Occidental Petroleum Corporation (NYSE:OXY) Q1 2024 Earnings Call Transcript May 8, 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 First Quarter 2024 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, Drew. Good afternoon, everyone. And thank you for participating in Occidental’s first quarter 2024 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. I’m pleased to report on a strong start to 2024 driven by our persistent focus on operational execution. As we will detail in today’s call, our oil and gas business delivered robust production results, essentially offsetting an extended third-party outage, while our Midstream and OxyChem businesses outperformed our first quarter guidance. Today, I’ll start by discussing our first quarter performance, including highlighting our Delaware appraisal success and its contribution to Permian’s development runway. Then I’ll discuss what’s on the horizon for Oxy and how these initiatives are expected to generate significant value for our shareholders. Operational excellence is fundamental to everything we do at Oxy, and our capabilities were evident during the first quarter as our teams generated over $2.4 billion in operating cash flow before working capital.
Though the third-party outage in the Eastern Gulf of Mexico made it a challenging start to the year, our teams delivered excellent performance in all areas of our portfolio. We concluded the first quarter by approximating the midpoint of our production guidance, and we restarted production from our Gulf of Mexico platforms affected by the outage in mid-April. Taking a closer look at our production results, the first quarter benefited from strong new well performance in the Permian Basin and the Rockies, overcoming the impact of winter weather early in the year. In the Permian, we exceeded the midpoint of our production guidance due in part to better than expected secondary bench performance in the Delaware Basin. Our Delaware teams are achieving impressive performance results by applying the same proprietary subsurface workflows that have generated remarkable success in our primary benches and applying that to secondary benches.
Through utilization of fit-for-purpose well design and reservoir characterization expertise, performance in our secondary benches is nearly matching Oxy’s record-setting 2023 program average. Not only that, first-year cumulative production from Oxy’s 2023 secondary wells exceeds the Delaware industry average for all horizontal wells for the same period by more than 30%. We are driving financial returns for our shareholders by improving our ability to high-grade our near-term inventory and by extending our runway of tier one locations. Meanwhile, use of our existing infrastructure yields meaningful capital efficiencies. We expect these efficiency benefits to become more impactful as secondary benches become a more substantial part of our development program.
Our Rockies asset outperformed the high end of our first quarter production guidance, partly driven by strong new well performance in the DJ Basin, better production uptime, higher than expected outside operating volumes. And then internationally, we achieved record gross daily production in Oman North driven by new well performance and production uptime. Our teams continue to improve capital efficiency through a combination of innovative well design, exceptional execution, proactive supply chain, and management practices. In the DJ and Powder River Basins, our teams optimized casing and cementing plans, completion stage design, and profit utilization. These fit-for-purpose well design enhancements resulted in tangible first quarter well cost reductions of between $700,000 and $1 million per well, compared to the first half of last year.
We’re also starting to see cost reduction progress in the Delaware Basin. Our continuous drive for improvement not only leads to innovations that increase operational efficiencies, but in many instances, we’re also able to reduce emissions and advance progress toward our net zero goals. I’m proud of our team’s involvement in another oil and gas industry first, the deployment of a fully electric well service rig. Oxy and Axis Energy Services deployed the first of its kind rig into our Permian Basin operation. Expanding electrification is integral to Oxy’s strategy because it increases operational efficiency, generates cost savings, improves safety, and helps reduce our emissions. Our midstream business significantly outperformed the high end of our guidance for the first quarter.
Our performance was partly driven by gas marketing optimization across our portfolio where our teams captured value in regional pricing disparities. Warmer than expected weather combined with various third party midstream infrastructure maintenance resulted in disjointed prices in some regions. Midstream’s first quarter performance demonstrates how our teams realized value from these pricing abnormalities by leveraging Oxy’s rich market intelligence along with our product storage and transportation portfolio. Looking back over multiple quarters, our marketing teams have frequently demonstrated the ability to outperform with our transportation optimization capabilities playing a major role. Over the longer term, we anticipate similar marketing opportunities, but we generally exclude those opportunities from our guidance because of the difficulty in predicting event occurrence.
Not only does our midstream business provide us with flow assurance for our marketed products, it also offers great diversification during periods of commodity price volatility as we saw in early 2024. Along with being one of the top performers for the products it manufactures, OxyChem is a consistent cash flow diversifier within our business due in part to its renowned focus on operational efficiency. During the first quarter, OxyChem benefited from improved demand from our marketed products, including PVC and vinyl chloride, as well as lower ethylene costs. This performance demonstrates how our diversified asset portfolio is well positioned to deliver financial results for our shareholders throughout the commodity cycle. In prior calls, we have reiterated our drive to increase value for our investors on an absolute and per share basis through cash flow and earnings growth.
Today, I’d like to provide an update on the specific projects that we mentioned in our last quarterly call. Some aspects of the OxyChem plant enhancement projects are complete, but there is more to be done, including the battleground project where the team held a ground-breaking ceremony on April 4th to kick off the site work. Employees, contractors, community partners, city leaders, and elected officials attended in support of the project. The completion of the OxyChem projects and reductions in crude oil and transportation rates from the Permian to the Gulf Coast are expected to deliver incremental cash flow of approximately $725 million per year. In our midstream business, we expect that our ownership stake in Western Midstream, or WES, will also enhance our financial results.
In February, WES announced an increase of over 50% to their distribution. Based on the current distribution, we anticipate that WES will contribute over $240 million of additional cash flow per year to Oxy. Additionally, we intend to increase free cash flow by repaying debt as it matures. Repayment of existing debt maturities through 2026 will result in approximately $180 million of annualized incremental cash flow from interest savings that can then be applied to further strengthen our balance sheet. Overall, we expect more than $1 billion of cash flow improvements that are independent of commodity cycles. That figure does not include our oil and gas business, which is also poised for continued financial success. As most of you know, at the end of last year, we entered into an agreement to strategically enhance our Midland Basin portfolio for the acquisition of CrownRock.
The free cash flow accretion and portfolio high grading to be enabled by the CrownRock acquisition are expected to provide the potential for equity appreciation and acceleration of our shareholder return priorities. At our low carbon ventures businesses, we expect to generate cash flow detached from oil and gas, price volatility, and further strengthen Oxy’s cash flow resiliency. Construction of our first direct air capture plant, STRATOS, is advancing on schedule, and during the first quarter, we were pleased to announce a multitude of carbon dioxide removal credit agreements with customers across a variety of sectors. Throughout Oxy’s portfolio, we are focused on expanding resilient cash flow and enhancing shareholder value for decades to come.
I will now hand the call over to Sunil, who will cover our financial results and guidance.
Sunil Mathew: Thank you, Vicki. In the first quarter of 2024, we generated an adjusted profit of $0.63 per diluted share and a reported profit of $0.75 per diluted share. The difference between adjusted and reported profit was primarily driven by a litigation settlement gain related to the Andes arbitration and gains on sales included in equity income, partially offset by derivative losses. We exited the first quarter with nearly $1.3 billion of unrestricted cash. We had a negative working capital change, which is typical for the first quarter and is largely due to semi-annual interest payments on our debt, annual property tax payments, and payments under our compensation plans. During the first quarter, we delivered over $700 million of free cash flow before working capital, despite third-party outage impacts to portions of our oily, high-margin production in the Gulf of Mexico.
First quarter free cash flow was underpinned by outperformance in our onshore domestic portfolio and our midstream and OxyChem segments. Looking ahead to the second quarter, total company production is expected to increase to a range of 1.23 million to 1.27 million BOE per day, compared to the first quarter annual low of 1.17 million BOE per day. The midpoint of second quarter production guidance will be the highest quarterly production in over three years. The production increase is mainly due to U.S. onshore activity levels, the completion of annual plant maintenance at Dolphin, and the return of production in mid-April from the Gulf of Mexico outage. Our second quarter Gulf of Mexico production guidance includes third-party outage impacts in April, as well as plant maintenance in the Central Gulf of Mexico.
Though we revised fully a Gulf of Mexico production guidance down as a result of the extended outage, it is fully offset by outperformance in the Rockies, and we are maintaining our total company production guidance for the year. The modified production mix is expected to impact annual total company oil cut. We had a strong start to 2024 in our chemicals business and anticipate modest price improvements during the second quarter, combined with higher volumes as we exit the usual period of seasonal subdued demand. Though lower gas prices are unfavorable elsewhere in our portfolio, OxyChem benefits from reduced energy costs, and our midstream teams are well positioned to capitalize on the gas marketing opportunities that Vicki highlighted. Solid outperformance enabled us to raise midstream’s fully guidance range by $110 million.
Oxy’s first quarter performance demonstrates the benefits of a differentiated portfolio. Our diversified assets and distinguished operational capabilities offer our shareholders cash flow resiliency throughout the commodity cycle. In terms of capital spending, our first quarter results were in alignment with the 2024 business plan and the capital program that is weighted towards the first half of the year. On the last earnings call, we stated that approximately 40% of Rocky’s capital for the year is associated with built and uncompleted wells, or ducts, carried in from 2023. We intend to continue completing these wells and reduce duct inventory through the first half of the year. Similarly, Permian capital is weighted towards the first half of the year due to working interest variability and the desire to high-grade rigs and increase utilization rates into the second half of the year.
This U.S. onshore capital profile, combined with Battleground Project ramp-up, is expected to result in second quarter being the highest quarterly capital for the year. I would like to close today by touching on the CrownRock acquisition. Our teams are working constructively with the FTC, and we anticipate that the transaction will close in the third quarter of this year. As a reminder, Oxy will benefit from CrownRock’s activity between the transaction’s January 1, 2024 effective date and close, subject to customary purchase price adjustments. Concurrent with the CrownRock acquisition, we announced a $4.5 billion to $6 billion divestiture program to be completed within 18 months of the transaction’s close. The high-quality assets within our portfolio have garnered much interest, and our teams have commenced the early stages of the divestiture process.
Sales proceeds will be applied to deleveraging until we reduce our principal debt to $15 billion or below. The near-term cash flow enhancements that Vicki highlighted are expected to deliver significant free cash flow growth per diluted share for our common shareholders, and to enable us to accelerate the achievement of our debt target. After our debt target is met, we intend to resume our share repurchase program and provide even greater value per common share. As we have discussed on today’s call, we are well-positioned to build on a strong first quarter of 2024 and deliver a differentiated, long-term value proposition to our shareholders. I will now turn the call back over to Vicki.
Vicki Hollub: Thank you, Sunil. Before we move to Q&A, I want to tell you about a milestone our team celebrated last quarter. Oxy began trading on the New York Stock Exchange on March 3, 1964. On that day, our operations consisted of 252 oil and gas wells in six states. Today, we’re an international energy, chemicals, and carbon management company with the best portfolio in our history. But I believe that Oxy’s employees are a true differentiator. Their expertise and drive to outperform continue to stretch the limits of what is achievable in our industry. Our employees are hard at work executing our strategy through superior operations and best-in-class assets. Their efforts result in long-term shareholder value, and I look forward to showcasing more of their achievements on future calls. With that, we’ll now open the call for questions. And as a reminder, as Jordan mentioned, Richard Jackson and Ken Dillon are with us today for the Q&A session.
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