Occidental Petroleum (OXY) Q3 2022 Earnings Call Transcript

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Occidental Petroleum (OXY -9.22%)
Q3 2022 Earnings Call
Nov 09, 2022, 1:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good afternoon and welcome to Occidental’s third quarter 2022 earnings conference call. [Operator instructions] Please note, today’s event is being recorded. I would now like to turn the conference over to Jeff Alvarez, vice president of investor relations. Please go ahead, sir.

Jeff Alvarez — Vice President, Investor Relations

Thank you, Rocco. Good afternoon, everyone, and thank you for participating in Occidental’s third quarter 2022 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 of 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 to our earnings release and on our website.

I’ll now turn the call over to Vicki. Vicki, please go ahead.

Vicki Hollub — President and Chief Executive Officer

Thank you, Jeff, and good afternoon, everyone. We delivered another strong quarter operationally and financially, enabling us to further advance our shareholder return framework as we made meaningfully — meaningful progress toward completing our $3 billion share repurchase program. We achieved our goal of reducing the face value of our debt to the high teens and planned to continue repaying debt through the remainder of this year before allocating a higher percentage of cash flow to shareholder returns next year. The excellent operational performance of our businesses was a key driver of our strong financial results, including generating the cash flow required to advance our shareholder return framework and further strengthen our balance sheet.

OxyChem delivered strong earnings following a record second quarter, while our Gulf of Mexico, International, Rockies, and Permian teams set new operational records. This afternoon, I will cover our third quarter operational performance and the exciting progress our low-carbon business has made since our investor update in March. Rob will cover our financial results, as well as our updated guidance, which includes an increase in full year guidance for all three of our business segments. Our businesses all performed well in the third quarter, enabling us to generate $3.6 billion of free cash flow before working capital, with total companywide capital spend of approximately $1.1 billion.

Our oil and gas business delivered production of nearly 1.2 million BOE per day, exceeding the midpoint of guidance by approximately 25,000 BOE per day. Our performance from the Rockies and Gulf of Mexico were key drivers of our production exceeding third quarter guidance. The Rockies’ success was driven by better-than-expected base production and higher NGL recoveries. In the Gulf of Mexico, we benefited from unseasonably calm weather during most of the third quarter and better-than-expected performance from Horn Mountain West.

Our ability to generate substantial free cash flow, even as oil prices declined compared to the previous quarter, positioned us to complete approximately $2.6 billion of our $3 billion share repurchase program through November 7th. Over the last 12 months, we have returned approximately $3.21 per share to common shareholders, moving us closer to potentially being able to begin redeeming the preferred equity in 2023. We also repaid approximately $1.5 billion of debt in the third quarter and in the period ending November 7th. Providing commodity prices remain supportive, we intend to reduce the face value of our debt approximately $18 billion by the end of this year, meaning that we will have repaid over $10 billion of debt in 2022.

As we enter 2023, we expect that our free cash flow allocation will shift significantly toward shareholder returns. We intend to reward shareholders with a sustainable dividend, supported by an active repurchase program; continued rebalancing of our enterprise value in favor of common shareholders; and a reduction in our cost of capital as the preferred equity is partially redeemed. Turning to OxyChem and midstream. Both businesses benefited from supportive market conditions during the third quarter.

OxyChem exceeded its guidance as chlor-alkali prices continued to strengthen and the expected softening in the PVC markets did not materialize to the extent that we had forecast. We continue to be highly encouraged by well performance across our portfolio. In the Delaware Basin, we delivered our best quarter to date for early well performance with the 46 wells online averaging 30-day rates of over 3,600 BOE per day, demonstrating the superior quality of our inventory and subsurface expertise. And in the Texas Delaware, we recently brought online a new Silvertip well with the highest initial oil production of any horizontal well previously drilled in the lower 48.

The Python 13H well poses a three-stream IP of almost 20,000 BOE per day and averaged over 11,000 BOE per day over its first 30 days online, which we believe to be the strongest performance ever for a Permian well. Overall, the Python development has outperformed expectations, and we’re looking forward to developing the offsetting areas over the next few months. We’re beginning to see additional progress in Colorado’s new permit approval process. In August, we received approval from the Colorado Oil and Gas Conservation Commission for the state’s first comprehensive area plan under the recently implemented regulations.

This plan has paved the way for us to complete more than 200 new wells in Weld County over the next few years. Also, several drilling permit applications that had been pending for a period of time were recently approved, allowing us to add back a rig in the DJ Basin after reallocating one earlier this year. With the purpose we have in hand and our expectations for future approval, we have enhanced our flexibility as we formulate our activity for next year. Last quarter, we celebrated first oil from our new discovery field in the Gulf of Mexico, Horn Mountain West.

While it’s exciting to realize production from new discoveries, our existing fields have abundant potential that we continue to unlock with innovative technical solutions like subsea expansions. For example, our Caesar-Tonga field recently reached a production milestone of 150 barrels of cumulative oil production that’s a start-up 10 years ago. Caesar-Tonga is a subsea tied back to the Constitution’s part and is one of the largest fields in the Outer Continental Shelf. This impressive achievement is a result of the collaboration and hard work across Oxy’s Gulf of Mexico business unit, including the asset development teams and offshore personnel who focus on delivering safe and efficient barrels every day.

In the years ahead, we plan to continue maximizing production capacity through projects like this one. The Caesar-Tonga subsea expansion, which is scheduled for start-up in the first quarter of next year, will address facility bottlenecks and maximize production capacity from the field while signaling a transition into the next phase of field development. In the second quarter, I highlighted new production records at Al Hosn in the UAE and Block 9 in Oman. I’d like to congratulate our Al Hosn and Oman teams again this quarter for breaking those recently set records.

We’re beginning to benefit from incremental production from Al Hosn and are pleased the expansion project is on track for completion in the middle of 2023. Turning to our low-carbon business, I’m pleased to share that we broke ground on the world’s largest direct air capture plant in Ector County, Texas. The first stage of construction, which includes site preparation and road work, began in September. That start-up is expected in late 2024.

During our March LCV Investor Update, we provided an overview of the expected revenues and costs for both direct air capture and point source capture projects. Since then, we have experienced progress on legislative and commercial fronts. Congress passed the Inflation Reduction Act, which contains several enhancements to the 45Q tax credits that will incentivize the development of carbon capture projects. Additionally, strong interest from potential customers has provided us with a clearer picture of the market for carbon dioxide removal credits, or CDRs, and net-zero oil, in addition to other products.

We believe our low-carbon strategy, combined with the ability to leverage direct air capture, or DAC, for the benefit of ourselves and others, uniquely positions us to lead the market in supplying CDRs to the thousands of businesses that have established net-zero ambitions. We are encouraged by the passage of the IRR — IRA and previously highlighted the potential for the 45Q enhancements to accelerate our low-carbon strategy. We expect the 45Q enhancements to jump-start the voluntary market for CDRs, which gives us confidence to increase the number of DACs in our current…