% premium payment of close to $65 million.

To date, we have eliminated approximately $52 million of annual preferred dividend, while also transfer enterprise value to our common shareholders. During last quarter’s call, we reviewed how the mandatory redemption of preferred equity is triggered when rolling 12-month common shareholder distributions reached a cumulative $4 per share. The preferred stock agreement requires at least a 30-day notice for each redemption. By the end of this week, all $647 million of preferred equity triggered for addition during the first quarter will be fully redeemed. As of May 9, we have distributed $4.57 per share to common shareholders over the rolling 12-month period. We intend to continue repurchasing common shares in part to remain above the $4 trigger per share for as long as we are able.

We recognize that staying above the $4 trigger will become more challenging in the latter half of this year due to the timing and pace of our prior share repurchase program. Our ability to remain above the $4 trigger will be heavily influenced by commodity prices. But even if we fall below the trigger, we plan to continue repurchasing common shares so that the distribution is required to surpass the trigger in future quarters are more evenly spread throughout the year. During a period where we may be below the $4 trigger, we may also seek to retire debt opportunistically, which would achieve a similar result of transferred enterprise value to common shareholders and further enhancing our credit profile. Turning now to our first quarter results.

We posted an adjusted profit of $1.09 per diluted share and a reported profit of $1 per diluted share. The difference between our adjusted and reported profit for the quarter was primarily driven by the premium paid to redeem the preferred equity. We concluded the first quarter with nearly $1.2 billion of unrestricted cash, but had not yet made payments to preferred equity holder as of March 31 due to the 30-day redemption notice requirement. However, the first quarter call on the preferred equity is reflected in our balance sheet as an accrued liability and will be captured in future cash flow statements as payments to the preferred equity holder made. During the first quarter, we generated approximately $1.7 billion of free cash flow before working capital, which was accomplished despite a lower commodity price environment as compared to prior quarter, lower domestic oil utilization as a cone and lower sales and production due to the quarter-end timing of cargo lipids in Algeria.

We experienced a modestly negative working capital change during the period, which is typical for the first quarter, and was primarily driven by a similar annual interest payments on our debt, annual property tax payments and payments under compensation and pension plans. These items, which are largely classified as accounts payable and accrued liabilities were partially offset by a net decrease in receivables, driven by lower commodity prices. We see the potential for working capital partly reverse in the second quarter since many of these payments are made annually in the first quarter, but accrued throughout the year. As discussed in the last call, we expect to be a full U.S. federal cash taxpayer in 2023, which is reflected in our financials by the reduced deferred income tax provision and our cash flow statement compared to prior quarters.

We are pleased to update our full year guidance for oil and gas in OxyChem as a result of excellent first quarter performance in both businesses. Vicki reviewed many of the highlights in our oil and gas business that contributed to our production outperformance across our high-quality assets portfolio. These factors enabled us to surpass our first quarter guidance and some are expected to continue having positive impact on production throughout the year. Specifically, the acceleration of the Al Hosn gas expansion project and new well performance in our domestic onshore businesses are expected to yield higher production than originally planned. These positive results provided us with the confidence to increase our full year production guidance midpoint to 1.195 million BOE per day.

Looking ahead, we anticipate that the second quarter production will be in the lowest of the year, primarily driven by the timing of domestic onshore activity and optimization of our maintenance schedule to reduce planned downtime in the Gulf of Mexico. As discussed on our last call, we expected that the first quarter of 2023, will have the fewest wells come online in our U.S. onshore business all year. This proved to be the case at the Rockies and Permian unconventional businesses turned six and 53 wells to production, respectively, in the first quarter. In the second quarter, we expect to return significantly higher number of wells on production the benefits of which will be fully realized in the second half of the year. [Indiscernible] timing fluctuations are bringing wells online, and the resulting production impact are typically and primarily driven by the optimization of resources and pad development timing.

Internationally, we expect production compared to prior first quarter — we expect higher production compared to the first quarter as our annual scheduled turnarounds were completed and production in Algeria is ramping up. Increased international production will be slightly offset by the just finalized Algeria production sharing contract, which decreases reported production but is not expected to have a material impact on operating cash flow. We anticipate that our second quarter oil mix will reduce to approximately 52% lower oil production in the Gulf of Mexico and Algeria, compounded by increased gas production at Al Hosn. While our oil mix will be lower in the second quarter, we expect that it will rebound in the second half of the year and be more in line with our full year guidance once maintenance in the Gulf of Mexico is complete.

Maintenance work and the associated lower volumes in the second quarter will also contribute to a domestic price operating cost increase of $9.85 per BOE before exceeding on a BOE basis in the latter half of the year. In summary, our impressive first quarter production and activity plans for the remainder of the year provide us with the confidence to raise full year production guidance despite anticipated reduced production levels in the second quarter. OxyChem approximated guidance in the first quarter. Due to the seasonality of customers’ overall inventory orders, we anticipate the first half of the year reflects stronger results in the latter half of 2023. Despite macroeconomic uncertainty, margins for OxyChem’s core products remain robust, and lead us to expect another year of strong results, providing us with the confidence to raise OxyChem’s 2023 pre-tax income guidance midpoint to $1.5 billion.

Midstream and marketing generated pre-tax income of $35 million in the first quarter, following within our guidance range. First quarter results were primarily impacted by the timing of crude oil sales as well as favorable gas margins due to transportation capacity optimization in the marketing business. These items were partially offset by lower equity method investment from income from West. Capital spending in the quarter approximately $1.5 billion and close to 25% of our 2023 capital plan, which remains at $5.4 billion to $6.2 billion. We expect higher capital spending in the second quarter compared to the first due to development timing in Rockies and Permian and advancement of the OxyChem better ground modernization and expansion project.

We also anticipate that capital spending in the third and fourth quarters will be below the second quarter and in line with full year guidance. Overall, the first quarter represents an excellent start to 2023. As we look ahead in the rest of the year, we are favorably positioned to execute on our cash flow priorities and advance our shareholder return framework. We aim to continue shifting our capital structure in favor of our common shareholders in the near and long term. I will now turn the call back over to Vicki.

Vicki Hollub: Thank you, Rob. We’re now ready for your questions.

Q&A Session

Operator: We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Neal Dingmann from Truist Securities. Please go ahead.

Operator: Our next question comes from Neil Mehta from Goldman Sachs. Please go ahead.

Operator: Our next question comes from Doug Leggate from Bank of America. Please go ahead.

Operator: Our next question comes from John Royall from JPMorgan. Please go ahead.

Operator: Our next question comes from Paul Cheng from Scotiabank. Please go ahead.

Operator: Our next question comes from Leo Mariani from ROTH MKM. Please go ahead.

Operator: The next question comes from Roger Read from Wells Fargo Securities. Please go ahead.

Operator: [Operator Instructions] There are no more questions in the queue. This concludes our question-and-answer session. I would like to turn the conference back over to Vicki Hollub for any closing remarks.

Vicki Hollub: I just talked to say in closing that I know there’s been a lot of concerns among investors in the — in our industry, particularly with respect to asset quality, execution, performance. And as Doug had pointed out, I wonder if that’s part of the reason for the reaction to what we’re seeing today. But looking at our asset quality, I think there’s nobody that could question the quality of our assets. And you look at our past performance, I also think that our continuing improvement in well productivity in the Permian and some data that we’ll show next earnings call about our performance in the Rockies, will clearly show that we’re not losing any capabilities. We’re not losing any performance. And in fact, looking at what our teams are doing technically today, they continue to innovate, continue to optimize.

And with the mention of a new technique in the DJ, there are also new ways of doing things that we’re trying in the Permian as well as in our Oman operations, Gulf of Mexico with the subsea pumping and systems installations, starting to look at our seismic differently. I think that for our company, we have not seen degradation in the quality or performance of our teams. And I want to thank our teams for that because they continue to push the envelope and every year get better and better. And so I don’t think there should be any concern about where we are today and what we’re doing is it’s just a kind of a strange scenario where in second quarter, it happens to be the lowest of the year, but our production and productivity is continuing to get better.

So with that, I want to thank you all for participating in the call today.

Operator: Conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.