Occidental Petroleum Corp (OXY) — Q4 2018 Earnings Call Transcript

Thank you, Laura. Good morning, everyone, and thank you for participating in Occidental Petroleum's fourth quarter 2018 conference call. On the call with us today are Vicki Hollub, President and Chief Executive Officer; Cedric Burgher, Senior Vice President and Chief Financial Officer; Ken Dillon, President International Oil and Gas Operations; and BJ Hebert, President of OxyChem. In just a moment, I will turn the call over to Vicki. As a reminder, today's conference call contains certain projections and other forward-looking statements within the meaning of the federal securities laws. These statements are subject to risks and uncertainties that may cause actual results to differ materially from those expressed or implied in these statements, as more fully described in our cautionary statement regarding forward-looking statements on slide 2. Our earnings press release, the investor relations supplemental schedules, and our non-GAAP to GAAP reconciliations and the conference call presentation slides can be downloaded off of our website at www.oxy.com. I'll now turn the call over to Vicki. Vicki, please go ahead.

Thank you, Jeff, and good morning, everyone. Today I'll begin our fourth quarter results followed by our 2018 achievements, a plan for the year ahead, and an overview of the benefits of our integrated business model. The fourth quarter of 2018 wrapped up a successful year for Oxy both financially and operationally. We returned $900 million to shareholders in the quarter through a combination of dividend and share repurchases. Our continued focus on increasing returns for our shareholders was achieved due to outstanding performance from all three of our businesses in a changing market condition. Despite WTI falling below $43 a barrel in the quarter, we posted core earnings per share of $1.22 and generated the highest semiannual level of operating cash flow since 2014, making the second half of 2018 our strongest six-month period since our portfolio optimization. Permian cash operating costs were the lowest this decade, driven by the long-term high-return investments that we're making, such as in facilities and infrastructure. We operate our assets with a full lifecycle view. Our investments will continue to provide payback in the form of lower costs as our production base expands. OxyChem and our Midstream business both achieved record fourth quarter earnings as a result of our integrated business model, which enables us to take full advantage of market conditions, such as delivering higher realizations from our Permian takeaway position. In 2018, we grew cash flow to a level that exceeded both capital expenditures and our dividend, a key achievement we have been working toward since completing our portfolio optimization. Organic cash flow growth was driven by prioritizing the allocation of capital to opportunities that generate the highest full cycle returns. We are pursuing cash flow growth with two key objectives in mind: first and foremost to generate a higher return on capital; and second to return an increasing level of excess cash to shareholders. In 2018, we returned more than $3.6 billion to shareholders through our sector-leading dividend and $1.3 billion of share repurchases under our $2 billion-plus share repurchase program. We intend to complete the remainder of the share repurchase program in 2019. We remain committed to returning capital to shareholders through a balanced combination of dividends and share repurchases as we've done for a long time. Since 2002, we’ve increased our dividend each consecutive year and we've returned $33 billion to our shareholders through our dividend and share repurchases. That's about 70% of our current market capitalization. Almost 50% of this was returned in the last five years, a time period which included one of the worst downturns our industry has ever experienced. Through this downturn, we also maintained our strong balance sheet and A-level credit ratings. Our focus on investing in our high-quality assets delivered a 2018 return on capital employed of 14% and cash return on capital employed at 27%, both significantly higher than 2017 and our performance peer group. These achievements reflect our commitment to our value proposition, the strength of our integrated business model, and the high quality of our assets. We made notable productivity and efficiency gains across all three business segments in 2018. The investments that OxyChem and our Midstream business completed in recent years paid off in 2018 as both segments optimized cash flow and delivered record earnings. Our Permian business continued to outperform with Permian Resources delivering an impressive 52% production growth and Permian EOR exceeding cost reduction targets for the acquired Seminole CO2 field. Our international business generated $1.4 billion in free cash flow in 2018 and has enormous potential to grow cash flow going forward. On our last call, Ken provided details of our new international opportunities. Now we're pleased to have been awarded a new block in Abu Dhabi that Ken will describe in a few minutes. This new Abu Dhabi block along with six in Colombia and three in Oman make ten new blocks added in the last year. These new international opportunities will add significant high-return low-decline development inventory to our portfolio. At the same time, it's worth highlighting that these will require only a modest investment in the short term. One of our key competitive advantages is our ability to develop assets in a way that efficiently maximizes all production recovery and generate significant cash flow growth over the next decades. For the last three years, we've achieved all-in reserve replacement ratios exceeding 160% companywide. The 2018 reserve replacement ratio of 164% is due to the excellent technical work our teams have completed in enhancing subsurface characterization across our portfolio and building customized development plans. Our momentum has continued into 2019 as our business segments continue to invest in high-return opportunities. Last month we discussed various capital budgets through three different pricing scenarios, but we've decided to limit our full capital spend in 2019 to $4.5 billion. This represents a $500 million or a full 10% reduction from 2018. By maximizing efficiencies, we are reducing spending to adjust to a lower oil price environment. As activity is adjusted to make full year capital spending of $4.5 billion, we expect spending to be higher in the first half of the year. In creating our capital budget to realize the highest returns, Permian Resources shale production will become a larger portion of our total oil and gas production. We expect this will increase our oil and gas base decline to 20% in 2019. As we continue to invest in the Permian, we will advance our appraisal in the short cycle low decline development opportunities in our new international blocks to prepare them for growth. Our 2019 capital program is dominated by short-cycle investments, the majority of which we’ll pay back within two years at $50 WTI. We will continue to be conservative, and if necessary, within six months we can reduce capital spending to sustainable levels, meaning that Oxy remains flexible throughout the commodity cycle. We will grow oil and gas production by 9% to 11% in 2019 to replace the cash flow from Qatar in 2020, but our long-term annual growth rate forecast remains at 5% to 8% plus percent. Cash flow growth is an inherent driver in generating a high return on capital and a higher return on capital. Our 2022 roadmap details the projects we will prioritize and execute over the next few years in order to grow cash flow from operations to $9 billion in 2022. While Permian Resources will continue to be the main driver of growth through 2022, our international business will also grow in terms of both cash flow and production. In addition to having many high-return short cycle opportunities, we also continue to benefit from the stable sustainable cash flow generated by OxyChem, Midstream, and Dolphin. Even with a lower activity level and a significantly reduced capital budget for 2019, we still remain on track to achieve the low end of the 2022 cash flow range of $9 billion to $9.5 billion that we communicated in our third quarter call. As you will have noticed, based on our expectations for the WTI spread, we’ve updated our Brent price assumption for 2020 onwards, and this will have minimal impact based on our production sharing contracts. To be conservative, we modeled OxyChem and midstream cash flow at the low end of the previous range and our projection of $9 billion in cash flow by 2022 does not include significant upside from several additional projects that we're currently evaluating. We'll provide updates on these projects as we advance. This morning, Cedric will take you through our financial results and updated guidance; and Jeff will detail the continuous improvements we are creating in the Permian. Ken will then provide an update on our new opportunities in our international business. I'll now hand the call over to Cedric.

Thanks Vicki. As Vicki highlighted, we are pleased to have continued repurchasing shares, allowing us to return $900 million of cash to shareholders during the fourth quarter and over $3.6 billion in 2018 including our dividend. On slide 10, I'd like to start with our earnings which improved across all segments year-over-year. For the fourth quarter, we had core earnings of $1.22 per diluted share and reported earnings of $0.93 per diluted share. The difference between reported and core income is attributable to an impairment charge of $220 million, which was driven by lower oil prices. Earnings also included a net tax benefit of $224 million, which significantly decreased our fourth quarter effective tax rate and consisted of $100 million for additional EOR tax credits and tax credits related to U.S. export sales; $99 million for releasing a foreign withholding tax accrual; and $25 million for changes related to the 2017 Tax Reform Act. Oil and gas core income decreased in the fourth quarter compared to the prior quarter, reflecting lower oil and NGL prices as realized prices declined by 10% and 23% respectively from the third quarter. Fourth quarter oil and gas results included a non-cash mark-to-market change related to our CO2 purchase contracts as well as higher operating and DD&A expenses in Qatar as a result of the ISND contract expiration later this year. Total fourth quarter reported production of 700,000 BOEs per day was above the midpoint of our guidance due to the continued best-in-class execution and well productivity in the Permian Resources, which resulted in 250,000 BOEs per day during the quarter at the top end of the guidance range and represents an exit to exit increase of over 57%. Total international production of 290,000 BOEs per day was up slightly lower than guidance primarily due to the oil price adjustment in our production sharing contracts in Oman. The contracts utilize pricing mechanisms with a two-month delay, which resulted in a higher realized price and lower production for Oman in the fourth quarter. Fourth quarter international production was also impacted by weather and accelerated maintenance. OxyChem continues to perform strongly reporting its highest fourth quarter pre-tax income ever of $223 million, above guidance of $220 million. Earnings decreased from the third quarter primarily due to expected seasonality and end market demand for core vinyl products as well as lower realized caustic soda pricing and higher natural gas and ethylene costs. Our midstream business reported record core fourth quarter earnings of $670 million, which exceeded the high-end of our guidance due to positive mark-to-market movements and a higher-than-expected Midland to MEH differential. Compared to the prior quarter, fourth quarter earnings reflected lower marketing margins due to a decrease in the Midland to MEH differential from $16.67 to $15.31 and lower pipeline income from the sale of the Centurion Pipeline in the prior quarter. Fourth quarter revenue and cost of sales were both grossed up by $340 million due to the accounting treatment of certain Midstream contracts, where we've used our excess takeaway capacity from the Permian to purchase and resale third-party barrels. The third quarter gross-up amount was $327 million. Operating cash flow before working capital for the fourth quarter was $1.9 billion, which covered our capital expenditures of $1.3 billion and dividends of $594 million. Our total year-end capital spend came in just under our planned spend amount of $5 billion. Slide 11 details our guidance for the first quarter and full year 2019. As Vicki mentioned, we will pursue high-return reinvestment opportunities in 2019 that will be funded by a total capital budget of $4.5 billion, which will result in annual production growth of 9% to 11%. We are reducing capital spending year-over-year and due to technical and operational advances, we are still able to deliver significant cash flow growth. As we advance into 2019, our balance sheet remains strong and we have ample liquidity available to complete our share repurchase program. We ended 2018 with over $3 billion in cash and still hold PAGP units with a market value of approximately $700 million. I'll now turn the call over to Jeff.

Thank you, Cedric. 2018 was an outstanding year for our combined Permian business as we improved the value of our conventional and unconventional assets through our value-based development approach. We're able to add high-margin barrels and generate great returns on our investments. We replaced 216% of our production with new reserves through industry-leading performance and successful appraisal. Combined total year production per Permian Resources and Permian EOR grew 77,000 BOEs per day compared to 2017 and exceeded 400,000 BOEs per day in the fourth quarter. We lowered Permian operating costs 9% by utilizing advanced data analytics on our artificial lift, implementing new water recycling technology, and improving maintenance efficiency across the Permian. Permian Resources has a simple model that I love called 'leave no doubt,' which refers to our relentless pursuit of generating the best returns in the industry. In 2018, we made tremendous progress toward achieving this principle as we increased our total production 52% and exceeded our initial 2018 guidance by 12,000 BOEs per day. Our subsurface characterization improvements have driven breakthroughs at an accelerated pace. By integrating advancements in geoscience with our 12,000 square miles of 3D seismic and subsurface characterization models, we are rapidly achieving step change improvements in well design and placement. In 2018, we improved our average six-month cumulative production by 25% compared to 2017. Over the last 12 months, Oxy has delivered 40% of the top 50 horizontal wells in the basin which is the most for any operator while only drilling 5% of the total wells over the same time period. On the capital efficiency front, our operational improvement initiatives continue to drive efficiency, compressed time-to-market, and lower full cycle cost. In 2018, we increased our feet drilled per day by 19% and we drilled record 15-day 10,000-foot wells measured rig release-to-rig release in both our Mexico and Texas Delaware areas. On a base management front, our investments and operability and surveillance are transforming how we optimize our base as demonstrated by our 10% reduction in operating cost per barrel in 2018. In addition to efficiency improvements, we're also achieving major advancements in artificial lift optimization and well enhancements to lower the base decline rate. The rate of progress in Permian Resources is extraordinary and will lead us to exceed 600,000 BOEs per day for this business alone within the next five years. Our Permian EOR business also had a great year. We continued the integration of the Seminole-San Andres unit and have now lowered OpEx by $8 per BOE since we took over operations in September of 2017. We started injection on the new grassroots CO2 flood at the West Sundown unit, which started injection four months earlier than planned and will achieve a development cost of under $6 per BOE. Permian EOR continues to provide a low decline cash flow and high returns for our shareholders. We're excited about the critical role it will play in our long-term business sustainability strategy, especially as we leverage our position and expertise to reduce our carbon footprint. Slide 14 provides more detail on the 2019 capital program. Permian Resources will comprise $2.6 billion of our $4.5 billion total capital budget in 2019. We will utilize approximately 12 operated rigs and one to two non-operated rigs with development focus on our core areas. We plan to operate six to seven rigs in New Mexico which will primarily develop the high-return Bone Springs and Wolfcamp formations. We will continue development in areas proved to be highly prolific in 2018 and plan to allocate activity to the tanks area of Greater Sand Dunes in the second half of the year. The appraisal results from the tanks area have been outstanding, with the three wells online in 2018 averaging over 3,000 BOEs per day per well for 30 days. In Texas, Delaware, we'll operate five to six rigs primarily developing the Wolfcamp A and Hoban formations. The tapered well design we implemented in the second half of 2018 significantly improved the returns of our new wells and we expect to see continued improvement through 2019. Overall our capital program for 2019 will generate significant value for our shareholders and result in 30% to 35% annual production growth. We will also be advancing the commercialization of unconventional EOR development and expect to share more information on results later in the year. As you can see, 2018 was an exceptional year for our Permian businesses. We saw well productivity records, significantly lowered operating costs, and realized breakthroughs with data analytics and subsurface characterization that improves the returns from our assets. 2018 may seem like a hard year to beat, but the organization is more energized and capable than ever and I'm sure we will leave no doubt in 2019. I'll now turn the call over to Ken to discuss international.

Thank you, Jeff, and good morning, everyone. As Vicki and Cedric mentioned, our 2019 capital plan focuses on investing in projects that grow cash flow and generate the highest returns. Today we're pleased to share the details of onshore Block 3, which is a new 35-year concession in Abu Dhabi. We feel honored to expand our relationship with ADNOC in the first award of its kind onshore. With Block 3 as well as the new onshore blocks landed in Oman and Colombia, we feel we have established the clear pathway for Oxy to grow sustainable cash flow from our low-decline long-life international assets. We certainly appreciate the recognition as a partner of choice. As shown on slide 16, Block 3 covers an area of approximately 1.5 million acres, which is slightly greater than the total of our net unconventional acreage in the Permian. We have high expectations for this block given its location between the prolific oil fields of Abu Dhabi and Oman. It's also adjacent to our Al Hosn gas project. As I mentioned in the last call, our regional geological knowledge is best-in-class and it continues to develop. We utilize that experience in preparing our initial stacked pay prospect inventory for Block 3. In 2019, our capital spend in Block 3 will be modest. The initial scope of work involves participating in the state-of-the-art 3D seismic acquisition and degradation. Our plan is to initiate drilling in 2019. Expanding our footprint in the UAE in such a meaningful way, especially through the 35-year concession, has allowed us to enhance our long-term international portfolio at an attractive price of entry. Additionally, in Abu Dhabi, we continue to look at cost effective ways to debottleneck the Al Hosn Gas facilities. In Colombia, in partnership with EcoPetrol, we have signed an agreement to develop Blocks 39 and 52. These blocks are adjacent to our giant Caño Limón field and where we had successful discoveries this year. In addition, we formed into four blocks in the highly prospective Putumayo Basin where we have regional knowledge of the reservoirs. With these blocks, our net acreage in Colombia has arisen to approximately one million acres with a low cost of entry. Like your other recent awards, capital will be small in 2019. In terms of performance, our Oxy international drilling teams continue to improve performance and since 2014 save approximately $650 million for Oxy and our partners, as well as improving efficiency, cost, and time-to-market. The international safety performance was again world-class. Our international exploration programs in 2017 added 47 million BOE of resources and bettered that in 2018 by adding 94 million BOE of resources while at the same time opening up new plays. Funding costs were around $0.76 per BOE. In closing, we expect 2019 to be an exciting year for Oxy internationally as the exploration programs in new blocks for gas will continue to provide updates on significant developments. As you can see, the work we are executing closely aligns with Oxy's key technical competencies and returns focused on our true partnership. I'll now turn the call back to Vicki. Thank you.

Thank you, Ken. Before we go to Q&A, I'd like to emphasize that we believe the strongest oil and gas companies of the future will be those that have a shareholder-focused value proposition and our structure and sustainability to withstand the oil price cycles, while also maintaining a social license to operate in the world in general and operate in a low carbon world. Our value proposition will continue to deliver a growing dividend in the upper quartile or maybe best-in-class returns to our shareholders, while also growing oil and gas production 5% to 8% plus percent annually. Unlike many companies in our sector, we delivered this through one of the longest downturns our industry has faced. Our company is primarily an upstream oil and gas company with integrated midstream and chemicals business, so that adds significant value and provides important support during low oil price cycles. The diversification of our upstream oil and gas business also provides strength in periods of low oil price along with substantial upside in higher oil price cycles. This upside is made possible by our short-cycle, high-return, unconventional assets in the Permian, along with new conventional opportunities that we just picked up in Oman, Colombia, and Abu Dhabi. Our strength in the low price environment is bolstered by our very low decline enhanced oil recovery projects in the Permian, Oman, and Colombia. I'm specifically referring to our CO2 and water floods in the Permian, our water floods in northern Oman, our steam flood in Mukhaizna, which happens to be one of the largest steam floods in the world, and our new TECA steam flood in Colombia. Our production sharing contracts and our road to decline gas projects in Oman and Al Hosn also provide significant support in low oil price cycles. I believe there are no other oil companies in the oil and gas industry that have this blend of high-quality, focused oil and gas projects that provides this diversity. This is why we can continue to deliver our value proposition. Not only do we have a great blend of assets with the addition of our new blocks, we have an incredible inventory of development opportunities. Over the past few years, we've replaced our production with new reserves at a ratio of greater than 160%. With the inventory we now have, we expect to achieve that replacement ratio for the foreseeable future. This ensures the sustainability of our value proposition. With respect to our social license to operate, our commitment is to manage our business in a way that improves the quality of life for our employees, contractors, and the communities where we operate, while also minimizing the potential impacts of our operations. Our employees are the lifeblood of our company. They are the drivers of our success and as such, we are committed to their continued development and helping them address the challenges of work/life balance. Many people refer to this as human capital management, but I don't. These are our people, the Oxy family, not just capital. It's personal to us. We want their lives to be the best that they can be at home and at work. This will enable them to be engaged and ready to deliver the best possible value to our shareholders as they have done in a significant way during this downturn. And in the areas where we operate, we want to ensure that we have a positive impact and can find ways that improve the quality of life in the community. Lastly, but equally as important, is our commitment to use our unique skills and assets to lead carbon capture use in sequestration or CCUS, starting in the United States and ultimately in other parts of the world. Along with many other initiatives, CCUS is necessary to limit the impact of climate change. With our CO2 Enhanced Oil Recovery expertise and projects in the Permian, we believe we can lead the effort to capture current CO2 emissions from industrial sources to use in sequestering in our Permian reservoirs. This will benefit the climate and our shareholders. As we have previously mentioned, we now have a low carbon team whose mission is to seek opportunities to innovatively reduce our carbon footprint in ways that also improve our operations and thus are expandable and sustainable. Our comprehensive strategy addresses all the factors that make a company great and sustainable. I believe this has built us into our next-generation company that is uniquely positioned to excel in our changing world. We'll now open it up to your questions.

Yeah. Good morning. How are you? Hopefully, everybody can hear me? Yeah. I just wanted to kind of come at it from the capital discipline side. Obviously, the presentation you put out in January highlighted that you would live within cash flow given the oil price. Good to see the higher growth rate now 9% to 11% versus the 10% to 8%. But just really my question is along the lines of trying to think about how Oxy and maybe the broader E&P space fits here, with what you're trying to do versus maybe what we’re seeing out of the super majors in terms of increasing activity in the Permian, and then we haven't seen the magnitude of drop-off, I think we would have expected out of some of the private companies. So as you think about capital returns, capital discipline, but then maybe a little bit of the risk being squeezed between these other two components, how do you kind of square that circle up? And what do you see as the driver for how you want to run the company?

The driver for us is to maximize returns. And so the way we put together our development programs is, we don't try to design for peak rate production. We really try to design all of our development programs and our comprehensive development of the Permian with the synergies between EOR and resources. We try to design that in a way that creates the highest difference in value. And I can tell you, we're not trying to outpace the majors. We're trying to outperform the majors. And I think that we're clearly doing that in the Permian at this time. I think it's – from the standpoint of our programs versus theirs. We're doing a lot more with the rigs that we employed today than many other companies are with almost double the rigs that we have. And our focus is more on making sure that every dollar we invest creates more value. And so we're trying to really work the side of maximizing recovery from the reservoir and minimizing our cost. So it's not a race for us to outpace them. And we have teams that have built our infrastructure and our position and our relationship in a way that grows as they will; they will not impact our operations. We believe we are perfectly positioned to be able to do the things we need to do. We have the takeaway capacity, we have the export capacity, we have the infrastructure within the Permian. So, we're positioned there, and I think in a catch-up mode at this point.

Okay. Thanks. And then Jeff just the part you mentioned about data analytics, I understand it's helping. Is there any quantification that you can offer on that front? Or either what's been captured to-date or what you would expect going forward?

Yes, the real measurement comes from evaluating performance enhancements and the eventual impact on capital efficiency. When we examine our well performance and development outcomes, a significant part of that is driven by our use of data analytics. I would highlight that our development success is not heavily reliant on trial and error. Instead, it stems from our capacity to thoroughly understand the reservoir from a subsurface perspective, effectively utilize the vast amounts of data available to us, and devise an optimal development strategy that yields strong results from the outset, rather than approaching it with a trial and error mentality that leads to underutilized capital. While it may seem disproportionate to highlight our use of artificial lift due to the significant advancements we've made, data analytics is being incorporated into nearly every facet of the business, with subsurface characterization being the most discussed area due to its substantial impact. However, its application is widespread throughout the business, and there are numerous instances illustrating the value it's generating.

Great. Thanks. And it's okay from our perspective if you want to be unfair when we're thinking about other stocks.

Thanks, Roger.

Thank you. Good afternoon, everyone. My first question, Vicki, is about capital discipline. You have set the budget this year at $4.5 billion to allow for returning any cash generated above $50 a barrel to shareholders. Looking beyond this year, you plan to increase CapEx, which means you would be spending cash above $50 a barrel to meet your 5% to 8% production growth target. To what degree would you consider maintaining the current approach of capping spending to return cash above $50 per barrel to shareholders? I understand this might place your growth at the lower end of your target, but you can still achieve double-digit growth in Permian Resources. Is there a possibility that you may continue this approach beyond this year to return any excess cash above $50 per barrel to shareholders?

Our assumption for 2020 was based on our belief that oil prices will be $60 in 2020. And if that's the case, with a budget of 5 to 5.3, we would still be able to return cash to shareholders. And we want to continue to, at some point, grow our dividend more meaningfully and Cedric will talk about that a little later, but our 5 to 5.3 capital budget would allow for us above a $60 environment to return cash, and that's something that we've always done as I mentioned in my script and something that we'll continue to do. We think of balance to return of cash to shareholders through repurchases and strong dividend with the right balance between those is important to continue.

Sure, I appreciate that. So, my second question is for Cedric. Cedric last quarter you mentioned that M&A was part of Oxy's DNA and so at this stage, do you see the A&D environment more conducive to opportunities for Oxy out there or have you grown more optimistic with regard to potential acquisitions or adding to your portfolio in the Permian?

We have definitely noticed an increase in M&A activity. From OXY's standpoint, we stay well-informed and explore numerous opportunities. It's uncommon for us not to receive communications about new market opportunities. However, when we evaluate our organic growth prospects, they are strong globally and across all sectors. Therefore, pursuing a deal is not a necessity for us unless it provides significant value to our shareholders. Over time, we anticipate being a consolidator, which aligns with our position as a low-cost producer. We believe we are among the lowest cost producers in the regions where we operate. While we foresee potential consolidation opportunities, any deal must be compelling for both us and our shareholders.

Is there an advanced catalyst that sort of sparks an increase in consolidation not necessarily for OXY, but across the Permian at some point?

It's difficult for me to forecast. There are certainly many assets and small private companies that lack the scale or technology to achieve low-cost producer status. At some point, these may come to market at more reasonable prices. While a few have emerged, predicting these events is challenging. We are prepared for when that occurs. Additionally, other operators are trying to achieve the breakthroughs we have, and this situation is still to be determined. It's hard to predict.

Hey Bob, this is Jeff. I mean, the only thing I'd add to what Cedric said, if you look at the Permian history, it's consolidated when the business got really hard, prices drop, margins get squeezed and then consolidation generally happens. I think when you look across though in conventional space, you all know better than anyone, the business continues to get harder not easier as people move to full section development, having to operate with lower operating costs, manage infrastructure, large KOLs all those things. So, we're definitely progressing to where you're starting to see differentiation between those that are good operators and those that are maybe aren't as good.

No, I agree. OXY is positioned very well in that type of environment. So, I appreciate your comments. Thank you very much.

Good afternoon. Just a couple of points of clarification on your presentation, if I could, on slide 4 you stated that you drilled less than 5% of the horizontal wells in the Permian, but have 40% of the top 50 well results. Could you expand on that a little bit in terms of what you're comparing and how you're comparing that? Thank you.

Sure Paul. I'll take that. Basically if you go to anyone who has the deck opened slide 31 shows that. So there's lots of ways to measure performance. Specific measure that we use is the cleanest as to where we look at over the last year top 50 wells from an IP standpoint, where are they? Who has them? And then you can see on the left, we've got 20 of the top 50 over the last year. We've showed this for several quarters, so you can see it moves around and how it progresses. And 40% of those were the top operators when you look at the data. Another thing we add to it, on the right, which is something we often talk about is we are able to do it with less proppant. And the reason we highlight that is twofold; one, it’s a big cost driver. Obviously you all know that; the more proppant in pump, the more cost. But two, it really indicates how we customize our development. You can see we don’t have a universal number where we use 2,000 pounds per foot on every well, we vary it. And that’s a function of our development strategy and our understanding of the subsurface to get really, really good wells in a customizable way. The other thing I'd point you to, Paul, one thing we put in there, because the question we keep getting asked all the time is, are results continuing to improve? And it seems like every time we show a comparison of results, they are normalized by something, or you cherry pick which wells you use, you exclude this, you include this. So we include a slide in this deck that I'll point out slide 28. So what this slide is, it shows our six-month performance for every horizontal well. We didn't cherry pick which wells that go in there, all appraisal wells, all development wells, all of our wells are in every year that you can see for 2015, 2016, 2017, and 2018, across Midland Basin, New Mexico, Texas, Delaware, and it answers the fundamental question of are we able to continue to improve? And you can look at each year and there's reasons that vary on why we're improving. Some years, it may be more of the lateral length, some years it may be better completions. Every year is being driven by a better understanding of the subsurface. And so, there's lots of things driving it. But the fundamental question of are we continuing to improve, I think, is answered with this slide. And what makes it even more impressive is, when you dig into the details and you look at 2018, that's with 90-plus percent of wells that have an offset so characterized as children wells. So the big debate on our children wells, versus some parent wells, we can have that discussion. But fundamentally, you can look at for many different reasons; we continue to get better well performance every year.

Thanks, Jeff. And follow-up along the lines of clarification on slide 7. You talk about unconventional EOR commercial success in 2019. Could you talk more about that? I'm not sure what you mean there? Thank you.

We have in the past, done four CO2 injection pilots in the Midland Basin to test the efficiency and the commerciality of CO2 flooding the shale. And that's in the Midland. And what we're looking at in the Southeast New Mexico area is more of an enhanced oil recovery using hydrocarbon gas injections, which would do two things for us. First, it would help us to maintain pressure. Secondly, it would become also somewhat miscible with the oil and would make it the same as CO2 does, make it less reluctant to flow, lower the friction, and improve the ability to flow the oil from where it is to be produced to help in performing a full string. What we intend to do in Southeast New Mexico would be a continuous injection that would be full stream. So we're going to test that. We believe based on our models that it'll work and part of the objective there is to try to lower the decline of the Resources business, and we believe that we'll successfully do that over time.

Understood Vicki. Thank you.

Thank you.

Looking ahead, as we consider the normalization of capital expenditures, we see a range of $5 billion to $5.3 billion beyond 2019. Is the additional capital investment primarily driven by increased activity in the Permian Basin, or is it more from a revival of operations in international areas?

It will be both. The additional capital in 2020 will be allocated between our resources and international areas, with part directed towards growth sectors. We expect to see ongoing growth from our established international areas through exploration and other initiatives we're pursuing. However, we will also see progress in new areas as we finish our appraisal programs. Most of the growth capital will still be focused on resources in 2020, but we will increase the allocation to these new areas.

And maybe on that as well, I mean, you referenced some of the base case kind of assumes $60 crude in 2020. If you were to be at $50 again in 2020, would you see a similar type of program that we see here in 2019, where you continue to kind of smear out the international investment and run a moderated program in onshore?

It will be dependent really on where we are with respect to our cash flow. Our commitment is to stay, keep our capital programs within cash flow going forward. So if we're in a $50 environment, with what we're seeing from efficiency improvements and are increasing production in 2020, I wouldn't say that we would be at the 4.5; it would depend on how our costs are looking now and everything else, but we would stay within cash flow.

Maybe an unrelated question, I appreciate some of the details you provided on water sourcing. Can you talk through how you see potential risk of increasing cost from water disposal going forward particularly in the Delaware Basin? And how you set up to handle water disposal over the long term?

So one thing – this is Jeff. So, one thing given our full cycle value focus, water infrastructure is really, really important in all of our development areas from the very beginning. So if you go look at New Mexico and how much we're recycling up there, the size of our water infrastructure in Texas, Delaware. I mean, we see not only a risk to the business if you don't manage it properly, but definitely a significant economic risk if you can't do it well. So one of the things we do from the very beginning of when we go to a development area is ensure we have water infrastructure in place to collect the water, recycle it where we can as much as we can, and then have numerous disposal outlets for when we're done for whatever water is left over. So I'd say, in all of our development areas, we're very well-positioned. And where there are some areas that have different risks than others, some may be cost and just availability, some may be permitting related to seismicity or whatever it is, we've identified and mitigated those risks in all of our development areas.

Great. And thanks, Jeff.

Thank you. Good morning. A couple questions with regards to the longer-term outlook here. In the years to come, how do you see your skill in the Permian impacting global unit operating and G&A cost? Do you see these costs falling flat or rising on a per BOE basis? And then what base case into that 2022 cash flow plan? And then if I might add to that separately and you talked a little bit about this earlier what gives you confidence to base case production in Oman in the UAE even if it's three to four years out at the key milestones that we should be focused on between now and then?

Firstly, regarding general and administrative costs, we expect the G&A on a per BOE basis to decrease over time, which is reflected in our 2022 plan. Additionally, the milestones are outlined on slide 7, providing a roadmap for how we plan to achieve our goals, including information about the international blocks and the non-conventional enhanced oil recovery timelines. This roadmap will allow you to track our progress. In terms of performance, it will rely on analogs. Ken recently highlighted that among the four neighboring countries, we are likely the only company that has operated in all of them, allowing us to draw from our extensive experience in this area. This expertise helps us create analogs to better forecast our expectations. I’ll now turn it over to Ken to elaborate further on the roadmap.

Thanks Vicki. If we start with Oman in the north, the game plan is to further define the hydrocarbons in Block 30 and 51 in order that we can optimize the regional development by potentially using their existing Block 62 as a hub for facilities. On a previous call, I was asked if we spread the well in Block 30 before the end of last year. We did. It's an on-trend discovery and in fact, we found a new zone that we were not expecting. We plan to drill a follow-on well this quarter on Block 51; we’re reprocessing the existing seismic lines and plan to be drill ready by Q3 this year, which leads to look at the hub concept for Block 62. We think hub and spoke is the best and most efficient way to develop this area. In Block 72, we started shooting seismic and we hope to have usable data by Q2 2020, but we may use some fast-track data for early drilling. Again, our oil targets there are similar to those we've seen in our existing Block 53 hub, again hub and spoke concept to maximize efficiencies. In Abu Dhabi, we were delighted to land Block 3. The block is 90 miles long and 30 miles wide and very few wells have been drilled there since the 1970s. It's in a great location, not only because of proximity to super giant fields, but also because of infrastructure for success where we can hook up the flow lines very quickly and get that oil to export very quickly. I mentioned earlier we’ll spud a well this year. We've already mapped 162 prospects into 11 stacked reservoirs as targets and within these based on the new 3D seismic, which we think is some of the most cost efficient seismic ever obtained by anyone in the industry. So overall we try to detail the milestones for Oman in Abu Dhabi and Colombia we're ramping up TECA, we'll drill 30 wells this year in TECA and will stream online to them this year, replacing all of the long lead items for TECA, which will enable the ramp up that continues through 2020 and 2021. And as Vicki said, we're continuing to explore in our core existing assets also. So we've tried to make the roadmap something that we can update you on periodically as we get good results and I hope that answers your question.

Great. Thank you, yeah. So my follow-up goes back to the Permian. And you highlighted some of the areas of efficiency and productivity gains in your comments and so far in the Q&A. I think if you look across the landscape even among larger and more scaled Permian companies for a company of your Permian Resources production base, you're planning to grow production at a rate that other E&Ps kind of spend more in capital to achieve than what you're projecting. Can you just talk to what you see as the risk around the Permian capital and production plan this year? And to what degree Aventine hub is going to be a driver of further capital efficiency or whether that's already essentially been reflected in recent CapEx results?

Yes, Brian, this is Jeff. I'll address your question. We feel very positive about the areas we're focusing on for development as they are core areas where we have substantial expertise. While there is some appraisal work involved, it’s relatively minor. Last year, we drilled numerous development wells rather than just single well projects, which aligns with our current strategy. We are confident in our technical abilities regarding well performance, which we consider to be very low risk. The primary concern we have is the increasing productivity and quicker time-to-market we're experiencing, leading to the challenge of managing the pace of our operations as it accelerates. From a cost perspective, Aventine is operational, and we've achieved two-thirds of the expected benefits. Our team is already in place, as we proactively gathered the necessary resources ahead of the increased activity. I believe our program is well de-risked concerning execution, costs, and performance for this year, especially given the current pace. Operating 12 rigs is manageable for us, particularly when compared to previous years when we operated 40 rigs, and we are confident in our ability to handle this both operationally and technically.

Great. Thank you.

Thank you, good morning everyone. Cedric I wonder if I could just get some clarification from you on slide 21. And I guess I'm also comparing it to the slide you put up specific to 2019 capital back and I think there's a confidence at the beginning of the year. So, what I'm really trying to understand here is $50 WTI post-2019, you're capping your spending is that the way to think about this and above that is going back to shareholders?

Hi Doug, that's a good question, and I appreciate the clarification. We didn't mean to suggest that our plans are exact in terms of moving from one penny to the next, but it represents how we approach things. Two years ago, we introduced our breakeven plan, which enables us to maintain a leading dividend and keep our production steady at $40 oil. What we've achieved today, two years later, is impressive, exceeding those earlier expectations in various areas. We're improving on costs, as Jeff mentioned, and on the productivity of our wells. Lowering our breakevens is key to increasing our dividend more significantly. Although we've raised our dividend for 16 consecutive years, the increases have been modest since the downturn. We aim to return to more aggressive growth rates, and reducing our breakevens while generating more cash flow is essential for that. Above $40, our focus is on reinvesting first, aiming for a long-term growth rate of 5% to 8%, with continued modest dividend growth. Once we reach above $50, we will consider both improving our balance sheet and share buybacks, which we've already begun. While I can't provide an exact number like $50.01 for when we'll initiate share buybacks or a dividend increase, this is our strategy as we anticipate a $60 environment for 2020, which we believe offers a reasonable balance for supply and demand in the industry. At that point, we plan to return more capital, and we don't foresee needing to grow beyond that 5% to 8% long-term target.

I understand. I appreciate the clarification, because I just wasn't – I think there was an earlier question it sounded like it was different but that's very clear. Just to talk on that very quickly the $50 WTI I assume you're still using a $10 differential for Brent?

Yes.

Okay. My follow-up then is also related to the dividend. So I know you guys talked to this many times in the past, but if you're at $9 billion let's assume in a couple of years’ time or let's assume oil maybe is a little bit more generous in between times. Is your first priority to reduce the dividend burden by buying back stock because on a per share basis you still get the growth of your buyback the stock? So how should we think about absolute dividend growth versus per share growth through share buybacks? I'll leave it there. Thanks.

Great question. I mean, we see dividends and share buybacks as complementary. I will say our first priority is always the dividend. We prove that in the downturn. We're one of the few high-dividend paying companies that didn't cut the dividend. There's a long trail of bodies of companies that did. We're very proud of our track record in a very tough time. So our priority is and always will be the dividend. We want to – we will continue to grow it. That's our intent and we certainly want to grow it at even more meaningful rates as we're able to. Can't forecast when that will be, but as we think about higher prices, that's certainly like I said earlier when we start to think about buybacks and it's complementary as you stated, because it does reduce the share count which enables us to afford dividend growth more easily. So but certainly that $9 billion that we're forecasting in 2020 should we have a $60 environment? If you back out the midpoint of the CapEx range at that time of $5.1 billion, that leaves you $3.9 billion of free cash flow. That compares to our current dividend of about $2.4 billion. So that's more than a 50% cushion on that dividend, if you will that would allow you in a $60 environment to both grow the dividend and do buyback. So I think we would be in a very good position that even a modest improvement in oil prices over that time to be in a really good position to deliver a return a lot more capital and we would do it in both dividends and buybacks, which again I think – we think of as complementary.

I appreciate the full answers. Thanks Cedric.

Yes. Hi. Good afternoon. Thanks for squeezing me in here, just starting I guess with Midstream. Could you help maybe bridge the 4Q actual results to the 1Q guidance? I know, maybe there were some items on both sides here but it just seems a little bit bigger than the normal sensitivity, I would suggest the differentials. And then if you have an outlook on the full year for the midstream business whether it's on differentials or the pretax income, if you could share that?

Yeah. Part of what's happening in Q1 is a Dolphin turnaround. So that's part of the difference between Q4 and the Midstream and the differential impact and Dolphin. We have some other just general marketing things that will have an impact in Q1 that we can detail out after Q1.

Okay.

With respect to the full year, it's kind of hard to forecast the full year at this point because of the differentials and what the volatility there might be. So we’ll see how things go over the next few months or so.

Hey, Phil this is Jeff and just to add to what Vicki said. I mean one thing that we wanted to update people on is to remember when the differential collapses, you see that in midstream from a negative standpoint. But the upstream now, given our oil production in the Permian, we’ll realize more than 50% of what you lose on the midstream side. So good way to think about that. We gave that sensitivity so, as that differential collapses just for everyone to remember that more than half of the benefit will be recognized in oil and gas.

Sure. And is there a caustic price assumption that will be behind that chemicals guidance? I know that maybe early part of the year seems to be a little tougher than the back half, I'm just trying to calibrate that?

Yes Phil, this is BJ. For caustic, and obviously, we saw price erosion towards the end of 2018. Our assumption in 2019 is we're going to see some price pickup but not to the level of the erosion that we saw towards the end of the year. So we're taking a conservative approach looking forward. But we feel really good about supply and demand fundamentals long term in the caustic market. So I think it's conservative but we still felt really good about the forward years.

Just to add one thing on. As we've certainly made a few adjustments to the 2022 cash flow outlook because we wanted to keep it current and that was one of the items that we were more conservative on caustic prices as well as sulfur which affects the midstream business. The combined effect of that is a deduct of about $150 million versus what we showed in 2022 versus what we showed you in the third quarter. We also had a deduct of $250 million related to the lower production associated with a lower capital spend in 2019 and the less of a ramp in 2020. So that caused some confusion also last night, we didn't intend for that. We thought we’ve laid it out, but just to clarify. So that's $400 million combined which more than offset the $150 million pick up we have from the $5 increase in the Brent price differential versus last quarter. So just trying to bring it kind of current with current thinking, so it's not stale, but that's where we kind of move from the midpoint of the $9.25 billion last quarter to the $9.0 billion this quarter.

That's really helpful. Thanks Cedric. Last question for Vicki, you just made a comment in your prepared remarks about 20% base decline rate and that it was higher than in the past. So I just wanted to understand that comment a little bit more, what would you have said it was in the past? And I guess just because Permian's only one-third of the production at this point, so it's a little bit high to me, but just any additional detail behind that would be helpful? Thank you.

In the past, our decline rate was slightly below 10%. The increase in the Permian will bring us to about 20% by the end of this year. It's important to note that our chemicals business remains strong in this environment, and the overall cash flow decline is only around 15%. Therefore, while the 20% decline in the oil and gas business may seem significant, it is not concerning, especially as we develop our international assets, which will help mitigate that decline.

Okay. Thank you.