Occidental Petroleum Corporation (NYSE:OXY) Q4 2023 Earnings Call Transcript

Occidental Petroleum Corporation (NYSE:OXY) Q4 2023 Earnings Call Transcript February 15, 2024

Occidental Petroleum Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good afternoon. And welcome to Occidental’s Fourth 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 Jordan Tanner, Vice President of Investor Relations. Please go ahead.

Jordan Tanner: Thank you, Gary. Good afternoon, everyone. And thank you for participating in Occidental’s fourth quarter 2023 earnings conference call. On the call with us today are Vicki Hollub, President and Chief Executive Officer; Sunil Mathew, Senior Vice President and Chief Financial Officer; Richard Jackson, President Operations, U.S. Onshore Resources and Carbon Management; and Ken Dillon, Senior Vice President and President, International Oil and Gas Operations. This afternoon, we will refer to slides available on the Investor section of our website. The presentation includes a cautionary statement on slide two regarding forward-looking statements that will be made on the call this afternoon. We’ll also reference a few non-GAAP financial measures today. Reconciliations to the nearest corresponding GAAP measure can be found in the schedules for our earnings release and on our website. I’ll now turn the call over to Vicki.

Vicki Hollub: Thank you, Jordan, and good afternoon, everyone. 2023 was a great year for us, thanks to the performance of all of our teams in Oxy. I’m going to start by discussing our financial performance, operational excellence and our strategic advancements in 2023. Then I’ll review our capital plans for 2024. These continue to position us to deliver sustainable and growing returns for our shareholders through our premier asset portfolio, advanced technology and robust commercial runway. First, I’ll begin by reviewing our financial performance in 2023. Last year, our talented and committed teams across the company applied advanced technical expertise, operating skills, leading-edge technologies and innovation to our exceptional portfolio, and they delivered results, $5.5 billion in free cash flow, which enabled us to pay $600 million of common dividends, repurchase $1.8 billion of common shares and redeem $1.5 billion of preferred shares, while also investing $6.2 billion back into the business.

Next, I’ll comment on our operational excellence in 2023. Last year, our production in our global oil and gas business exceeded the midpoint of our original four-year production guidance by 43,000 BOE per day. This was driven by record new well productivity rates across our domestic assets in the Delaware, Midland and DJ basins, and internationally by record production from Block 9 in Oman. And in addition, we safely completed the expansion of the Al Hosn plant in the UAE, which also delivered record annual production. Despite negative price revisions, well performance across our portfolio enabled us to achieve an all-in reserves replacement ratio of 137% in 2023 and a three-year average ratio of 183%. Our track record from prior years of consistently replacing produced barrels continues and at an F&D cost that is below our current DD&A rate.

Oxy’s year-end 2023 worldwide proved reserves increased to 4.0 billion BOE from 3.8 billion BOE in 2022. OxyChem performed exceptionally well in 2023. It exceeded guidance and achieved $1.5 billion in pre-tax income for the third time in its history, due largely to lower energy costs and an efficient planned turnaround at our Ingleside plant, even as product markets softened compared to 2022. In addition, construction on STRATOS, our first Direct Air Capture facility, is progressing on schedule to be commercially operational in mid-2025. The fourth quarter of 2023 was an exciting way to conclude a successful year. In oil and gas, we delivered our highest quarterly production in over three years and outperformed the midpoint of our production guidance, despite a third-party interruption in the Gulf of Mexico.

Our Rockies business outperformed in the fourth quarter and that’s consistent with its year-long trends. Innovative artificial lift technology continued to maximize base production. Well-designed optimization in the DJ Basin that we presented in our second quarter earnings call contributed to a 32% productivity improvement from 2022. We also continued to deliver robust well performance in the Permian Basin, where our Delaware teams drove results to the high end of the Permian’s fourth quarter production guidance. Our Top Spot well, which we also discussed in our second quarter earnings call, continued its strong performance trajectory and delivered the highest six-month cumulative production of any horizontal well ever in the New Mexico, Delaware Basin.

In fact, Oxy has drilled eight of the top ten horizontal wells of all time across the entire Delaware, based on this production metric and three of those wells came online last year. Since mid-2022, our teams outperformed the Delaware Basin industry average 12-month cumulative oil production by nearly 50%. Our team aims to extend our leadership in the New Mexico, Delaware Basin this year. A significant portion of the 2024 Delaware program will develop the same horizon as the record Top Spot well. Further south in the Texas, Delaware Basin, our teams continue to deliver success with a couple of notable appraisal wells in the second Bone Spring and third Bone Spring line. These wells drove incredibly early time volumes and accordingly secured additional capital in our 2024 Delaware program.

Our appraisal programs are positioning us for success by adding horizons in the Delaware Basin and moving Tier 2 and Tier 3 wells to Tier 1. But we’re also improving our current Tier 1 intervals, for example, with our Top Spot well. Outside the Delaware Basin, we’re also making strides in some of the basins that we expect will begin to play a more consequential role. In the Midland Basin, technical excellence, including the basin-leading Barnett wells, drove a one-year cumulative improvement in well productivity of over 30% compared to the prior year. In the Powder River Basin, Oxy had one Wyoming state initial production and early cumulative production pad record of 1.5 million barrels of oil produced in only about seven months. As we highlighted, our uncommissional technical teams continue to expand and improve inventory across all U.S. Onshore basins.

While our subsurface modeling, innovative well designs and enhanced artificial lift technology have driven improvements in well recovery, new well designs have also resulted in record drilling times for both 2-mile and 3-mile Texas, Delaware Basin laterals. Similarly, in the Powder River Basin, our teams drilled an average 1,650 feet per day and we drilled a 10,000-foot well in only 11 days, both achieving Oxy basin records. Our successes are not limited to our Onshore U.S. portfolio. In the deepwater Gulf of Mexico, we are continuing to leverage technology to drive even stronger production results. Our subsea pumping system on the K2 field achieved first lift four months ahead of schedule. This is Oxy’s first deployment of this technology in deepwater.

We expect it to unlock future production enhancement opportunities and longer-distance subsea tiebacks. Next, I’ll shift to discussing how we advanced our strategy last year. In 2023, we high-graded our oil and gas portfolio, launched the expansion of our OxyChem Battleground facility and announced strategic commercial transactions that we expect will deliver sustainable multiyear value to our shareholders. These steps strengthened our portfolio and make it unique in our industry. We have high-quality, short-cycle, high-return oil and gas shale development in the U.S., along with conventional, lower-decline oil and gas development in Permian EOR, GoM, Oman, Algeria and Abu Dhabi. These developments are complemented by our strong and stable cash flow from our chemicals business and the cash flow and carbon reduction we expect our low-carbon ventures to provide in the future.

In addition to high-grading our oil and gas portfolio through organic development and appraisal work last year, we also announced the strategic acquisition of CrownRock, which will add high-margin, low-break-even inventory, while increasing free cash flow for delivered share. The incremental cash flow will support our cash flow priority of delivering a sustainable and growing dividend, along with deleveraging and share repurchases after reducing the principal debt to $15 billion. We are working constructively with the FTC in its review of the transaction and expect to receive regulatory approval and close in the second half of this year. The capital plan we will review in a moment excludes CrownRock, because we’ll continue to operate as two separate companies until we obtain regulatory approval and close the acquisition.

In our LCB business, we completed many pivotal transactions that provided technology advancement, third-party capital, revenue certainty and commercial optionality. We closed the acquisition of Direct Air Capture Technology Innovator Carbon Engineering last quarter. This was a landmark achievement in our Direct Air Capture development path. We’re excited also about our STRATOS joint venture with BlackRock, which we believe demonstrates the DAC is becoming an investable asset for world-class financial institutions. In addition, our team signed on several more flagship carbon dioxide removal credit customers. Now I’d like to reiterate our cash flow priorities and discuss our capital plans for 2024. On our December call, we discussed how we will focus on our cash flow and shareholder return priorities in 2024 on dividend growth, debt reduction and the capital allocation program that generates strong free cash flow throughout the commodity cycle.

As we discussed regarding CrownRock, we intend to complete at least $4.5 billion in debt repayments for both pro forma cash flow and proceeds from a divestiture program. We intend to prioritize debt reduction until we achieve a principal debt balance of $15 billion or below, including repaying debt as it matures. As a result of the acquisition, we expect to strengthen our balance sheet, improve our resilience in lower commodity price environments and free up cash from interest payments to support future sustainable dividend growth and shareholder purchases. Every year, we design our capital plans to support our strategic initiatives via projects that maximize our returns and best position Oxy to deliver long-term and resilient returns to our shareholders.

Our 2024 capital plan continues a bifurcated investment approach that balances short-cycle, high-margin investments with measured, longer-cycle cash flow growth investments. In 2024, we plan to invest $5.8 to $6 billion in our energy and chemicals businesses, resulting in slightly less capital for our unconventional assets this year. However, we expect our unconventional assets to return more cash to the business and we continue to expect year-over-year production growth and continued success across our premier unconventional portfolio, including some of the emerging horizons. We intend to complement our unconventional exposure with increases to our mid-cycle investments, including lower decline conventional reservoirs, which are expected to drive longer-cycle cash flow resiliency.

Our 2024 mid-cycle capital investments will position us to continue the exciting projects that we started last year. Investments in OxyChem are expected to increase this year as progress continues on the Battleground expansion and the plant enhancement project. We also added a second drillship in the Gulf of Mexico to support what we believe could become a future growth asset for Oxy. Lower decline oil production from our enhanced oil recovery or EOR, is an important part of our long-term strategy. This year, we’re investing in gas processing expansions for our Permian EOR business that support longer term growth in many of our core CO2 fields. Our EOR business will continue to be a key part of our future oil and gas development as we believe that carbon dioxide captured by Direct Air Capture facilities is a sustainable way to develop the 2 billion barrels of potentially recoverable oil remaining in our premier EOR operation.

In our emerging low-carbon businesses, much of Oxy’s planned $600 million 2024 investment will be directed to STRATOS. We have also allocated capital to continue preparations for a second Direct Air Capture and sequestration hub in South Texas, along with subsurface and well-permitting investments needed at our Gulf Coast sequestration hubs. Capital received from financial partners for our LCB businesses will add to our $600 million investment. This includes capital contributions from our joint venture partner, BlackRock, for STRATOS. BlackRock’s investment totaled $100 million in 2023 and we expect that figure will increase in 2024. We’re making great progress toward advancing our net-zero pathway as we develop Direct Air Capture and other exciting technologies.

We see tremendous potential in LCB to increase Oxy’s cash flow resilience and generate solid long-term returns for our shareholders. I’ll now turn the call over to Sunil for a review of our fourth quarter financial results and 2024 guidance.

Sunil Mathew: Thank you, Vicki. I will begin today by reviewing our fourth quarter results. We announced an adjusted profit of $0.74 per diluted share and a reported profit of $1.08 per diluted share, with a difference between adjusted and reported profit primarily driven by the after-tax fair value gain related to the acquisition of Carbon Engineering. Our teams exceeded the midpoint of guidance across all three business segments during the fourth quarter and we delivered outstanding operational performance. Higher-than-expected production in our domestic, onshore, and international assets enabled us to overcome production losses caused by an unplanned third-party outage in the eastern Gulf of Mexico. This outage led to a lower-than-expected company-wide oil cut and a higher-than-anticipated domestic operating costs per BOE.

It is also expected to impact production into early next month and is reflected in the guidance that I will soon cover. We had a positive working capital change, primarily due to receipt of the environmental remediation settlement, timing of semi-annual interest payments on debt and decreases in commodity prices. We exited the quarter with over $1.4 billion of unrestricted cash. Turning now to guidance. Last month, Oxy and CrownRock each received a request from the FTC for additional information related to the acquisition. The FTC’s request for additional information will impact the timing of closing, which we expect to occur in the second half of the year. Oxy will receive the benefit of CrownRock’s activity between the January 1, 2024 transaction effective date and close, subject to customer repurchase price adjustments.

Additionally, the issuance of senior unsecured notes, funding of the fully committed $4.7 billion term loans and termination of the existing bridge loan facility are expected to be aligned with the transaction’s closing. In 2024, we expect full year production to average 1.25 million BOE per day, representing low single-digit growth from 2023, with the Rockies and Al Hosn driving production growth. As Vicki mentioned, well-designed and operational expertise drove production outperformance in the Rockies last year. We anticipate that these results will continue in 2024, with a steadier run rate of wells coming online compared to the first quarter of last year when we recently ramped up brick activity. Permian production is expected to remain largely flat, with Permian unconventional capital decreasing by approximately 10% compared to the prior year.

Internationally, we anticipate continued higher production at Al Hosn following last year’s plant expansion. Total company production guidance in the first quarter reflects a low point for 2024, with a significant step-up expected in the remainder of the year. The expected first quarter decrease in production is primarily driven by the relatively lower activity levels and working interest in the Permian Basin in last year’s fourth quarter. January winter storm impacts of approximately 8,000 BOE per day in our domestic onshore assets, annual plant maintenance at Dolphin, and the Gulf of Mexico unplanned downtime event. Domestic operating costs on a BOE basis in 2024 are expected to decrease due to reduced maintenance in the Gulf of Mexico and improved lifting costs in the DJ Basin.

Moving on to chemicals. In 2023, OxyChem generated pre-tax income nearly matching its second highest year ever. This year, we are guiding to a midpoint of $1.1 billion of pre-tax income. This year’s full year guidance is close to the fourth best year ever for the chemicals segment, despite potential challenging market conditions. We expect that our first quarter OxyChem results will be largely flat from the prior quarter. Our guidance for Q1 reflects the combination of PVC price erosion largely associated with contract adjustments in Q4, typical seasonal subdued demand in both PVC and caustic, and export pricing pressure on caustic from China. Our guidance assumes that in Q1 we have reached the bottom of the cycle with more stabilized prices.

I would like to close today by looking beyond 2024 to highlight several catalysts that we expect will enhance our financial trajectory in the coming years. Our midstream business is well positioned to benefit from a reduction in crude oil transportation rates from the Permian to the Gulf Coast by the end of the third quarter of 2025. We expect annualized savings from these rate reductions of $300 million to $400 million, with approximately 40% of the savings starting in 2025 and the full annual savings anticipated in 2026. The OxyChem Battleground and plant enhancement projects are expected to generate incremental benefits to EBITDA of $300 million to $400 million per year once complete. In combination, these improvements to midstream and chemicals are expected to deliver an incremental annualized run rate EBITDA of $600 million to $800 million.

As Vicki discussed, we also expect the planned mid-cycle investments in our conventional Gulf of Mexico and Permian EOR assets to provide cash flow resiliency through lower decline conventional production. As we continue to execute on high-grading our premier portfolio, we are committed to meeting our deleveraging targets that I outlined in December. We believe that a strengthened balance sheet and Oxy’s premier portfolio will enable future increases to our common dividend and rebalance enterprise value in favor of our common shareholders. Our teams are focused on extending Oxy’s track record of operational excellence and solid execution on our path to delivering growing and sustainable shareholder returns over the long-term. I will now turn the call back over to Vicki.

Vicki Hollub: Thank you, Sunil. 2023 was a significant year for Oxy on both operational and commercial fronts. Our teams skillfully navigated through the dynamics and I want to recognize our employees’ ingenuity and hard work. Their efforts generated the exciting achievements we covered today, as well as the great progress that is underway to position us for a successful 2024. With that, we’d like to open the call for questions. Jordan mentioned earlier that Richard Jackson and Ken Dillon are also on the call and they will participate in the Q&A session. We’ll now take your calls.

Operator: [Operator Instructions] The first question is from Neil Mehta with Goldman Sachs. Please go ahead.

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Q&A Session

Neil Mehta: Thank you so much, and Vicki, great to hear from you. My question is just really around deleveraging and so you talked about this in the opening comments, but just talk about the path to getting balance sheet to where you want to be post the CrownRock acquisition, and how you see the asset sale market playing out here in enabling you to get that debt lower? Thank you.

Vicki Hollub: Well, as you notice, by virtue of all the M&A that’s happening, there’s a lot of appetite for companies to try to get into the Permian and we do have properties in the Permian that are not core to us but could be core to others and some of it just where they’re placed in the Permian geographically and how they’re not as cored up as some of our key areas. So the divestitures, I believe, will go well. What we won’t do, though, is we’ve decided not to make any divestitures until we close the CrownRock acquisition and then we’ll start a proactive process more aggressively at that point.

Neil Mehta: That’s great, Vicki. Thank you. And then on the Gulf of Mexico, the Q1 guide of 107 to 115, but the balance of the year 133 to 141, I’m guessing a lot of that’s around the pipeline outage. Can you just give us a sense of what are the gating factors to get that asset back online and how we should be thinking about the cadence of production over the course of the year?

Vicki Hollub: Yeah. We’re leaving the updates on that to the operator and so we’re not making any comments on that because we’re giving them room to get their business done. With respect to the rest of the year, we expect the rest of the year to continue on as normal and we expect that when we’re back up and running, we may get a little bit of flush production from that and we’ll have, hopefully, our target date for getting back up and online is pretty close to what we said. Do you have anything to add?

Ken Dillon: No. It’s Ken here. Maybe I can add a couple of things. So we’re feeling pretty good about the date, and for example, we’re sending our specialist startup crews offshore tomorrow to finish lining out the facilities for full operations. I think that gives you a feel for where we are in the process. The plants are in great shape. Our operations crews in parallel with the outage carried out our full 2024 turnarounds and also completed our enhancement projects for the year as well. So avoiding outages in 2024 gives us a really good shot. So we’re looking forward to it.

Neil Mehta: Thank you. Thanks, Ken.

Vicki Hollub: So — thank you. Appreciate it, Neil. That was time very well spent. They made use of all the time that they had to do things that we needed to do.

Operator: The next question is from Doug Leggate with Bank of America. Please go ahead.

Doug Leggate: Thanks. Good morning, everyone. I guess the number of course are shrinking, Ken. It’s great to hear you on the call after Conoco’s latest retirement. So thanks, Vicki, for getting on as well. So I have a couple of questions, if I may. I guess, the first one is, I hate to do it, but I want to come back on the disposal question. I realize you don’t want to give a lot of detail, but I want to frame it like this. When you bought Anadarko and you were trying to delever, I seem to recall you had about 25 different packages that were for sale, and of course, you ended up not having to do hardly any of those. I think it was about a dozen or something like that. So it seems to me that you’ve got a lot of things that you’ve already scrubbed.

So my question is, can you give us some color as to whether there is significant cash flow that would come along with the range of $4.5 billion to $6 billion? Without being specific on assets, what’s the associated free cash flow number?

Vicki Hollub: Well, depending on what actually is divested, we can’t really give you an estimate of what that is today. Some things are changing in terms of what we’re looking at. So I think that it would be very difficult to put the number out there at this point.

Doug Leggate: Is it significant? Would you consider it material, Vicki?

Vicki Hollub: Anything that’s material, we wouldn’t likely do. We’re trying to minimize the cash flows sold to ensure that we can maintain our cash flow. With that said, there will be some cash flow going, because it’s hard to sell any assets out here that we haven’t already at least done appraisal work on to generate some cash flow.

Doug Leggate: Okay. Thank you. My follow-up is on sustaining capital. You’ve stepped it up a little bit to $3.9 billion. But what we’re trying to figure out is this year’s growth is about 2%. You’re spending $6.5 billion, of which $1 billion is Battleground and DAC, which gets you to about $5.5 billion. So what I’m trying to figure out is, the growth rate of 2% seems to correlate with growth spending of about $1.5 billion. It seems — the ratio just seems a bit off. Can you help me understand how I should think about that?

Vicki Hollub: So if you look at our — what we’ve said we’ll spend in oil and gas is $4.8 billion to $5 billion in 2024, that — part of that will be spent on, as we mentioned, some of the mid-cycle projects that generate oil production at a later date. For example, the Permian EOR, investing in that would generate the oil and gas production from that in about the third year after we started. So that will be a bit delayed. Gulf of Mexico, some of those are also preparing us for the future. So the mid-cycle investments will not impact this year’s production. The potentially 2.2% increase will be based on the spending of the $4.9 billion, if you use the mid-cycle price, less than $4.8 billion. And then when you look at what’s being spent in our oil and gas operations minus that amount, you still have some of that going for our facilities.

I think it speaks well to what the teams have done with respect to productivity and getting more out of the wells that we can actually spend what’s really less than half that billion that you mentioned on oil and gas activities and then some of that will be for facilities. So we’re actually getting a 2% growth rate from some of what we’ve developed in 2023, going over to 2024 and then the high productivity that we’re getting out of our development.

Doug Leggate: That’s a great answer, Vicki. You’re still the most capital efficient portfolio by miles, so thank you so much for the answer.

Vicki Hollub: It’s really exciting what the teams have done and thank you for the question.

Operator: The next question is from John Royall with JPMorgan. Please go ahead.

John Royall: Hi. Good afternoon. Thanks for taking my question. So my first question is on midstream. I think one area that surprised us a bit was the full year midstream guide. You gave some good color in the slides, kind of bridging from 4Q to 1Q. But just thinking about bridging the full year, how would you characterize the moving pieces from full year 2023 to full year 2024? And then maybe what do you think the midstream business can do structurally kind of under mid-cycle conditions, excess $300 million to $400 million savings you’ve spoken about?

Sunil Mathew: Yeah. Hi. So one of the main drivers for the relatively lower guidance for this year is an assumption on the spread for the gas transportation contracts. So last year, we captured several gas transportation capacity optimization opportunities. For example, when the cold weather event occurred in the West Coast in the first quarter. So obviously we cannot predict these events, so our guidance assumes compressed gas transportation spreads. But when the market does present itself, we are well positioned to capture these opportunities. So that is one of the main factors. The other one is in Al Hosn. We’ve assumed a lower sulfur pricing for 2024 compared to last year. Now, sulfur prices are at a near-term low of around $70 per ton and that is primarily due to weak Asian fertilizer demand and also sale of built-up sulfur inventories by major regional producers.

But based on the market trends, we think — we see a potential improvement in prices during the second half from demand pickup and also unwinding of the sulfur inventory. And the last thing I would say is, we think this is sort of the low point in terms of the midstream income. We have assumed a narrow spread for the gas transportation for this year, and starting next year, we are also going to start getting the benefit of the two transportation contracts expiring, like I mentioned in my prepared remarks. So, looking forward, the next three years or four years, you should see a significant uplift in our midstream income.

John Royall: Great. Thanks for the color, Sunil. And then maybe just hoping for a little bit of detail on the $700 million BOE of additions to reserves. It’s a pretty big number, especially when considering you’re adding an acquisition this year. So maybe just some color on the sources of those additions and where they’re coming from.

Vicki Hollub: I think the bulk of the additions were from our Permian Resources business. I think the — I think just essentially most of it was. We had some revisions from productivity improvements in other areas, but the bulk was from Permian EOR, where I think, Richard, if you look at your reserve replacement ratio just for onshore, that was pretty significant.

Richard Jackson: Yeah. I mean, just to add to that, I mean, obviously the focus, while near-term, some of these highlights that we’re putting in on the primary benches that we’ve been developing, driving the outperformance on production. But some of the highlights we’ve been trying to put in the call are some of these secondary benches that are becoming more prevalent in our program. If you look at some of those highlights, so that second Bone Spring or the Bone Spring line, you look at that Delaware chart that we’ve got on cumu production highlighting the year-on-year performance in the Delaware, those secondary benches are outperforming our 2023 average. And so those — as we delineate and develop more of those, that’s really driving that reserves in the unconventional.

EOR continues to do well. Talk in more detail if there’s interest, but some of the projects they have going on there to increase capacity in some of our gas processing facilities, like in Seminole, which I think we highlighted, these are also giving us near-term, we call it operability or it’s really the reliability of that production. So some of that incremental investment this year is driving, say, a couple of thousand barrels a day of improved base production. But that’s also providing capacity to develop some of those low development cost barrels that Vicki noted as we’re able to bring on this CO2 for the future. So that’s sort of how we’re thinking about the reserve story and it plays out in near-term outperformance, but the long-term is picking it up on reserves as well.