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Good afternoon, and welcome to Occidental Petroleum’s Second Quarter 2022 Earnings Conference Call.[Operator Instructions] Please note that this event is being recorded.I would now like to turn the meeting over to Jeff Alvarez, VP of Investor Relations.please continue.
Thank you, Jason.Good afternoon everyone, and thank you for joining Occidental Petroleum’s Q2 2022 conference call.On our call today are Vicki Hollub, President and CEO, Rob Peterson, Senior Vice President and Chief Financial Officer, and Richard Jackson, President, U.S. Onshore Resources and Carbon Management Operations.
This afternoon, we’ll be referring to slides from the investor section of our website.This presentation includes a cautionary statement on Slide Two regarding forward-looking statements to be made on this afternoon’s conference call.I will now turn the call over to Vicki.Vicky, please go ahead.
Thank you Jeff and good morning or afternoon everyone.We achieved a significant milestone in the second quarter as we completed our near-term debt reduction goals and initiated our share repurchase program.Earlier this year, we set a near-term goal of repaying an additional $5 billion in debt and then further increasing the amount of cash allocated to shareholder returns.The debt we closed in May brought our total debt repayments this year to over $8 billion, exceeding our goal at a faster pace than we initially expected.
With the achievement of our near-term debt reduction goals, we initiated a $3 billion share repurchase program in the second quarter and have repurchased more than $1.1 billion in stock.The additional distribution of cash to shareholders marks a meaningful progression of our cash flow priorities, as we have allocated free cash flow primarily to debt relief over the past few years.Our efforts to improve our balance sheet continue, but our deleveraging process has reached a stage where our focus is expanding to more cash flow priorities.This afternoon, I will present the next phase of the shareholder return framework and second quarter operating results.
Rob will cover our financial results as well as our updated guidance, which includes adding to our full-year guidance for OxyChem.Start with our shareholder return framework.Our ability to consistently deliver excellent operating results, coupled with our focus on improving our balance sheet, allows us to increase the amount of capital returned to shareholders.Given current commodity price expectations, we expect to repurchase a total of $3 billion in stock and reduce total debt into the mid-teens by the end of the year.
Once we complete our $3 billion share repurchase program and reduce our debt into the mid-teens, we intend to continue returning capital to shareholders in 2023 through a sustainable $40 WTI co-dividend and an aggressive share repurchase program .The progress we’ve made in lowering interest payments through debt reduction, coupled with managing the number of shares outstanding, will improve the sustainability of our dividend and allow us to increase our common dividend in due course.While we expect future dividend increases to be gradual and meaningful, we do not expect dividends to return to their previous peaks.Given our focus on returning capital to shareholders, next year we may return more than $4 per share to common shareholders over the past 12 months.
Reaching and maintaining returns to common stockholders above this threshold will require us to begin redemption of their preferred stock while returning additional cash to common stockholders.I want to clarify two things.First, reaching the $4 per share threshold is a potential outcome of our shareholder return framework, not a specific goal.Second, if we start redeeming preferred stock, it does not imply a cap on returns to common stockholders, as cash will continue to be returned to common stockholders in excess of $4 per share.
In the second quarter, we generated free cash flow of $4.2 billion before working capital, our highest quarterly free cash flow to date.Our businesses are all performing well, with our ongoing operating production of approximately 1.1 million barrels of oil equivalent per day, in line with the midpoint of our guidance, and total company capital expenditures of $972 million.OxyChem reported record earnings for the fourth consecutive quarter, with EBIT of $800 million, as the business continued to benefit from strong pricing and demand in the caustic, chlorine and PVC markets.Last quarter, we highlighted OxyChem’s Responsible Care and Facility Safety awards from the American Chemistry Council.
OxyChem’s achievements continue to be recognized.In May, the U.S. Department of Energy named OxyChem the recipient of the Best Practices Award, which recognizes companies for innovative and industry-leading achievements in energy management.OxyChem was recognized for an integrated engineering, training and development program that resulted in process changes that save energy and reduce carbon dioxide emissions by 7,000 metric tons per year.
It’s an achievement like this that makes me so proud to announce the modernization and expansion of a key plant at OxyChem, which we’ll get into in more detail later.Turn to oil and gas.I would like to congratulate the Gulf of Mexico team celebrating the first oil production from the newly discovered Horn Mountain West field.The new field was successfully connected to the Horn Hill spar using a three-and-a-half-mile twin-streamline.
The project was completed on budget and more than three months ahead of schedule.The Horn Mountain West tie-back is expected to eventually add approximately 30,000 barrels of oil per day and is a great example of how we leverage our assets and technical expertise to bring new production online in a capital efficient manner.I would also like to congratulate our Al Hosn and Oman teams.As part of a planned turnaround in the first quarter, Al Hosn achieved its most recent production record following its first full plant closure.
Oxy’s Oman team celebrated record daily production at Block 9 in northern Oman, where Oxy has been operating since 1984.Even after nearly 40 years, Block 9 is still breaking records with strong base production and new development platform performance, backed by a successful exploration program.We are also actively seizing opportunities to leverage our large inventory of assets within the United States.
When we announced our Midland Basin joint venture with EcoPetrol in 2019, I mentioned that we are excited to be working with one of our strongest and oldest strategic partners.The joint venture is an excellent partnership for both parties, with Oxy benefiting from incremental production and cash flow from the Midland Basin with minimal investment.We are fortunate to work with partners who have extensive expertise and share our long-term vision.That’s why I am equally excited to announce this morning that Oxy and EcoPetrol have agreed to strengthen our joint venture in the Midland Basin and expand our partnership to cover approximately 20,000 net acres in the Delaware Basin.
This includes 17,000 acres in Delaware, Texas, that we will use for infrastructure.In the Midland Basin, Oxy will benefit from continued development opportunities, extending capital through the first quarter of 2025 to close this agreement.In the Delaware Basin, we have the opportunity to advance prime land further in our development plans while benefiting from additional capital spreads of up to 75%.In exchange for attached capital, EcoPetrol will receive a percentage of the working interest in the joint venture assets.
Last month, we entered into a new 25-year production sharing agreement with Sonatrach in Algeria, which will consolidate Oxy’s existing licenses into a single agreement.The new Production Sharing Agreement refreshes and deepens our partnership with Sonatrach, while providing Oxy with the opportunity to increase reserves and continue to develop low-decline cash-generating assets with long-term partners.While 2022 is expected to be a record year for OxyChem, we see a unique opportunity to expand OxyChem’s future earnings and cash flow generating capabilities by investing in high-return projects.On our Q4 conference call, we mentioned the FEED study to explore the modernization of certain Gulf Coast chlor-alkali assets and diaphragm-to-membrane technology.
I am pleased to announce that our Battleground facility, located near the Houston Ship Channel in Deer Park, Texas, is one of the facilities we will be modernizing.Battleground is Oxy’s largest chlorine and caustic soda production facility with ready access to domestic and international markets.This project was implemented in part to meet customer demand for chlorine, chlorine derivatives and certain grades of caustic soda, which we can manufacture using newer technologies.It will also lead to increased capacity for both products.
The project is expected to increase cash flow by improving profit margins and increasing the number of products, while reducing the energy intensity of the products produced.The modernization and expansion project will begin in 2023 with a capital investment of up to $1.1 billion over a three-year period.During construction, existing operations are expected to continue as normal, with improvements expected in 2026.The expansion is not an expected build as we are structurally pre-contracted and internally derived to consume the increased chlorine volume and caustic volumes will be contracted when the new capacity comes online.
The Battleground project is our first large-scale investment in OxyChem since the construction and completion of the ethylene cracker 4CPe plant in 2017.This high-return project is just one of several opportunities for us to increase OxyChem’s cash flow over the next few years.We are conducting similar FEED studies on other chlor-alkali assets and plan to communicate the results upon completion.I will now turn the call over to Rob, who will brief you on our second quarter results and guidance.
Thank you, Vicky, and good afternoon.In the second quarter, our profitability remained strong and we generated record free cash flow.We announced adjusted earnings per diluted share of $3.16 and reported diluted earnings per share of $3.47, the difference between the two numbers primarily due to gains from early debt settlement and a positive market cap adjustment.We are pleased to be able to allocate cash for share repurchases in the second quarter.
To date, as of Monday, August 1, we have purchased more than 18 million shares for approximately $1.1 billion, a weighted average price of less than $60 per share.Additionally, during the quarter, approximately 3.1 million publicly traded warrants were exercised, bringing the exercise total to nearly 4.4 million, of which 11.5 million – 111.5 million were outstanding.As we said, when the warrants are issued in 2020, the cash proceeds received will be used for share repurchases to mitigate potential dilution to common stockholders.As Vicki mentioned, we are excited to strengthen and expand our relationship with EcoPetrol in the Permian Basin.
The JV Amendment closes in the second quarter with an effective date of January 1, 2022.To maximize this opportunity, we intend to add an additional rig at the end of the year to support joint venture development activities in the Delaware Basin.Additional activity is not expected to add any production until 2023, as the Delaware joint venture’s first well won’t come online until next year.Again, the JV amendment is not expected to have any meaningful impact on our capital budget for this year.
We expect the Delaware JV and the enhanced Midland JV will allow us to maintain or even reduce the Permian’s industry-leading capital intensity beyond 2023.We will provide more details when we provide 2023 production guidance.We have revised down our full-year Permian production guidance slightly in light of the 1/1/22 effective date and the transfer of related work interests to our joint venture partner in the Midland Basin.Additionally, we are reallocating some of the funds earmarked for OBO expenditures this year to our operating Permian assets.
The reallocation of capital operating activities will provide more certainty for our western deliveries in the second half of 2022 and early 2023, while also delivering superior returns given our inventory quality and cost control.Although the timing of this change has a slight impact on our production in 2022 due to the relocation of activities in the second half of the year, the benefits of developing the resources in which we operate are expected to lead to stronger financial results going forward.An updated event slide in the earnings report appendix reflects this change.The transfer of OBO capital, coupled with the transfer of working interests in the joint venture, and various near-term operability issues have resulted in a slight downward revision to our full-year Permian production guidance.
Operability impacts are primarily related to third party issues such as downstream gas processing disruptions at our EOR assets and other unplanned disruptions by third parties.In 2022, company-wide full-year production guidance remains unchanged as the Permian adjustment is fully offset by higher production in the Rockies and Gulf of Mexico.Finally, we note that our Permian production deliveries remain very strong, with our implied production guidance for the fourth quarter of 2022 increasing by approximately 100,000 BOE per day compared to the fourth quarter of 2021.We expect production to average around 1.2 million boe per day in the second half of 2022, significantly higher than the first half.
Higher production in the second half has been an expected outcome of our 2022 plan, in part due to ramp-up activity and planned turnaround in the first quarter.Company-wide production guidance for the third quarter includes continued growth in the Permian, but takes into account the possibility of tropical weather impacts in the Gulf of Mexico, coupled with third-party downtime and lower production in the Rockies as we relocate rigs to the Permian.Our capital budget for the full year remains the same.But as I mentioned on the previous call, we expect capital expenditures to be near the high end of our range of $3.9 billion to $4.3 billion.
Certain regions in which we operate, particularly the Permian region, continue to experience higher inflationary pressures than others.To support activity through 2023 and address the regional impact of inflation, we are reallocating $200 million to the Permian.We believe our company-wide capital budget is appropriately sized to execute on our 2022 plan, as additional capital in the Permian will be reallocated from other assets capable of generating higher-than-expected capital savings.We raised our full-year domestic operating expense guidance to $8.50 per barrel of oil equivalent primarily due to higher-than-expected labor and energy costs, primarily in the Permian, and continued pricing in EOR for our WTI Index CO2 purchase contracts Upward pressure business.
OxyChem continued to perform well, and we raised our full-year guidance to reflect a strong second quarter and a slightly better second half than previously expected.While longer-term fundamentals continue to hold support, we still believe market conditions are likely to weaken from current levels due to inflationary pressures, and we expect the third and fourth quarters to be strong by historical standards.Back to financial items.In September, we intend to settle a nominal interest rate swap of $275 million.
The net debt or cash outflow required to sell these swaps is approximately $100 million on the current interest rate curve.Last quarter, I mentioned that with WTI averaging $90 a barrel in 2022, we expected to pay about $600 million in US federal cash taxes.Oil prices continue to remain strong, raising the odds that WTI’s annual average price will be even higher.
If WTI averages $100 in 2022, we expect to pay about $1.2 billion in US federal cash taxes.As Vicki said, year-to-date, we paid down approximately $8.1 billion in debt, including $4.8 billion in the second quarter, exceeding our near-term goal of paying $5 billion in principal this year.We have also made meaningful progress towards our medium-term goal of reducing total teenage debt.
We began repurchasing shares in the second quarter to further advance our shareholder return framework as part of our commitment to return more cash to shareholders.We intend to continue to allocate free cash flow to share repurchases until we complete our current $3 billion program.During this period, we will continue to opportunistically view debt repayments, and we may repay debt at the same time as repurchasing stock.Once our initial share repurchase program is complete, we intend to allocate free cash flow to lower face value of teenage debt, which we believe will accelerate our return to investment grade.
When we reach this stage, we intend to reduce our incentive to allocate free cash flow by including initial projects in our cash flow priorities, primarily by reducing debt.We continue to make progress towards our goal of returning to investment grade.Fitch has signed a positive outlook on our credit rating since our last earnings call.All three major credit rating agencies rate our debt one notch below investment grade, with positive outlooks from both Moody’s and Fitch.
Over time, we intend to maintain medium-term leverage at around 1x debt/EBITDA or below $15 billion.We believe this level of leverage will suit our capital structure as we improve our return on equity while strengthening our ability to return capital to shareholders throughout the commodity cycle.I will now turn the call back to Vicki.
Hey good afternoon guys.Thanks for taking my question.So, can you talk about the various changes in the capex guidance?I know you raised the Permian count, but the total remained the same.So, what was the source of that funding?And then an early look at some of the dynamic parts of next year’s new FID for Chems, and then the structural changes to EcoPetrol?Anything you can give us in next year’s puts will help.
I’ll let Richard cover the capex changes and then I’ll follow up with the additional part of that question.
John, this is Richard.Yes, there are some moving parts when we look overland in the US.In our view, several things happened this year.
I think, first of all, from an OBO perspective, we assumed a wedge in the production plan.At the beginning of the year, it became a bit slow in terms of delivery.So we continue to take action to reallocate some of the funds into our operations, which does something.One, it secures a production wedge for us, but it also adds resources to the second half, giving us some continuity in the second half.
We like what we do.As Rob mentioned in his comment, these are very good high return projects.So it’s a good move.And then, getting some rigs and fracking cores at the beginning of the year worked really well for us to manage inflation and improve the timing of our performance as we delivered that growth in the second half of the year.
Another part, so the second step is actually reallocating from Oxy.So part of it is from LCV.We can discuss in more detail if needed.But it does — as we go into the second half of the year, we want to be close to the midpoint of low-carbon businesses.
In some of the CCUS center work that we have in place, it’s really just more certainty developing around direct air capture.So, plus, I think some of the other savings on the rest of the Oxy really contributed to that balance.So if you think about that extra 200, I’d say 50% of them are really around activity additions.So we’re a bit front-loaded in our plans for this year.
This allows us to leverage this capital and maintain continuity, especially on rigs, which will give us options as we go into 2023.Then another part is actually around inflation.We’ve seen this pressure.We’ve been able to mitigate a lot of that.
But compared to this year’s plan, we expect the outlook to increase by 7% to 10%.We’ve been able to make up for the 4% increase again in operational savings.Very pleased with this progress.But we do start to see some inflationary pressures emerge.
I would say that in terms of capital in 2023, it’s too early for us to know for sure what it will be.But EcoPetrol JV will be suitable for resource allocation and we will compete with capital in this program.
good very good.Then, switch to chemicals.If you can talk about the fundamentals of the business.After a very strong second quarter, guidance for the second half fell sharply.
So, if you could give some color on the sources of power in the second quarter and the changes you saw in the second half?
Of course, John.I would say the conditions of the vinyl and caustic soda business largely determine our overall performance.On the chemical side, they were clearly very favorable in the second quarter.When we look at both of those — both the business and the vantage point, you have a significant impact on earnings, which led to our record second quarter.
If you go into the third quarter, I would say that the extreme tension that we’ve had in the vinyl business for quite some time has become more manageable.This is actually due to improved supply and a weaker domestic market, while the caustic soda business is still very strong and continues to improve.I would say that macroeconomic conditions still show that when you look at interest rates, housing starts, GDP, they’re trading a little bit less, which is why we talked about a weak second half relative to the first half.But in terms of weather, we’re also entering a very unpredictable period of the year, the second half of the third quarter, which is sure to disrupt supply and demand.
Post time: Aug-04-2022