Occidental Petroleum Q2 2024 Earnings Call Transcript

Yeah. As you know, we have a deep inventory of assets, and our portfolio is very, very strong. And I certainly appreciate your interest in the details, but we feel like talking in detail about what the assets would be would compromise our ability to maximize the value of those divestitures. We've said previously that we get a lot of incoming offers, but it's clear that something -- this is a fire sale, and it is not -- this acquisition has actually enabled us to improve our inventory quality and scale, which provides us now the opportunity to bring forward value. And that's what we did with this CrownRock acquisition.

It's not that the assets that we just sold or, as Sunil said, a part of our core for 10 years, it's that we knew that we needed to bring forward the value to our shareholders. And we did it in a way that makes our inventory stronger, so it was the best possible way to do it. But in terms of talking about the other assets, I can just assure you that we have high confidence we're going to be able to achieve our debt reduction targets. And as you saw and as you mentioned, definitely, we're off to a good start, and we're excited about where we're headed with this and think that certainly, the $15 billion that we are targeting to achieve is doable by the end of 2026 or first of 2027, we've previously said.

Now bearing in mind that with the SEC rules and regs, our teams have had the opportunity to get together and to talk, but not to dive into the details or their plans. And so we've had now just a week for the team to start looking at where the -- what the situation is now with CrownRock. And we're, again, incredibly excited about the assets. But I think Richard's team, you have found some additional details that have differentiated what we were expecting versus what happened over the past couple of quarters.

Yeah, that's great. Thanks, Vicki, and I'll try to answer this question in a couple of pieces. I'll start with sort of where we're at today. And like Vicki said, I guess, the first thing to say is just very excited to work with our new team and was able to spend some time after close in the last week with them and everything that we thought they would be, they are, and very excited about really the opportunity. So the first part, I'll kind of address where we are, and then I'll go ahead and speak to some of the synergies and how we're thinking about that generally. And then as I think we said in our prepared remarks, we'll have more updates, I think, as we go into the end of the year.

So where we start again, this plan started with the rules that CrownRock really had a 2024 plan that they constructed. We didn't have a lot of insight to that. So we spent time kind of understanding where we are and lots of positives. The upsides that we saw, not only in a one-year program, but longer term, still see. But as we think about that 170 [Phonetic] in our latest guidance, and we're able to talk to the team, a couple of things. One, like us, had some downtime due to some weather events early in the year and just some other operational downtime that was a part of that. I'd call it more singular events than ongoing. And then the majority is really well mix. I think due to their development plans and trying to optimize returns beyond just this year, that they really focused on some shallower zones that were a bit tighter spaced and even a little less horizontal length. And so there are different reasons they constructed the program today versus what we had originally had in our plan. So we'll -- we're in the process of deconstructing that. But again, we see that same upside as we roll this forward. I would say it was more delayed in terms of getting to the 170 as we anticipated. It certainly hasn't gone away.

A couple of good things to note. I'd say well cost, and again, this applied to OXY as well, but encouraged by where not only their costs are today, but what they see as improvement opportunities. And so we'll be diving into that. And then looking at some of the opportunities going forward, I think, remain from a well performance perspective, I think the ability now to compare notes on things like well spacing and even the sequencing of how we develop the stack pay, we see opportunity. And so that will be a big part of what we're working through for the rest of this year and next year. And then just scale and efficiency. So we can quickly see opportunities as we think about a rig and frac core utilization. And really, that rolls into time-to-market improvements. And so as you are able to drive utilization of those resources up, we still see time to market.

And then as Vicki mentioned, really the water management. We've been very proud of our water sort of management capabilities. But when we combine with a very strong position and frankly, more scale with what the CrownRock team has put together, I think that's going to deliver cost synergies as well as operational synergies. So to sum it all up, again, excited to be with the team. Same opportunity, same upside. Just we're rolling it forward from where we start today, and we're looking forward to providing more details as we go into the end of the year.

Right. No, thanks for the question. We're excited certainly with the STRATOS project and the progress, and I'll flip it to Ken after a few remarks, kind of give you more detail on that. I'd say generally, continue to see great progress in the business. Obviously, the sales with Microsoft not only be the largest CDR kind of block sale to date, but really, that counterparty meant a lot to us. We know they're very diligent in the way they think about what the product of a CDR can mean to the business and it's just great constructive dialogue that ultimately rolls into the future market and what that product can deliver. So beyond just the monetary aspect of that very pleased with that outcome.

I'd say the other thing I'd like to highlight, and I think again, as we roll into STRATOS next year and then think about the future, continue to see great progress out of our carbon engineering R&D team. And so as we think about the core elements of that process, being able to process air, capture CO2 in our sorbent, liquid sorbent and then how do you efficiently release that and either sequester, use it. We're seeing some very innovative things that we can see direct line of sight to cost down, which is ultimately what we're trying to do as we get into the development. And so those are sort of the catalysts we're paying to -- closely to intentionally. I would say, to your point, we'll continue to monitor CDR sales. We remain very optimistic on the outlook of that market.

We hadn't set any specific parameters in terms of what that target is going forward, but it will be a major component of our FID criteria for that too, for certain. And so I think as we get closer to that, over the next period of time here, that we'll be able to give more disclosure of how we think about that from a commercial project to FID. So maybe with that, I'll turn it over to Ken.

Good afternoon, Betty. Overall, we remain on track for start of next summer. We currently have around 1,200 people at site, which is our peak. We'll start rolling off soon. We've been able to staff all trades as necessary. And Worley continues to do an excellent job. The efficiency of each of the trades is at or above where we expected them to be. We're now moving away from bulk fill, by that, I mean putting in the large piping, able, etc., into completing the systems one by one. So we're at that stage now so that we can commission in the right sequence. We get power live this month, which then means we can start getting the control room up and running and testing all of the instrumentation throughout the plant. So going really well at the moment.

Also, as Richard highlighted, learning constantly during construction and also from the CEIC, we are seeing really great potential for performance improvements and cost down improvements. And we're looking at how to incorporate these learnings as quickly as possible. Companies like Technip Energies are also focused on how to achieve cost down for their equipment, and that's driven from the top of the company. So we're getting great support from our visionary vendors who have bought into long-term DAC future. So I hope that answers your question.

Yeah, no, appreciate that question. The Rockies has been a significant part of our outperformance really over the last couple of years. So a couple of things going on there. I think, continue to do well in the DJ and the Powder River basin. So as we highlighted, I think, in the slide, each of those are seeing sequential well performance improvement even in the DJ, where we've been more mature in terms of operation. And so very, very pleased with that.

From an activity standpoint, we really have done work in the early part of this year in the Powder River basin, where again, the well performance has been very good, not only against the industry, which we note, but also against our internal expectations. And so what we're planning to do there is we'll be lower activity in the second half of the year while we pause and really rework our development plans. And so similar to what we kind of laid out generally in our highlights slide, we're really looking at how do you take primary and secondary benches with the Turner and now even the Mowry and think about that longer term as we build out our infrastructure and so what we're expecting is to be in position at the end of this year to be able to put together a development plan and then have that compete with capital as we go into 2025. So I think, again, just very pleased with that, but I would call it steady activity in the DJ with a couple of rigs and then really putting a competitive case forward for Powder River basin in 2025.

Paul, thank you for the question. I'll take the first question you had. And I can tell you, we absolutely believe that the CrownRock asset, as a combined asset is -- it is one of the best we've seen. Tim -- Tim Dunn did a great job of putting together the portfolio of assets that CrownRock had, and they did a great job of developing it. And there's a lot of really good possibilities in there for continued expansion. And as you know, the inventory came in mostly in our Tier 1 inventory. So the way that worked is that we wanted to buy 100% of CrownRock. And I actually informed Ecopetrol on numerous occasions that our preference was to purchase 100% of CrownRock.

But as a part of the Rodeo JV, we had an agreement with Ecopetrol within that JV agreement that they had the right to purchase 49% of anything that we purchased within a certain area and vice versa. If they were to purchase something, we would have had the right to buy 49% of what they had purchased within a given area within the Midland Basin. So we wanted it at all, but they also wanted to be a part of it. They saw the assets. They know they were high-quality assets. They wanted to be a part of it. So since they are a valued partner to us, we've been in partnerships with them for decades, and we have a great relationship with them. So we negotiated to a 30% working interest that we felt like would -- would be fair and beneficial to both of us.

And we worked on that deal from March to just last week, and we thought we were done, but President Petro of Colombia didn't approve of it. He's made it very clear to the world that he's anti-oil and gas, anti-fracking, and anti-U.S. And with those three strikes, he pretty much dealt the Ecopetrol out of the deal. And that's all according to news reports. But certainly, we wanted it all, they wanted a part of it. Unfortunately, there are others in the world like Petro. And there are some -- actually, in the United States like Petro, who believe that oil and gas should go away and believe that we shouldn't be an industry anymore and that renewable energy will be all that's needed to go forward and to help with the climate transition.

But the reality is that, as you know, oil and gas is going to be needed for many decades to come. And so the other part of what Ecopetrol had some interest in was our strategy. And our strategy in the Midland Basin with respect to CO2 and an enhanced ore recovery. And our strategy is very important to the world in that we're going to be taking CO2 out of the atmosphere and putting it in the assets that we have in the Midland Basin, including CrownRock to get more oil out of the ground. And so they were very, very excited about that and wanted to be a part of it.

So the way that would work is that if we continued on beyond the ending of the -- potential ending of the JV, the interest would just be divided 49% for Ecopetrol, 51% for OXY. So a discontinuation of the JV would just result in a couple of scenarios. One being, if we just broke it off, didn't go forward at all with the JV, we would each just have just like a normal operating situation where it's 51% us, 49% them. Did that answer your question?

I believe that's around 40,000 barrels a day.

Yeah, that's right. Yeah. It's around 40,000.

Was it 900?

Yeah. It's been very steady. I mean, I think we gave the guidance midpoint around 950 [Phonetic], and it's been very steady with their 5 rigs. So we looked at that, and I think that's part of their success. They've been able to be very flat, which turns into a great production profile as well. So very -- you can think about it very steady.

Yeah, I just wanted to clarify on the Midland production, the 40,000, that's our net production.

We can't yet because we really haven't made decisions on what the next set of divestitures would be. We're still under evaluation of that.

Yeah. Maybe I'll answer that, kind of yes to both. I think one thing we've done is with the King Ranch sequestration hub, we continue to develop that. We're pursuing really across all of our sequestration hubs in the Gulf Coast, our stratigraphic wells that prove the subsurface storage capability. We're going through permitting for Class 6 wells. And so we've really put that sort of front-end work together to be able to accommodate both direct air capture and our point source. And that continues to go well.

King Ranch is really what we've targeted for the next kind of development beyond the Permian. And it really has a lot of scale advantages that we've talked about in the past, both with the subsurface and as we think about it, the balance of plant. So you think about key power inputs, emission-free power inputs, water or other advantages. And so that sort of engineering work, we continue to do for South Texas as it relates to the subsurface and DAC. But yes, to your first part of the question, which is we do think it's really important to see STRATOS as we continue to show this great line of sight on cost down, both in STRATOS and the construction and then as it turns into operations next year and also how we think about the carbon engineering innovation center and the R&D improvements that Ken and I talked about earlier roll in.

So we do feel like from a milestone going into next year, getting this plant online, we're able to incorporate some of these learnings already into that process as we begin ramping up that capacity next year. We think that's a really important thing to factor into that South Texas FID in addition to the continued CDR sales that I mentioned earlier. And the last thing to say, the exciting part about that King Ranch development, that's really a 30 million ton per year hub. And so you get these tremendous economies of scale that we really think add to the R&D improvements in terms of a cost down. And so that's really how we see that play out if you go back to our early sort of presentations on the development plan into the next decade. That's a big part of that ramp-up. So let me stop there, and hopefully, that answered some of the intent of your question.

It really depends on the macro because what we're doing today with this accretive acquisition to me is actually delivers better value than buying back shares. So given -- that's why we did the deal we did. But share repurchases still is a part of our value proposition and especially given the fact that our share price is so much lower than we believe where it should be. So as we get through this period and we get our debt down, back down to $15 billion, we will then resume share repurchases. And then it really depends on the macro at that point. If we are in a scenario where we can buy enough shares back to trigger the $4 per share, then we would start also buying back the preferred. That would be a part of what we do.

We can't ever rule out the -- what the situation would be if we were in a prolonged high-price environment, because I think that although the Berkshire preferred becomes available to us at a 5% rather than 10% premium starting in 2029, so that if we haven't bought it back by then, we would definitely launch a campaign at that point to buy the preferred.

That would probably happen mid- to late quarter is the last update that we've had.

The exploration, it won't be as aggressive as it's been in the past because of the fact that we've launched an evaluation using data analytics and AI. And what we want to do is give our teams the tools that we believe will help even further understand what's happening in the subsurface of the very complex deepwater prospects within the Gulf of Mexico. But the exciting thing is we have numerous other things that we can do in the Gulf of Mexico that Ken can describe.

Thanks, Vicki. I think overall, the teams are performing really well on all fronts, the base, including primary, exploration and the waterflood designs. On the base, for example, as a result of recent OBN seismic data, we moved further northwest at one of our fields and brought on a 15,000 barrel a day well, which came on in early May. From further analysis of the OBN data, we're seeing more potential in that area than others. In exploration, we're currently involved in two recent discoveries in GoM, Ocotillo and Tiberius. Ocotillo can tie back to Marlin, Tiberius to Lucius. These are like 3.5 mile to 8 mile tiebacks. Both projects are going through our process to FID at the moment, and we can discuss more after sanction.

We're continuing our waterflood project designs. We'll be capable of commencing execution next year. These have the potential to add substantial low-cost reserves in these projects. We're in our wheelhouse as a company where waterflood is one of our strengths. And operationally, we've safely completed all our major turnarounds for the year. So very positive overall in GoM as we lean into the AI pilots that Vicki highlighted earlier.

Let me just start and then Ken can provide some better detail. I just wanted to make mention, certainly see an improvement in overall capital efficiency or well cost facilities. And we wanted to highlight that in the slide, mainly because the teams have really been engaged this year upfront, improving operations, but also engaging with our service contractors to find how do we drive utilization up and how do we create the sustained kind of program. So we highlighted the 10% year-to-date on well cost, which we think is a tremendous value-add as you roll that into 2025 in addition to the opex improvements that Vicki highlighted. But let me -- let me stop there. I just want to say thank you to the teams, and turn it over to Ken.

Yeah. Same as Richard, onshore U.S., from a supply chain perspective, we see deflation continuing. Between, say, last summer and the end of this year, we see north of 10% rolling through in our drilling and completion basket. We also see OCTG significantly higher than that in terms of deflation, which also benefits all the other functions. We see continued focus by the contractors to improve efficiency and technologies of e-fleets, auto frac. They're really pushing the technology aspects and they're working with us also on utilization. And it's not only the efficiency that comes with utilization, but because of the planning that Richard's teams are doing, it releases those contractors to use that equipment in the spaces we're not so they can maximize their margins also. Having mass matters, so CrownRock will enable more value in that space in the Midland Basin. So it's definitely accretive. Hope that answers question.

I would say that we would keep the same activity level with CrownRock going into next year. They've had this, as Richard said earlier, this same activity level for quite a while. It's worked well for them. And we think with the capability of our teams working together that we'll actually be able to maybe do more with less. And so we think that's going to be a good news story. So likely no increase in activity in CrownRock.

In the Barilla Draw, part of the reason that we divested in Barilla Draw is because we weren't investing capital there because we had development going on in other areas that was taking the capital away from Barilla Draw. And so our philosophy has always been, if we have an asset that doesn't compete for capital and/or would have competed under different circumstances, but we're not going to get to it for five to 10 years, then that's why we divest of it.

I would say there's a lot of interest in STRATOS. And it's now -- I think about every conference around the world and companies around the world are all talking about STRATOS. In fact, we had a major operator -- had an international operator come and visited our site because there's a lot of interest in it. But as Richard said, first of all, we want to get it up and running. And because we believe that as we prove it up, as we make it better, that it's going to be much more valuable than what people realize today. And Richard, did you have something to add?

No, I just think that's right. I mean I think we continue to talk our ambitious plans. We think that there's a lot of scale in terms of development. You've seen some of our development plans. And so as we prove it, as we give line of sight to cost down, we're very confident that both strategic and capital partners are going to have an investable development that will be able to help us. So that is our strategy, but I mean we're doing a lot of engagement on multiple fronts, both from offtake and future capital partnership. So I appreciate that question.

I'd just like to say thank you all for your questions and have a great rest of your day.