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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