Occidental Petroleum Corp (OXY) — Q3 2023 Earnings Call Transcript

Thank you, Anthony. Good afternoon, everyone, and thank you for participating in Occidental's Third Quarter 2023 Conference Call. On the call with us today are Vicki Hollub, President and Chief Executive Officer; Richard Jackson, President, Operations, U.S. Onshore Resources and Carbon Management; Rob Peterson, Executive Vice President, Essential Chemistry; Ken Dillon, Senior Vice President and President, International Oil and Gas Operations; and Mike Avery, President and General Manager of 1PointFive. This afternoon, we will refer to slides available in the Investors section of our website. The presentation includes a cautionary statement on Slide 2 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 to our earnings release and on our website. I'll now turn the call over to Vicki. Vicki, please go ahead.

Thank you, Neil, and good afternoon, everyone. The team and I would like to discuss two key topics today. First, how our portfolio of assets managed by excellent teams once again drove record performance this quarter, which flowed to the bottom line. And second, as we promised an update on 1PointFive and Direct Air Capture, which we expect to play an increasingly important role in our portfolio over time. One important note before we begin, Rob Peterson, Executive VP of Essential Chemistry will cover our financial results and guidance today. Senior VP and Chief Financial Officer, Sunil Matthew, is unfortunately attending to a family emergency. We send our thoughts and prayers to Sunil and his family. I'll begin by reviewing our third quarter performance. Our teams again performed exceptionally well with our assets this quarter and delivered the strongest earnings and cash flow from operations that we've had to date this year. This positioned us to further advance our shareholder return framework and established a strong trajectory for the fourth quarter. Let's follow the molecules from producing oil and gas to moving and marketing it to where it is most valued to our African team making the products that the world needs to improve lives. And finally, returning the molecules back underground as we capture emissions and sequester them forever. First, let's review the exceptional results in oil and gas. Strong third quarter operational performance in oil and gas production exceeded the midpoint of our guidance by 34,000 BOE per day, enabling us to increase full year production guidance by 11,000 BOE per day. Our third production guidance increased this year. Production outperformance was driven by strong new well performance in the DJ and Delaware basins as well as higher uptime due to favorable operating conditions in the Gulf of Mexico. In the Permian and Rockies, our high-quality inventory, combined with our team's subsurface expertise, continue to drive record cumulative well performance improvements. This exceptional well performance and our activity plans for the remainder of the year drove our full year production guidance increase. In the third quarter, our Delaware operations team set a record with a continuous pumping time of over 88 hours, doubling the previous audacious record in the second quarter. Our teams are hyper-focused and diligent. Their advancements are continuing to drive high performance. Additionally, during the third quarter in the DJ Basin, we began deploying a new and innovative natural gas hybrid frac pump with Liberty Energy. We believe that deploying this forward-looking technology, which is an e-frac alternative will reduce completion costs over time as well as emissions. Our midstream business performed better than expected due to the timing of cargo sales amidst rising commodity prices. And finally, to OxyChem, which exceeded earnings guidance for the quarter, largely due to improved PVC and caustic soda export demand. I can't say it enough, OxyChem provides so much synergy and cash flow generation to our portfolio. And as you'll hear, plays a large role in our Direct Air Capture story. During the third quarter, we repurchased $600 million of common shares and have now completed 60% of our $3 billion share repurchase program. Share repurchases and our dividend enabled additional redemptions of the preferred equity. We have now redeemed over 15% of the preferred equity outstanding. Now I'd like to turn to the second big topic for our call, an update on the progress that our subsidiary, 1PointFive is experiencing with Direct Air Capture or DAC. The DAC technology we are using leverages the skills and expertise of our chemicals business and our enhanced ore recovery business. Our team's achievements in DAC will drive benefits to Oxy in three ways. First, we will advance DAC for commercial use. Second, it will increase Oxy's low resilience and generate solid returns to our shareholders over the long term. And third, it will broaden our pathway to carbon neutrality and help others to achieve the same. Some of the team's recent achievements include the agreement we announced last night with BlackRock as a partner in our first stack plant, STRATOS. This is a huge signal to the marketplace that we are attracting capital as well as customers to this exciting technology. We are very happy to have BlackRock as our partner. Our team also reached a memorandum of understanding with our long-standing partner ADNOC to explore opportunities with DAC and carbon dioxide sequestration hubs in the U.S. and the UAE. And in just eight weeks, we announced our first initiative together, a preliminary engineering study with ADNOC for a magneto scale DAC facility in the UAE. And shortly after the second quarter earnings call, the U.S. Department of Energy announced that it has selected 1PointFive to receive a grant for development of our South Texas DAC Hub. And just this morning, Oxy Oman announced an agreement with OQ Gas Networks, the sole transporter of natural gas in Oman to jointly study potential carbon capture utilization and sequestration projects in the ultimate. I'll now turn the call over to Richard who will delve deeper into the momentum and progression of the carbon dioxide removal market and our DAC development plans.

Thank you, Vicki. Today, I'm glad to provide a business update focused on Direct Air Capture and the carbon dioxide removal credit market. I also want to reiterate Vicki's comments on how thankful we are to welcome BlackRock as our initial investment partner for STRATOS, our first DAC facility. This is the most recent milestone in our DAC development strategy and is aligned with our execution approach, which we will discuss today. Across Oxy, we are determined to solve challenges to both improve our business and provide essential resources for the world. Our low carbon business is an expansion of that strategy, and it's positioned to be a key value differentiator for Oxy in emerging markets. I will begin by highlighting several of our key DAC-related accomplishments. As we advanced our low carbon business strategy, Direct Air Capture was recognized as both a necessary and valuable technology. Removing CO2 from the atmosphere provides a required solution for businesses across hard-to-abate emission sectors. Near term, we believe our DAC technology can provide carbon dioxide removal credits or CDRs at a lower cost and at larger scale than other product solutions, especially for businesses in the heavy-duty transportation sector that are working to hit decarbonization targets this decade. Longer term, cost-effective access to atmospheric CO2 to create innovative new fuels or other products can provide a pathway to lower carbon materials and commodities for many industries. From strategy to development, our team has been forward-thinking and deliberate with a road map to advance technology, partnerships, and markets. We continue to view technology to commercial product with the lens of capability, scale, and systems thinking. In the case of DAC, we believe carbon engineering created a unique and innovative large-scale carbon removal process that has a strong fit to our OxyChem capabilities. This process uses equipment and materials that are ready to deploy at scale. Additionally, capturing large volumes of cost-effective CO2 improves Oxy's larger integrated oil and gas, CCUS, and low-carbon businesses for today and tomorrow. Early team work with carbon engineering led to a more advanced innovation center at CE and U.S. development partnership with an exclusive license for Oxy. The formation of 1PointFive followed to allow more partnerships focused on market development for CDRs. Carbon removals reached critical momentum, both their early voluntary market leaders like Airbus purchasing CDRs and through new policy support measures like the U.S. Infrastructure Investment and Jobs Act, strategic catalysts for early commercial development for technologies, including DAC. This progress was recognized worldwide and enabled new global development and CDR demand scenarios for 1PointFive to begin to take shape. Meanwhile, measurable project progress was being made with CE process innovations, the groundbreaking for STRATOS, our DAC 1 plant, and with key zero-emission power and emissions measurement actions to support a durable and well-defined CDR product. Our DAC development took another step forward through the partnership with the King Ranch that enables a 30 megaton hub in South Texas, both to improve future DAC costs and to provide a more certain supply of CDRs for increasing demand. In 2022, the U.S. Department of Energy announced a $3.5 billion regional Direct Air Capture hubs program. In August of this year, we were notified that 1PointFive was selected by the DOE for a program grant to develop our second DAC in the South Texas Hub. This follows strong policy momentum over the last several years for CCUS through U.S. 45Q tax credit enhancements, including specific recognition for the role of carbon removals in the recent Inflation Reduction Act. Recently, we've seen major project momentum with ADNOC support for the UAE DAC development and especially BlackRock's key investment in STRATOS, which bolsters our ability both to build and capitalize our plans. Further support comes from recent CDR purchase agreements with ANA, a key aviation partner with Amazon, which purchased 250,000 metric tons of carbon removals and with TD Bank Group with one of the largest purchases of CDRs by a financial institution. These further showcase the growing appreciation for the necessity of CDRs from leaders in core industry sectors and the need to scale them in the near term. Finally, the acquisition of carbon engineering comes at a time where the need to accelerate DAC innovation is critical. We were excited to fully support CE as they advance DAC technology while also rapidly integrating the next generation of innovations into our DAC plant builds. This helps make sure we maximize value across our partnerships and supports our ability to meet this growing CDR demand. Our DAC strategy has been visionary and deliberate, aligning investment with advancements with technology, partnerships, policy, and CDR markets. This approach has enabled Oxy to deploy capital responsibly while establishing leadership in this critical technology and growing CDR market. Our accomplishments to date have positioned us as a DAC technology and market leader. The next phase of our DAC strategy is focused on growth through accelerating cost reduction and expanding partnerships. With full ownership of carbon engineering technology now in-house, we expect to supplement and support the highly talented carbon engineering team to accelerate the innovations that ultimately reduce the cost to capture years earlier than initially anticipated. By pairing the strengths of carbon engineering, Oxy major projects, and OxyChem, we will continue to reduce the cost for the life of the plant. Early innovations that could reduce the cost of DAC include improvements to air contactor geometry, where we believe we can materially reduce the number of air contactors per facility. We are also designing air contactor fan motors that consume less power. Additionally, our teams are leveraging OxyChem's electrochemical and chlor-alkali expertise to evaluate advanced sorbents and improvements to chemical reaction rates that could increase DAC efficiency. Oxy has a proven track record of innovation, improving operational efficiencies, and large-scale project development. The application of these core competencies will be key in the successful deployment of large-scale DAC. Both the CDR demand and global development opportunities continue to increase. By accelerating the cost reduction of DAC, we aim to provide a low-cost, large-scale supply of CDRs that we believe will provide a cost-effective solution to help businesses achieve their climate targets and improve the value proposition for DAC developers. We believe that DAC-generated CDRs will play a significant role in corporate emissions reduction strategies and specifically for several hard-to-abate sectors like aviation and marine, and markets like low carbon fuels. Future regulatory and compliance frameworks that cap emissions growth are driving companies in certain sectors to purchase measurable and durable CDR credits like DAC CDRs. As we reduce the cost of DAC, we expect companies will increase the share of DAC CDRs in their portfolio of solutions. We have included three market demand scenarios in our earnings presentation to illustrate how the DAC CDR market may grow rapidly through the end of this decade as the cost of capture is reduced. Reducing costs will enable us to offer CDRs to an expanding market at lower price points. In a scenario where the cost of capture remains at $450 per ton, we still expect the market for DAC-generated CDRs to be significantly undersupplied. Demand for CDR credits from the aviation industry is expected to reach an inflection point in 2027 when the International Civil Aviation Organization begins requiring airlines to reduce or offset their annual emissions through the carbon offsetting and reduction scheme for international aviation, also known as CORSIA. Operational improvements by airlines present limited opportunities for emissions reductions. We expect that emissions reductions from sustainable aviation fuel, or SAF, will also be constrained as SAF demand is anticipated to exceed supply once CORSIA and other SAF mandates come into effect. While we recognize the importance of SAF in aviation's pathway to decarbonization, SAF remains a partial solution that is currently unable to reduce emissions to true net zero. Already DAC CDRs can be priced lower than SAF while also having the ability to scale, meet demand, and deliver a true net zero solution. We expect DAC CDRs will be an essential cost-effective solution for several industries to achieve their targets within these compliance markets. The pace at which we will develop DAC facilities will be driven by market demand and our ability to reduce cost. If the CDR market develops slower than expected, we will have the flexibility to refocus our efforts on R&D with the goal of bringing costs down faster. If the CDR market develops in line with the medium or high cases we've laid out, then we intend to continue executing on our cost-down plan and to be positioned to secure development partners for capital. This capital flexibility becomes the most valuable at the CDR market grows in line with our high-demand forecast. A high demand for DAC CDRs would likely shift our focus towards licensing DAC technology with other developers to increase CDR supply more rapidly. The CE acquisition helps unlock this development optionality as we can integrate our learnings into a DAC technology license. Regional development partners can then support the build-out with local knowledge, technical and operational resources, and capital, while Oxy can support through a technical-heavy but capital-light development approach. Based on our current plan, we anticipate that the LCV program capital, excluding third-party funding, will be up to $600 million per year through 2026. Moving on to the DAC 1 and 2 developments. We are again excited to announce BlackRock will invest $550 million in STRATOS, our first DAC facility through a fund managed by its diversified infrastructure business. BlackRock's investment demonstrates that DAC is becoming an investable asset class for world-class financial institutions. STRATOS Construction is progressing well, and it's approximately 30% complete. Additionally, the ongoing work at the Carbon Engineering Innovation Center has already identified several promising opportunities to lower costs on future DAC. We expect several of these ideas can be implemented into STRATOS to help demonstrate the improvements at scale and to be ready for future DAC builds. To accommodate these process improvements, we are optimizing the construction schedule for the two process trains. This ensures STRATOS remains on schedule to be commercially operational in mid-2025 while also ensuring we are implementing the latest technical advancements earlier than previously planned. This may face some capacity into 2026, but optimize our development plan and future costs. Our South Texas DAC Hub has commenced front-end engineering design and stratigraphic well testing is in progress. We are very appreciative of our recent selection for a grant from the U.S. Department of Energy and the meaningful work we are doing through that process. Though the timing and the amount of the DOE grant are not yet known, we look forward to the final agreement and announcement of additional details. We have continued to work within a framework of DAC investment principles that will enable us to advance development while delivering returns for our shareholders and value to our customers and partners. We are focused on accelerating reductions in the cost to capture, which is expected to increase market demand for CDRs and in turn, attract additional development partners. These factors will drive future development pace of DAC, including a final investment decision of DAC 2. We will also continue to advance collaboration with companies like BlackRock, ADNOC, and Oman's OQ gas networks who share our long-term vision for Direct Air Capture and our broader low-carbon product ecosystem. Across it all, we appreciate these partnerships that are enabling this business for Oxy, and we are focused on delivering this solution that can supply essential lower carbon products for the world. I will now turn the call over to Rob for our financial discussion.

Thank you, Richard. We posted an adjusted profit of $1.18 per diluted share and a reported profit of $1.20 per diluted share. The difference between adjusted and reported earnings was primarily driven by gains on sales of noncore affluent assets, partially offset by derivative losses in the premium paid on preferred equity redemptions. During the third quarter, strong operational execution enabled us to generate over $1.7 billion of free cash flow before working capital, and we concluded the third quarter with over $600 million of unrestricted cash. We experienced a modest negative working capital change during the period, partially driven by an increase in commodity prices. In October, we received $341 million in cash in the environmental remediation settlement we mentioned in the last earnings call. As Vicki highlighted, each of our domestic assets exceeded the midpoint of third quarter production guidance, including in the Gulf of Mexico, where favorable weather contributed to production exceeding the high end of guidance and a higher-than-expected company-wide oil cut. Oxy's outperformance, coupled with a portion of Gulf of Mexico planned maintenance moving into the fourth quarter, resulted in better-than-expected domestic operating expenses of $10.20 per BOE for the third quarter. Capital spending in the third quarter was approximately $1.6 billion, representing a slight decrease from the second quarter. We further advanced our shareholder return framework during the third quarter through the repurchase of $600 million of common shares, including $175 million, which settled at the start of the fourth quarter. Additionally, we have now redeemed over 15% of deferred equity with $342 million deferred equity redemptions triggered and redeemed during the third quarter. As of November 7, rolling 12-month common shareholder distributions totaled $3.12, falling below the $4 preferred equity reduction trigger. It is unlikely that cumulative distributions to common shareholders will be above the $4 per share trigger again this year, primarily due to the concentration of share repurchases in the second half of 2022. However, we remain committed to the per share earnings and cash flow accretion benefits derived from our share repurchase program, and we intend to continue repurchasing shares at a pace that is largely driven by commodity prices. As Vicki mentioned, we are raising our full year production guidance through the outperformance in the third quarter. We are guiding to 1.226 million BOE per day in the fourth quarter, our highest quarterly production for the year despite hailstorms in Delaware Basin that caused power interruptions early in October. Property damage for these Permian storms and Gulf of Mexico maintenance are expected to result in fourth quarter domestic operating costs of approximately $10.50 per BOE. Fourth quarter OxyChem guidance reflects typical seasonality as well as the impact of a planned turnaround at our Ingleside plant. This turnaround was the first ever of the ethylene cracker and the first total plant outage in the Ingleside complex in over a decade. We are beginning to see early indications that PVC and caustic soda prices may have bottomed. However, we may not have full clarity on the fundamentals of the growth of the upcoming business cycle until early next year as challenges remain, including global macroeconomic uncertainty and demand impacts from rising interest rates. Our performance across our domestic businesses resulted in a lower-than-anticipated corporate adjusted effective tax rate during the third quarter, which we expect a rebound of approximately 30% in the fourth quarter as a proportion of international to domestic income increases during the period. Moving on to capital. Third quarter Permian capital spending was elevated as a result of program mix and activity optimization. In certain areas, we developed higher working interest projects than originally planned as we sought to balance OBO or operated by other production. Company-wide capital spending to date and planned spending in the fourth quarter are likely to result in full year spending at the higher end of our guidance range. Our teams are finalizing our 2024 capital plan, which we look forward to announcing in our next call following Board approval. Today, I would like to revisit several points from previous calls regarding our expected 2024 capital plan. In the Upstream business, we expect similar domestic onshore activity levels to add on average to 2023. We all anticipate no material change in spending for our international assets. Additionally, we expect to run two drillships in the Gulf of Mexico next year as part of our mid-cycle investment program. OxyChem commenced work on the modernization expansion of the Battleground plant this year. As construction advances, we anticipate an incremental $100 million of capital spending starting in 2024 compared to 2023 guidance. Incremental spending in the Battleground is expected to continue through 2025. To summarize, the third quarter of 2023 represented a strong operational and financial quarter for Oxy. As we are near the conclusion of this year, we are preparing for 2024 with a continued focus on operational excellence and delivering on our shareholder return framework. We are pleased with the progress of the framework to date and in addition to retiring the debt that matures in 2024, we intend to continue prioritizing share repurchases in our use of cash flow. The timing of when we may exceed the $4 of our preferred equity instant trigger again, will be determined by the pace of our share repurchase program, which were largely driven by the macro environment. I look forward to next quarter's call where we expect to report on completing another strong year for Oxy. I will now turn the call back over to Vicki.

Thank you, Rob. As Richard mentioned earlier, we anticipate that DAC will become increasingly significant in our exceptional and varied asset portfolio. We see great additional potential in this area. Joining us for the Q&A session, as Neil pointed out, is Ken Dillon, the Senior VP and President of International Oil and Gas Operations, who also oversees our major projects group. He will be available to address questions regarding the construction of the DAC. Additionally, Mike Avery, President and General Manager of 1PointFive, as previously mentioned, will respond to inquiries about the business aspects of how we are managing and will manage the DAC and other related projects within 1PointFive. Now, I'll hand the call over to the moderator for questions.

I want to start, Vicki, with the topic of your and the industry's M&A. I know Oxy has a deep bench of inventory that you highlighted. But obviously, with some deals out there recently, there's been a focus on consolidation. So just wanted to get your thoughts on how you see Oxy fitting into that trend going forward.

Well, Nitin, I do want to reiterate that we were early consolidators in our industry with the Anadarko acquisition. And we did that because we saw significant synergies there. And those were obvious to us, and they were in the acreage that made it possible for us to understand the subsurface and to gain those synergies. Now that we've done that, and we more than doubled our production with that acquisition. We've achieved over $2 billion of synergies that we had forecast. And now it's considerably strengthened what we are today. But the good thing is we don't have to do acquisitions. Therefore, while our BD group keeps up with and is aware of what's happening in our industry, we feel no need to have to do anything or be a part of it.

That's very helpful. Vicki, I want to go back. I know the focus is on LCV today, but last quarter, you talked about the strong performance in your Permian well productivity. There's been some talk around improving technology and really focusing on improving recovery rates in the basin, you do as much technical work as anybody else. So just curious if you have any technology if you are deploying or seeing being deployed that could lead to a step change in recovery factors?

I think I really feel like we've already had a step change in our recovery factors. And if you go back and look as far back as 2014 and '15, the improvements that we've seen have been dramatic, but most of those improvements have been around understanding the subsurface better and being able to better design frac jobs and also our wellbore configuration so that we can not only get the most out of the subsurface from a modeling perspective for the design but also from an operating standpoint. We have an operations team that is doing a lot on the surface and with artificial lift to take advantage of AI and other technologies to ensure that we get the most out of the wells from an operating perspective. And then we continue to access that by using artificial intelligence, lowering our bottom hole pressures and making sure that we're the best we can be on the subsurface with respect to efficiencies. Now, Richard and others would be eager to discuss all the technical work we're doing, but I consider that to be proprietary. And I really feel like we've disclosed a considerable amount in the past, and that's enabled some others to follow some of what we're doing. So to be honest, I'd just rather keep the proprietary stuff to ourselves for now. And from a technology perspective, we have mentioned some things that we're doing internationally to recover more out of our wells in Oman. But I'll just leave it at that.

Yes, that's right. I'll stay on point. The thing I wanted to highlight is just obviously, recovery factor is core to what we're doing. We're really proud of the slides that we keep in our appendix, which shows year-on-year the improving performance for our wells and not over a few days. We look at it on our one-year cycle. And it's not only in the Permian, it's in the Rockies. And as Vicki alluded to, we were talking earlier, Ken had some great advancements in the Middle East as well. The other thing I wanted to say was our appraisal success. So highlight this quarter on the Wolfcamp B well that came through as a record well. The ability to go engineer and do those technical things for these new benches is core to what we believe is important as we go forward. And so we are really proud of that appraisal success. The appraisal wells that we drilled this year, we've already replenished the planned drill wells for this year, and they're doing it at very low breakeven in terms of adding inventory. So I just wanted to add those two things to give recognition to our team and the progress they're making.

I thought I was going to have to cut them off there for a second, but he did good.

And I was just hoping that you wouldn't, Vicki, but great job, guys.

Yes. It's really helpful update around LCV. I wanted to take you up, Vicki, on that offer to talk about construction and how that DAC plant is building towards the mid-2025 start? What are the biggest gating items to get it to completion? And how do you feel about your ability to mitigate those risks?

Okay. We'll pass that to Ken then.

So far, I'd say construction is going very well. While we are performing extremely well in the engineering, procurement and construction phase of the project, we are basically moving through the execution phase where we've got around 550 people at site into the different trades and we'll move up to about 1,200 people at site by the end of Q1. So far, we've had no issues of paying labor on the field in terms of procurement. We're meeting construction needs at the moment, and we've committed around 90% of the material value that we need. So prices are locked in at the moment. So things are going very well. I think Worley's engineering capabilities are such that we saved quite a bit of money in construction and also, we designed the system so that we can replicate that based on the engineering that we're carrying out today. We're building a digital twin and we're using AI going forward. On the supply chain, I'd like to highlight the visionary vendors. We talked about that early on. We're basically working with companies who have aligned CEOs who are truly supportive, and that's made a huge difference for us. As you know, over the last couple of years, there's been huge pressure on electrical and instrumentation equipment. I'd like to highlight Siemens Industries in the U.S. have really helped us out. They've really been committed to this project. And what it means Technip Energies are also very supportive all the way to the CEO. And we've received many suggestions from the visionary vendors on how to reduce the cost of their packages going forward right down to very detailed specifications. I don't know if I can give one example, but one vendor that we visited had assembly lines for bespoke equipment and one for standard equipment, and they draw our attention to, we change one thing in our specification, we could save an awful lot of money. The experience is you don't gain any extra reliability for doing that. Safety performance has been exceptional, so. We're now through 1.2 million man-hours. So overall, things are going as well as expected and in terms of materials that are out with the required on-site dates, we don't really have any. So generally working well together with vendors, broadly fabricators, we have built materials of sites. We built piping racks. We did this as a pilot to reduce fabrication labor at site. That's worked very well. We'll definitely do that on future projects and that takes you into the mode of, can you get to the point where you build a DAC plant, or you can generate piping materials, air contactor frames without doing all the work at site. So overall, the project is doing well and we're getting a lot of help from vendors.

I'd like to expand on Ken's comments regarding visionary vendors. It has been beneficial for us to interview various vendors and select those we consider to be more visionary. We discovered that these companies are deeply committed to creating solutions that positively impact the world. Currently, about 35 gigatons of CO2 are emitted into the atmosphere, with 8 gigatons attributed to transportation, which accounts for 23%. As Richard pointed out, decarbonizing transportation is challenging unless we utilize sustainable aviation fuel or our carbon reduction credits. To address the 8 gigatons, thousands of Direct Air Capture facilities need to be constructed, and credible models indicate that we cannot limit global warming to 1.5 or 2 degrees without significantly reducing CO2 levels from the atmosphere, both from transportation and the overall excess in the atmosphere. This highlights the necessity of our technology, which is vital for the world. It's essential to differentiate between CO2 emissions from power generation, which can be mitigated through wind and solar energy, especially if we can develop an industrial battery to support them. However, Direct Air Capture should not be seen as a substitute for wind or solar since they target different types of CO2 emissions. With that, Neil, shall we move to your second question?

That was great, Vicki. And the follow-up is just around '24 capital considerations. I won't get it on the fourth-quarter call, I recognize, but can you just talk about the range from '23 to '24 and last quarter, you annualized it looks like a $6.4 billion of CapEx. Is it crazy to say that's a good starting point? And any thoughts on that would be great.

No, it wouldn't be crazy to say that. I'll go back to what Rob said in his script, and that is that our upstream oil and gas, especially in the U.S. will have the same activity level next year that it's had this year. In addition to that, we'll have $100 million for incremental for Battleground in 2024, and we'll run those two drillships in the Gulf of Mexico. So I think that gets you to work to that or above as you go in total all of that. And we'll have more guidance on that, hopefully, in the first part of next year.

I have two questions, possibly for Richard. Have you observed any significant inflation in the construction sector? Additionally, are the higher interest rates affecting your growth strategy and business model? That's my first question.

Sure. I'll start by assuming the inflation is related to oil and gas. If we need to expand beyond that, we can assist with it. I want to highlight a few points, which may relate to the earlier question as well. As we approach the end of this year, we've been focusing on optimizing our resources, particularly rigs and fracking operations. Over the last two quarters, we've decreased our rig usage, first by two rigs in the second and third quarters, and then down another two. This has really allowed us to better collaborate with our contractors, utilizing the right rigs and crews, and we’re seeing some early positive results, evident in improved performance per day in both the Rockies and the Delaware. As we enter the fourth quarter, we're not prepared to make predictions for next year, but we are noticing some areas of improvement across our rigs, along with trends in oil country tubular goods, sand, and fuel, indicating a slight softening, which we hope will continue. Our main focus has really been on optimizing efficiency.

Yes. And can we also expand not just on the oil and gas, but also to the low carbon business that are we seeing the inflation rate very different and is actually hitting up that does look like a lot of people is moving in that direction. And also that the high inflation also want to look at is on the low carbon ventures and how that impacts on that business model? And may as well ask my second question, which is you have signed some deals with financial institutes that bind the CDR, can you share what kind of term it is offtake and you say fixed price and even it is fixed price, what kind of pricing that we may be referring to right now?

Great. I think we will start with a discussion on inflation as it relates to DAC, and then I would like Mike to address the market and what we are observing with offtake, as that is a crucial aspect of our message.

Yes, we did observe increases in the cost estimate for STRATOS, primarily due to general industry inflation rather than specifically related to DAC. The increased costs are also due to insights gained from CEIC, with about half of the impact coming from moderate inflation affecting DAC and general price rises in materials like steel. We have now reached a stage in the project where pricing has been finalized, and we are confident in the optimizations we implemented to enhance long-term efficiency for DAC. These optimizations include heat recovery systems, solid handling upgrades, filtration systems upgrades, and electrical upgrades. Therefore, while inflation has had an impact, it is not solely related to DAC.

Paul, this is Mike Avery here. So I'll give an update on the sales process and progress that we've made for STRATOS. And so what we're getting here is a lot of momentum building in the market, with a strong sort of pipeline of buyers that are growing now. We attribute this to the market beginning to realize the importance of how Direct Air Capture is going to fit within their portfolios. I think there's also a growing recognition that Direct Air Capture is not sitting out in the future. It's a technology that's ready to go now at commercial scale. And that is actually more affordable than people think when placed next to some of the other alternatives out there. I think the market has also been moving towards these higher integrity solutions as the carbon markets have been maturing. And so to date, we've announced deals with Airbus, Amazon, ANA, TD Bank, NextGen, the Houston Astros and the Texans. There's a range of terms on the CDR sales. They range from 1 year to 10 years. They are fixed price agreements. And so if we look at the deals that we've announced to date and we couple that together with the mature negotiations where we have got price volume and term agreed, STRATOS net capacity is sold out to about 65% to 70% to 2030. And then there's a strong pipeline behind that of earlier stage negotiations that's also growing that takes us up to about 85% net capacity sold out to 2030.

Vicki, could you share the business plan or strategy moving forward? Clearly, you've reduced some working interest, which you had indicated before. I believe you mentioned our first partner in STRATOS; what is your perspective on your working interest there? How do you view it in DAC 2? Additionally, how does license revenue contribute to the capital efficiency of the DAC strategy? I also have a follow-up question.

We have strong confidence in this technology and its alignment with our strategy for the future. We expect to gain from the sale of carbon reduction credits integrated into our approach. Alongside continuing to provide sequestration and selling reservoirs for customers, we aim to supply CO2 as a product for conversion into sustainable aviation fuels, which adds another revenue stream. Additionally, the CO2 we capture from the atmosphere will be utilized in our enhanced oil recovery operations. This method represents the most genuine emission-free oil on a net basis that can supply fuels needed for maritime and aviation sectors. Sustainable aviation fuels are essential for development, and we are committed to supporting this by providing products and leveraging our investments. It's vital for the industry to recognize that CO2 can be used to produce net zero oil. This occurs when we inject more CO2 into the reservoir than the oil produced from that CO2, resulting in net zero oil that can then be transformed into jet fuel and maritime fuels. The significance of this process lies in its net negative emissions or emission neutrality. It also offers a lower environmental impact from a supply chain perspective, as it extracts more oil from existing reservoirs, using current infrastructure and thereby minimizing the emissions tied to upstream activities. Additionally, leveraging existing infrastructure reduces costs. The world requires a solution that delivers the highest intensity fuel at the lowest cost and emissions level to tackle the climate transition, as otherwise, we cannot limit global warming effectively. All these potential revenue streams will be vital for our business, emphasizing the importance of having partners from the outset to expedite technological advancement. Our goal is to transition from building one hundred of these systems to potentially thousands, which will be necessary. While we face criticism for establishing a business, commercial viability is essential for sustainability; otherwise, there's no better solution available. The current plans outlined by the UN and others are unaffordable. We believe we possess the strongest approach to advance this agenda, create significant shareholder value, and we will build the necessary partnerships to accelerate progress.

Yes, Vicki, to clarify, these are very ambitious growth plans for the future. It doesn't necessarily require Oxy capital, which was my point. Am I correct in thinking that outsourcing the capital once the technology is proven could generate revenue, similar to license revenue? That's what I was trying to convey.

Yes. That's incredibly important to us. There's absolutely no way that we would have the capability to provide all of the capital. We can't do it. We're going to continue to be an oil and gas business because oil and gas is also important for the world. We'll continue our investments in oil and gas and grow our oil over time because our oil will be carbon neutral or carbon negative ultimately. And so that's to me the last barrel of oil produced in the world should come from an enhanced oil recovery reservoir using CO2 from the atmosphere. So we will be doing that. But you're right, Doug, in that we will be licensing a lot of this out. And we've talked about regional concepts, having partners around the world that can manage and drive their own construction of these facilities as we go. And what would come back to us would be those licensing fees.

My first question is on your Permian plan, specifically. Just wondering, will you all turn to more co-development in the Dell or maybe just discuss your future broader completion plans there?

Could you clarify that?

Yes, I can respond to that in a few ways. One key aspect we've emphasized is our approach to developing secondary benches. We've been deliberate in how we assemble our Development Spacing Units with this in mind. This year, we have increased what I would term as completion intensity, specifically in hydraulic fracturing. Some of this increase in intensity was supported by the capital we invested back into the Permian, which resulted in higher cash flow for us this year. Therefore, a significant part of the rise in capital spending can be attributed to our intensified completion efforts. Looking ahead over the next few years, we plan to remain systematic in how we develop these secondary benches, which will eventually become a more significant part of our portfolio. We've observed positive surprises that have allowed us to optimize our development plans for the next three to five years, particularly noting our success in the Midland Basin regarding secondary benches. Reflecting on last year, we modified about half of our development strategy due to advancements in our appraisal activities. Moving forward, we will maintain our focus on subsurface development, aiming for outstanding recovery and ensuring our Development Spacing Units across various benches align well with the geology of the area.

And then second also on the Permian. The second largest earthquake in the Perm was reported this morning. I'm just wondering, is probably too early to know if you had any direct impact? I'm just wondering could you all discuss the continued disposal process and if that has changed in recent years?

I'm sorry, Neal, I didn't catch the first part of your question.

This morning, the second largest earthquake was reported in the Permian. It seems to have had an impact.

Earthquake.

Yes. Our plans continue to leverage the work we've done around water recycling, just in general, I'd say, independent of any of the hazards. We just believe that responsible use of water is a big part of what we should do. We actually had a trip here recently to the Permian, got to revisit the large recycling facility that we put together with our partner there in the Midland Basin. And that continues to be helpful not only for Oxy but actually some of our offset peers. So we're expanding that into the Delaware. It's actually a very nice link as you think about other carbon capture projects that we have. Responsible use of industrial water is a technology that we really think is important for the future. So we're aware of some of what you're asking about in some of the hazards that's been identified. But again, we're trying to get out in front of that just in general and recycle more water in all areas of our operations.

I wanted to start out on the Gulf of Mexico. You mentioned you'll be running two drillships there next year. Just curious if you could just give an idea of key projects you're progressing in 2024? And maybe expand a little bit on the depth of the tie-in opportunities and potential, I think, Vicki, you commented last quarter for possible growth out of the asset in the second half of the decade.

Yes. I would just reiterate, we're really excited about not just what we're doing from a capital perspective and the new development, but also what we're doing with the development that we have and Ken has some really good things to share with you about that.

If I start off with the first part of your question, as part of the development initiatives, we plan to drill and complete five wells includes proximity to our facilities tied back to existing subsea manifolds with available capacity. We also do tests on two promising exploration opportunities in the Eastern region, which probably have a working interest of around 40%, that aligns with our approach of more shots on goal through partnership. If I can maybe give some context to Vicki's comments on the last call, we basically see gone through three portfolio lenses. One is primary production with base optimization and drilling, including horizontals and stimulation; the second aspect is secondary recovery, which is one of Oxy's strengths as a company worldwide with water flooding and artificial lift, including subsea pumping and ESPs. On these assets, very little has been done on water flooding in the past for our reservoirs, and we see significant upside including reservoirs that already have direct analogs nearby. And that's been part of the success of some of the majors in Gulf of Mexico in terms of adding long-term low decline production and reserves to the base. And in exploration, we've now built a new portfolio with a significant new partner base, as you saw in the recent announcement that came from UNWILD, that looks like a successful approach going forward, and that could be easily tied back quickly to Lucius. So we see this as a way of moving capital between these three legs of the stool going forward and we see tremendous upside on the secondary recovery option.

Thank you all for your questions and for joining our call today. Very much appreciate it. Have a great day.