Occidental Petroleum Corp (OXY) — Q4 2023 Earnings Call Transcript

Thank you, Gary. Good afternoon, everyone, and thank you for participating in Occidental's Fourth Quarter 2023 earnings conference call. On the call with us today are Vicki Hollub, President and Chief Executive Officer; Sunil Mathew, Senior Vice President and Chief Financial Officer; Richard Jackson, President, Operations, U.S. Onshore Resources and carbon management; and Ken Dillon, Senior Vice President and President, International Oil and Gas Operations. This afternoon, we will refer to slides available on the 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 for our earnings release and on our website. I'll now turn the call over to Vicki.

Thank you, Jordan, and good afternoon, everyone. 2023 was a great year for us, thanks to the performance of all of our teams at Oxy. I'm going to start by discussing our financial performance, operational excellence, and our strategic advancements in 2023, then I'll review our capital plans for 2024. We continue to position ourselves to deliver sustainable and growing returns for our shareholders through our premier asset portfolio, advanced technology, and robust commercial runway. First, I'll begin by reviewing our financial performance in 2023. Last year, our talented and committed teams across the company applied advanced technical expertise, operating skills, leading-edge technologies, and innovation to our exceptional portfolio, delivering results of $5.5 billion in free cash flow. This enabled us to pay $600 million in common dividends, repurchase $1.8 billion of common shares, and redeem $1.5 billion of preferred shares, while also investing $6.2 billion back into the business. Next, I'll comment on our operational excellence in 2023. Our production in our global oil and gas business exceeded the midpoint of our original full year's production guidance by 43,000 BOE per day, driven by record new well productivity rates across our domestic assets in the Delaware, Midland, and DJ Basins. Internationally, we recorded production from Block 9 in Oman, and we safely completed the expansion of the Al Hosn plant in the UAE, which also delivered record annual production. Despite negative price revisions, well performance across our portfolio enabled us to achieve an all-in reserves replacement ratio of 137% in 2023, and a three-year average ratio of 183%. Our track record from prior years of consistently replacing produced barrels continues, with F&D costs below our current DD&A rate. At year-end 2023, our worldwide proved reserves increased to 4.0 billion BOE from 3.8 billion BOE in 2022. OxyChem performed exceptionally well in 2023, exceeding guidance and achieving $1.5 billion in pretax income for the third time in its history due largely to lower energy costs and an efficient planned turnaround at our Ingleside plant, even as product markets softened compared to 2022. In addition, construction on STRATOS, our first direct air capture facility, is progressing on schedule to be commercially operational in mid-2025. The fourth quarter of 2023 was an exciting way to conclude a successful year. In oil and gas, we delivered our highest quarterly production in over three years, outperforming the midpoint of our production guidance despite a third-party interruption in the Gulf of Mexico. Our Rockies business outperformed in the fourth quarter, consistent with its year-long trends. Innovative artificial lift technology continued to maximize base production. Well design optimization in the DJ Basin that we presented in our second-quarter earnings call contributed to a 32% productivity improvement from 2022. We also continued to deliver robust well performance in the Permian Basin, where our Delaware teams drove results to the high end of the Permian's fourth-quarter production guidance. Our top spot well, which we also discussed in our second-quarter earnings call, continued its strong performance trajectory and delivered the highest six-month cumulative production of any horizontal well ever in the New Mexico Delaware Basin. In fact, Oxy has drilled eight of the top ten horizontal wells of all time across the entire Delaware based on this production metric, with three of those wells coming online last year. Since mid-2022, our teams outperformed the Delaware Basin industry average for 12-month cumulative oil production by nearly 50%. Our team aims to extend our leadership in the New Mexico Delaware Basin this year. A significant portion of our 2024 Delaware program will develop the same horizon as the record top spot well. Further south in the Texas Delaware Basin, our teams continue to deliver success with notable appraisal wells in the 2nd Bone Spring and 3rd Bone Spring line. These wells drove incredibly early-time volumes, and accordingly, we secured additional capital in our 2024 Delaware program. Our appraisal programs are positioning us for success by adding horizons in the Delaware Basin and moving Tier 2 and Tier 3 wells to Tier 1. However, we're also improving our current Tier 1 intervals, for example, with our top spot well. Outside the Delaware Basin, we're also making strides in some of the basins that we expect will begin to play a more consequential role. In the Midland Basin, technical excellence, including the basin-leading Barnett wells, drove a one-year cumulative improvement in well productivity of over 30% compared to the prior year. In the Powder River Basin, Oxy set Wyoming state initial production and early cumulative production pad records of 1.5 million barrels of oil produced in just about seven months. As we highlighted, our unconventional technical teams continue to expand and improve inventory across all of U.S. onshore basins. Our subsurface modeling, innovative well designs, and enhanced artificial lift technology have driven improvements in well recovery. New well designs have also resulted in record drilling times for both 2- and 3-mile Texas Delaware Basin laterals. Similarly, in the Powder River Basin, our teams drilled an average of 1,650 feet per day, and we drilled a 10,000-foot well in only 11 days, achieving Oxy basin records. Our successes are not limited to our onshore U.S. portfolio. In the deepwater Gulf of Mexico, we are continuing to leverage technology to drive even stronger production results. Our subsea pumping system for the K2 field achieved first lift four months ahead of schedule. This is Oxy's first deployment of this technology in deepwater. We expect to unlock future production enhancement opportunities and longer-distance subsea tiebacks. Next, I'll shift to discussing how we advanced our strategy last year. In 2023, we high-graded our oil and gas portfolio, launched the expansion of our OxyChem Battleground facility, and announced strategic commercial transactions that we expect will deliver sustainable multiyear value to our shareholders. These steps strengthened our portfolio and made it unique in our industry. We have high-quality, short-cycle, high-return oil and gas shale development in the U.S. along with conventional lower decline oil and gas development in Permian EOR, Oman, Algeria, and Abu Dhabi. These developments are complemented by our strong and stable cash flow from our chemicals business and the cash flow and carbon reductions we expect our low-carbon ventures to provide in the future. In addition to high grading our oil and gas portfolio through organic development and appraisal work last year, we also announced the strategic acquisition of CrownRock, which will add high-margin, low-breakeven inventory while increasing free cash flow per diluted share. The incremental cash flow will support our cash flow priority of delivering a sustainable and growing dividend, along with deleveraging and share repurchases after reducing the principal debt to $15 billion. We are working constructively with the FTC in its review of the transaction and expect to receive regulatory approval and close in the second half of this year. The capital plan we will review in a moment excludes CrownRock because we will continue to operate as two separate companies until we obtain regulatory approval and close the acquisition. In our LCV business, we completed many pivotal transactions that provided technology advancement, third-party capital, revenue certainty, and commercial optionality. We closed the acquisition of direct air capture technology from Carbon Engineering last quarter. This was a landmark achievement in our direct air capture development path. We're also excited about our STRATOS joint venture with BlackRock, which we believe demonstrates that DAC is becoming an investable asset for world-class financial institutions. In addition, our teams signed on several more flagship carbon dioxide renewable credit customers. Now I'd like to reiterate our cash flow priorities and discuss our capital plans for 2024. On our December call, we discussed how we will focus on our cash flow and shareholder return priorities in 2024 on dividend growth, debt reduction, and the capital allocation program that generates strong free cash flow throughout the commodity cycle. Regarding CrownRock, we intend to complete at least $4.5 billion in debt repayments for both pro forma cash flow and proceeds from the divestiture program. We intend to prioritize debt reduction until we achieve a principal debt balance of $15 billion or below, including repaying debt as it matures. As a result of the acquisition, we expect to strengthen our balance sheet, improve our resilience in lower commodity price environments, and free up cash from interest payments to support future sustainable dividend growth and share repurchases. Every year, we design our capital plan to support our strategic initiatives via projects that maximize our returns and best position Oxy to deliver long-term and resilient returns to our shareholders. Our 2024 capital plan continues a bifurcated investment approach that balances short-cycle, high-margin investments with measured longer-cycle cash flow growth investments. In 2024, we plan to invest $5.8 billion to $6 billion in our energy and chemicals businesses, resulting in slightly less capital for our unconventional assets this year. However, we expect our unconventional assets to return more cash to the business, and we continue to expect year-over-year production growth and continued success across our premier unconventional portfolio, including some of the emerging horizons. We intend to complement our unconventional exposure with increases to our mid-cycle investments, including lower decline conventional reservoirs, which are expected to drive longer-cycle cash flow resiliency. Our 2024 mid-cycle capital investments will position us to continue the exciting projects that we started last year. Investments in OxyChem are expected to increase this year as progress continues on the battleground expansion and the plant enhancement project. We also added a second drillship in the Gulf of Mexico to support what we believe could become a future growth asset for Oxy. Lower decline oil production from our enhanced oil recovery or EOR is an important part of our long-term strategy. This year, we're investing in gas processing expansions for our Permian EOR business that support longer-term growth in many of our core CO2 facilities. Our EOR business will continue to be a key part of our future oil and gas development as we believe that carbon dioxide captured by direct air capture facilities is a sustainable way to develop the two billion barrels of potentially recoverable oil remaining in our Permian EOR operations. In our emerging low-carbon businesses, much of Oxy's planned $600 million in 2024 investment will be directed to STRATOS. We have also allocated capital to continue preparations for a second direct air capture and sequestration project in South Texas, along with subsurface and well permitting investments needed at our Gulf Coast sequestration hubs. Capital received from financial partners for our LCV businesses will add to our $600 million investment. This includes capital contributions from our joint venture partner, BlackRock, for STRATOS. BlackRock's investment totaled $100 million in 2023, and we expect that figure will increase in 2024. We're making great progress towards advancing our net-zero pathway as we develop direct air capture and other exciting technologies. We see tremendous potential in LCV to increase Oxy's cash flow resilience and generate solid long-term returns for our shareholders. I'll now turn the call over to Sunil for a review of our fourth quarter financial results and 2024 guidance.

Thank you, Vicki. I will begin today by reviewing our fourth quarter results. We announced an adjusted profit of $0.74 per diluted share, and a reported profit of $1.08 per diluted share, with the difference between adjusted and reported profit primarily driven by the after-tax fair value gain related to the acquisition of Carbon Engineering. Our teams exceeded the midpoint of guidance across all three business segments during the fourth quarter, and we delivered outstanding operational performance. Higher-than-expected production in our domestic onshore and international assets enabled us to overcome production losses caused by an unplanned third-party outage in the Eastern Gulf of Mexico. This outage led to a lower-than-expected company-wide oil cut and a higher-than-anticipated domestic operating cost per BOE. It is also expected to impact production into early next month and is reflected in the guidance that I will soon cover. We had a positive working capital change, primarily due to receipt of the environmental remediation settlement, timing of semiannual interest payments on debt, and decreases in commodity prices. We exited the quarter with over $1.4 billion of unrestricted cash. Turning now to guidance. Last month, Oxy and CrownRock each received a request from the FTC for additional information related to the acquisition. The FTC's request for additional information will impact the timing of closing, which we expect to occur in the second half of the year. Oxy will receive the benefit of CrownRock's activity between the January 1, 2024 transaction effective date and close, subject to customary purchase price adjustments. Additionally, the issuance of senior unsecured notes, funding of the fully committed $4.7 billion term loans, and termination of the existing bridge loan facility are expected to align with the transaction's closing. In 2024, we expect full-year production to average 1.25 million BOE per day, representing low single-digit growth from 2023, with the Rockies and Al Hosn driving production growth. As Vicki mentioned, well design and operational expertise drove production outperformance in the Rockies last year. We anticipate that these results will continue in 2024 with a steadier run rate of wells coming online compared to the first quarter of last year when we had recently ramped up rig activity. Permian production is expected to remain largely flat, with Permian unconventional capital decreasing by approximately 10% compared to the prior year. Internationally, we anticipate continued higher production at Al Hosn following last year's plant expansion. Total company production guidance in the first quarter reflects a low point for 2024, with a significant step-up expected in the remainder of the year. The expected first-quarter decrease in production is primarily driven by the relatively lower activity levels and working interest in the Permian Basin in last year's fourth quarter. January winter storm impacts of approximately 8,000 BOE per day in our domestic onshore assets, annual plant maintenance at Dolphin, and the Gulf of Mexico unplanned downtime event. Domestic operating costs on a BOE basis in 2024 are expected to decrease due to reduced maintenance in the Gulf of Mexico and improved lifting costs in the DJ Basin. Moving on to chemicals, in 2023, OxyChem generated pretax income nearly matching its second highest year ever. This year, we are guiding to a midpoint of $1.1 billion of pretax income. This year's full-year guidance is close to the fourth-best year ever for the chemicals segment despite potential challenging market conditions. We expect our first-quarter OxyChem results to be largely flat from the prior quarter. Our guidance for Q1 reflects the combination of PVC price erosion, largely associated with contract adjustments in Q4, typical seasonal subdued demand in both PVC and caustic, and export pricing pressure on caustic from China. Our guidance assumes that in Q1, we have reached the bottom of the cycle with more stabilized prices. I would like to close today by looking beyond 2024 to highlight several catalysts that we expect will enhance our financial trajectory in the coming years. Our midstream business is well positioned to benefit from a reduction in crude oil and transportation rates from the Permian to the Gulf Coast by the end of the third quarter of 2025. We expect annualized savings from these rate reductions of $300 million to $400 million, with approximately 40% of the savings starting in 2025, and the full annual savings anticipated in 2026. The OxyChem Battleground and plant enhancement projects are expected to generate incremental benefits to EBITDA of $300 million to $400 million per year once complete. Combined, these improvements to midstream and chemicals are expected to deliver an incremental annualized run rate EBITDA of $600 million to $800 million. As Vicki discussed, we also expect the planned mid-cycle investments in our conventional Gulf of Mexico and Permian EOR assets to provide cash flow resiliency through lower decline conventional production. As we continue to execute on high grading our premier portfolio, we are committed to meeting our deleveraging targets that I outlined in December. We believe that our strengthened balance sheet and Oxy's premium portfolio will enable future increases to our common dividend and rebalance enterprise value in favor of our common shareholders. Our teams are focused on extending Oxy's track record of operational excellence and solid execution on our path to delivering growing and sustainable shareholder returns over the long term.

Thank you, Sunil. 2023 was a significant year for Oxy on both operational and commercial fronts. Our teams skillfully navigated the dynamics, and I want to recognize our employees' ingenuity and hard work; their efforts generated the exciting achievements we covered today and the great progress that is underway to position us for a successful 2024. With that, we'd like to open the call for questions. Jordan mentioned earlier that Richard Jackson and Ken Dillon are also on the call, and they will participate in the Q&A session. We'll now take your calls.

My question is just really around deleveraging. And you talked about this in the opening comments, but just talk about the path to getting the balance sheet to where you want to be post the CrownRock acquisition and how you are seeing the asset sale market playing out here and enabling you to get that debt lower?

Well, as you noted, by virtue of all the M&A that's happening, there's a lot of appetite for companies to try to get into the Permian. We do have properties in the Permian that are not core to us but could be core to others, and some of it is where they're placed in the Permian geographically and how they're not as grouped up as some of our key areas. So the divestitures, I believe, will go well. What we won't do though is we've decided not to make any divestitures until we close the CrownRock acquisition. Then we'll start a proactive process more aggressively at that point.

That's great, Vicki. And then on the Gulf of Mexico, the Q1 guide of $107 million to $115 million, but the balance of the year, $133 million to $141 million. I'm guessing a lot of that's around the pipeline outage. Can you just give us a sense of what are the gating factors to get that asset back online, and how we should be thinking about the cadence of production over the course of the year?

Yes. We're leaving updates on that to the operator. We are not making any comments on that because we're giving them room to get their business done. With respect to the rest of the year, we expect the operations to continue normally, and we anticipate that when we're back up and running, we may get a little bit of flush production from that. Hopefully, our target date for getting back up online is pretty close to what we've said. Do you have anything to add?

It's Ken here. Maybe I can add a couple of things. We feel pretty good about the date. We're sending our specialist start-up crews offshore tomorrow to finish lining out the facilities for full operations. I think that gives you a feel for where we are in the process. The plants are in great shape. Our operations crews, in parallel with the outage, carried out our full 2024 turnarounds and also completed our enhancement projects for the year as well. Avoiding outages in 2024 gives us a really good shot. So we're looking forward to it.

Thank you. Appreciate it, Neil. That was well-timed. The team made use of all the time that they had to complete necessary tasks.

I guess the number of Scots is shrinking, Ken. It's great to hear you on the call after Conoco's latest retirement. So thanks, Vicki, for getting on as well. I have a couple of questions, if I may. I guess the first one is, I hate to do it, but I want to come back on the disposal question. I realize you don't want to give a lot of detail, but I want to frame it like this. When you had bought Anadarko and you were trying to delever, I seem to recall you had about 25 different packages that were for sale. And of course, you ended up not having to do hardly any of those. I think it was about a dozen or something like that. So it seems to me that you've got a lot of things that you've already scrubbed. So my question is, can you give us some color as to whether there is significant cash flow that would come along with the range of $4.5 billion to $6 billion, without being specific on assets, what's the associated free cash flow number?

Well, depending on what actually is divested, we can't really give you an estimate of what that is today. Some things are changing in terms of what we're looking at. So I think it would be very difficult to put the number out there at this point.

Is it significant? Would you consider it material, Vicki?

Anything that's material, we wouldn't likely do. We're trying to minimize cash flow sold to ensure that we can maintain our cash flow. With that said, there will be some cash flow going because it's hard to sell any assets here that we haven't already at least conducted appraisal work on to generate some cash flow.

My follow-up question is regarding sustaining capital. You've increased it slightly to $3.9 billion. However, I'm trying to understand that this year's growth is around 2%, while you're spending $6.5 billion, including $1 billion for Battleground and DAC, leaving approximately $5.5 billion. It appears that a growth rate of 2% should align with growth spending of about $1.5 billion, but the ratio seems a bit misaligned. Can you clarify how I should interpret this?

So if you look at what we've said we'll spend in oil and gas is $4.8 billion to $5 billion in 2024. Part of that will be spent on some of the mid-cycle projects that generate oil production at a later date. That's, for example, the Permian EOR, investing in that would generate the oil and gas production from that in about the third year after we start. So that will be a bit delayed. Some Gulf of Mexico projects are also preparing us for the future. The mid-cycle investments will not impact this year's production. The potential 2.2% increase will be based on spending less than that $4.9 billion. Even when you look at oil and gas operations minus some of that going into facilities, we're getting a 2% growth rate from what we've developed in 2023 flowing over to 2024 and from the high productivity we're getting out of our developments.

It's a great answer, Vicki, still the most capital efficient portfolio by miles.

I know it's really exciting what the teams have done, and thank you for the question.

So my first question is on midstream. I think one area that surprised us a bit was the full year midstream guide. You gave some good color on the slides kind of bridging from 4Q to 1Q. But just thinking about bridging the full year. How would you characterize the moving pieces from full year '23 to full year '24? And then maybe what do you think the midstream business can do structurally under mid-cycle conditions, excess $300 million to $400 million savings you've spoken about?

Yes. So one of the main drivers for the relatively lower guidance for this year is an assumption on the spread for the gas transportation contracts. Last year, we captured several gas transportation capacity optimization opportunities. For example, when the cold weather event occurred on the West Coast in the first quarter. Obviously, we cannot predict this event. Our guidance assumes compressed gas transportation spreads. But when the market presents itself, we are well-positioned to capture these opportunities. So that is one of the main factors. Additionally, in Al Hosn, we have assumed lower sulfur pricing for '24 compared to last year. Now sulfur prices are at near-term lows of around $70 per ton, primarily due to weak Asian fertilizer demand and the sale of built-up sulfur inventories by major regional producers. However, based on market trends, we anticipate a potential improvement in prices during the second half from demand pickup and unwinding of the sulfur inventory. Lastly, we believe this is the low point for midstream income. We have assumed a narrow spread for gas transportation this year, and starting next year, we will begin to benefit from the expiration of two crude transportation contracts. Looking forward, over the next three or four years, you should see a significant uplift in our midstream income.

Great. And then maybe just hoping for a little bit of detail on the 700 million BOE of additions to reserves. It's a pretty big number, especially when considering you're adding an acquisition this year. So maybe just some color on the sources of those additions and where they're coming from?

I think the bulk of the addition is from our Permian Resources business. I think most of it was from there. We had some revisions from productivity improvements in other areas, but the bulk was from Permian EOR, where I think, Richard, if you look at your reserve replacement ratio just for onshore, that was pretty significant.

Yes. I mean just to add to that, obviously, while near-term highlights focus on primary benches we've been developing to drive production outperformance, we're also highlighting secondary benches. For example, in the 2nd Bone Spring or the Bone Spring line, if you look at Delaware production data, those secondary benches are outperforming our 2023 average. As we delineate and develop more of those, that's really driving reserves in unconventional areas. EOR continues to do well, too. We have ongoing projects to increase capacity in some of our gas processing facilities, like in Seminole, which contributes to improved base production. Therefore, some incremental investment this year is producing a couple of thousand barrels a day of enhanced base production while providing capacity to develop low development cost barrels with CO2 in the future.

And I would add that another significant area where we added reserves was Algeria, as a result of our team's work to merge and extend all 18 contracts into one. That was great work by the Algeria team to add reserves there. I'm most proud that while the bulk of the reserves came from those two sources of the Permian and Algeria, and a little bit from the DJ, every business unit increased reserves except for Al Hosn, where we had already booked quite a bit because of the modeling adjustments to get that estimate more refined.

I just wanted to follow up a little just on the prior conversation around EOR. I guess this is being built out in conjunction with some of the anticipated volumes coming from STRATOS. Can you give us a sense of what sort of capacity in terms of production relative to where you're at today, you're intending to build out? Or I guess, another way, how large do you anticipate the growth rate to be out of the EOR production base over the next five to ten years?

Over the next five to ten years, it's going to be a significant part of our portfolio development. We have two billion barrels of resources remaining to develop. We believe that as we build our direct air capture facilities to remove CO2 from the atmosphere, it will represent the most sustainable barrels in the world. This is a resource that the world needs as we must leave 30% to 40% of oil in conventional reservoirs and 90% of oil and shale reservoirs unproduced, which is simply not acceptable. For the United States to maintain energy independence, EOR will have to be part of the equation. We're getting way ahead on this to ensure we're ready because we believe that the climate transition would not be affordable for the world without EOR being able to produce net-zero carbon barrels of oil. This is critical to our strategy and important for our shareholders, as it will add value not just in the U.S. but also in other regions.

One of the attributes we really like about EOR production, which we emphasize, is its lower decline. As we have navigated through the last few years, especially through downturns with lower commodity prices, being able to maintain a free cash flow has been due to the flat decline of less than 5%. We began restoring some low decline development last year. This year, as we proceed, we'll bring about 60 wells online, contributing about 4,000 barrels a day of new well production. The benefit of this EOR is when we talk mid-cycle, that production doubles the next year and triples by the third year. Thus, with our current investments, you expect to peak production of around 12,000 barrels a day three years from now. Additionally, as I mentioned earlier, the Seminole gas plant expansion will add around 85 million a day in capacity for about $40 million.

I appreciate the details, Richard. Maybe just sticking with the theme, I think you talked a bit about some spending being allocated this year for the second DAC facility in Kleberg. Is any part of that progression still contingent on conversations with the DOE? And do you expect a resolution around the funding and grants this year?

The discussions with the DOE are ongoing and progressing well. The timing of the start of the front-end engineering and design will depend on completing some of those discussions. The discussions will continue beyond that to prepare for the construction start, but there is a timeline that we are navigating.

Additionally, a lot of that spending is dedicated to building out the subsurface capability for CO2. Direct air capture is foundational for the King Ranch area, but we are also continuing to work on our other Gulf Coast hubs. We've submitted eight Class 6 applications and expect to submit another ten this year. This gives you a sense of the scale of our development work.

I'd like to come back to two things, please, Vicki. The first one on the CrownRock, if there's anything you can kind of offer us on what the FTC is asking you for a second request. And I'll just sort of preface with I understand there were concerns from some of the more integrated companies regarding concentration. I'm a little more surprised in a more upstream-oriented company. So anything you can help us with there?

Some of our teams felt like the FTC had asked for everything. I can tell you, our teams are diligently working with the FTC to provide them with all the answers they need. We are progressing and hope to, as we said, be able to close in the second half of this year.

So they ask for the moon and everything else?

Well, I didn't see the moon on there, but we're not done yet.

Fair enough. All right. The other question I had in terms of the capital efficiencies are obviously coming through in the Permian. The regular, let's call it, still modest growth there, but you're increasing the growth rate during 2024 for the Rockies and other part of it. When we had the follow-up calls yesterday, you said part of it was built in some mid-cycle businesses, maybe somewhat lower decline businesses. I was just wondering from a corporate structure, how you make the decision on where to allocate the growth capital here. Why lean more into the Rockies and the EOR rather than the Permian when the performance you're delivering at the wellhead kind of suggests it would benefit from more capital?

When you look at it on a corporate level, we try to balance our investments over time so we can have a sustainable growing dividend. We've got this unique balance which differentiates us from many other companies, and we want to take full advantage of that. I'd like to let Richard and Sunil chime in with their views on this because it is critical to our strategy.

When considering the allocation of growth capital to the Rockies, approximately 40% of that capital focuses on drilled uncompleted wells that were carried over from the previous year. The activity level last year put us ahead of drilling, and this year we will complete many of those wells. From a capital intensity standpoint, this provides very low cost for production added. Additionally, the Rockies yield high margins and royalties that drive competitive returns. The DAC count offers a view of this, expected to decrease significantly from the mid-60s range in the fourth quarter to the mid-30s as we manage toward a sustainable activity level.

When considering capital allocation in the oil and gas segment, we aim to balance margin, base decline, and capital flexibility. Cash margin begins with U.S. unconventional, garnering high returns, and enhanced by stable yet lower decline conventional investments and international assets with production sharing structures that mitigate some commodity price risk. Our overarching goal is to maintain a diverse portfolio of conventional and unconventional assets to manage decline while also maximizing returns and responding to macro conditions effectively.

My first question, Vicki, is on the DJ. I'm just wondering, could you remind me where you all sit? I think this is in good shape. I'm just wondering where you all sit on total permits pertaining to your DJ D&C plan? And then while early, are you all concerned about the latest potential Colorado bills?

I'll pass that to Richard.

From a permit standpoint, we've been very productive over the last couple of years. Currently, we're about one and a half times our current activity in permits. In the last six months, we've managed to secure 155. In the coming 12 months, we expect another 169. There are large ones we're working through in our overall development plans, which have been positively received. We continue to focus on emissions, improving safety, and consolidating operations to enhance transportation. These factors positively influence our permitting outlook.

Very helpful, Richard. And then just a follow-up on shareholder return on M&A. I'm just wondering, I assume the preferred redemptions would now not incur until late '25. Is it fair to assume that when you were looking at the CrownRock acquisition, you factored in the fact that any CrownRock incremental production or free cash flow would more than offset mitigated payments now for another year or so?

Yes, that's what we factored into that. Once we get our debt back down to $15 billion, the CrownRock acquisition will play a key role in resuming a robust share repurchase program for both common and ultimately preferred stock.

I was going to ask on a similar topic now that the asset sales are pushed out, and you don't have the term loan coming in just yet. Is the shareholder return profile, the base dividend this year and that kind of supports you getting to that $15 billion debt number a bit faster?

No, actually, we will accumulate cash flow as we continue to work toward closing the CrownRock deal. Part of the cash flow will be allocated to paying down both the term loan and our upcoming debt maturities. Thus, cash flow wouldn't be utilized for share repurchases until we achieve those goals.

Got it. And then I saw that the Battleground project was pushed out to 2026. If you could just go through any sort of the drivers of the extra time that was needed and what the status of the other plant enhancement projects look like? And maybe what the split of that $350 million EBITDA uplift was like kind of between Battleground and the other projects?

Projects were pushed out a bit like many other aspects due to supply chain issues and dealing with some inflation. However, those projects are progressing well. The importance of cash flow from the plant enhancement projects is evident, although actual cash flow from the Battleground expansion won't be seen until the second half of 2026. The OxyChem projects are expected to deliver a full uplift by the second half of 2026. Additionally, a $400 million reduction in mid-cycle contract prices in 2025 will reflect incrementally in 2026. When combined with the expected $1 billion in WTI at $70, this puts us in a strong position for 2026 with an incremental cash flow boost of at least $1.7 billion.

I appreciate all the detail you gave on the decision to direct more capital this year to mid-cycle investments. I wanted to ask specifically about the Gulf of Mexico, which is part of that. Back in December, you were planning on just the two drill ships. So I wanted to see what changed your thinking there to add a third drillship, especially given that services there seem to be tighter than they are onshore. Was it just part of this whole mid-cycle investment thesis? Or is there something else? Can you talk about specifically what you're seeing there that the third drillship will be targeting?

In terms of drillships, we're only planning on two drillships this year. In regards to the GoM overall, as I mentioned last time, our GoM 2.0 project is generating considerable excitement about the potential in our Gulf of Mexico assets. We're now focusing on detailed characterization work, and we see significant upside potential. Adding water injection is an economical way to achieve recovery factors on high-margin, low-development cost barrels. Typical improvements in appropriate reservoirs can yield between 10% and 16% improvements while simultaneously reducing decline. Therefore, we've successful analogs for these technologies in the GoM. We’re world leaders in these technologies across our operations, and domestic remains our foundation.

Yes, it does. I appreciate that, Ken. On your CrownRock acquisition call, Richard mentioned your pilot that you've been working on in the Midland Basin for a couple of years. I just wonder if there are any plans to expand EOR in the Midland in the near term? Did that have any bearing on your decision with the CrownRock acquisition?

The CrownRock acquisition stood on its own regarding quality and its role in our Midland Basin portfolio and made that asset stronger. We do believe the Midland Basin will be one of the areas we target significantly with enhanced oil recovery development that utilizes anthropogenic CO2. We're also focusing on similar developments in the Delaware Basin at this time. We have a pilot going on in Delaware that could present additional opportunities.

Just like to say thank you all for participating in our call today. Have a good day.