Occidental Petroleum Corp (OXY) — Q1 2024 Earnings Call Transcript

Thank you, Drew. Good afternoon, everyone and thank you for participating in Occidental's First Quarter 2024 Earnings Conference Call. On the call with us today are Vicki Hollub, President and Chief Executive Officer; Sunil Mathew, Senior Vice President and Chief Financial Officer; Richard Jackson, President, Operations, U.S. Onshore Resources and Carbon Management and Ken Dillon, Senior Vice President and President, International Oil and Gas Operations. This afternoon, we will refer to slides available on the 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.

Thank you, Jordan and good afternoon, everyone. I'm pleased to report on a strong start to 2024, driven by our persistent focus on operational execution. As we will detail in today's call, our oil and gas business delivered robust production results essentially offsetting an extended third-party outage, while our Midstream and OxyChem businesses outperformed our first quarter guidance. Today, I'll start by discussing our first quarter performance, including highlighting our Delaware appraisal success and its contribution to Permian's development runway. Then I'll discuss what's on the horizon for Oxy and how these initiatives are expected to generate significant value for our shareholders. Operational excellence is fundamental to everything we do at Oxy and our capabilities were evident during the first quarter as our teams generated over $2.4 billion in operating cash flow before working capital. Though the third-party outage in the Eastern Gulf of Mexico made it a challenging start to the year, our teams delivered excellent performance in all areas of our portfolio. We concluded the first quarter by approximating the midpoint of our production guidance and we restarted production from our Gulf of Mexico platforms affected by the outage in mid-April. Taking a closer look at our production results, the first quarter benefited from strong new well performance in the Permian Basin and the Rockies, overcoming the impact of winter weather early in the year. In the Permian, we exceeded the midpoint of our production guidance due in part to better-than-expected secondary bench performance in the Delaware Basin. Our Delaware teams are achieving impressive performance results by applying the same proprietary subsurface workflows that have generated remarkable success in our primary benches and applying that to secondary benches. Through utilization of fit-for-purpose well design and reservoir characterization expertise, performance in our secondary benches is nearly matching Oxy's record-setting 2023 program average. Not only that, first year cumulative production from Oxy's 2023 secondary wells exceeds the Delaware industry average for all horizontal wells for the same period by more than 30%. We are driving financial returns for our shareholders by improving our ability to high grade our near-term inventory and by extending our runway of Tier 1 locations. Meanwhile, use of our existing infrastructure yields meaningful capital efficiencies. We expect these efficiency benefits to become more impactful as secondary benches become a more substantial part of our development program. Our Rockies assets outperformed the high end of our first quarter production guidance, partly driven by strong new well performance in the DJ Basin, better production uptime, higher-than-expected outside operating volumes. And then internationally, we achieved record gross daily production in Oman North, driven by new well performance and production uptime. Our teams continue to improve capital efficiency through a combination of innovative well design, exceptional execution, proactive supply chain and management practices. In the DJ and Powder River Basins, our teams optimized casing and cementing plans, completion stage design and profit utilization. These fit-for-purpose well design enhancements resulted in tangible first quarter well cost reductions of between $700,000 and $1 million per well compared to the first half of last year. We're also starting to see cost reduction progress in the Delaware Basin. Our continuous drive for improvement not only leads to innovations that increased operational efficiencies but in many instances, we're also able to reduce emissions and advanced progress toward our net zero goals. I'm proud of our team's involvement in another oil and gas industry first, the deployment of a fully electric well service rig. Oxy and Axis Energy Services deployed the first of its kind rig into our Permian Basin operations. Expanding electrification is integral to Oxy's strategy because it increases operational efficiency, generates cost savings, improves safety and helps reduce our emissions. Our Midstream business significantly outperformed at the high end of our guidance for the first quarter. Outperformance was partly driven by gas marketing optimization across our portfolio where our teams captured value in regional pricing disparities. Warmer than expected weather, combined with various third-party midstream infrastructure maintenance resulted in disjointed prices in some regions. Midstream's first quarter performance demonstrates how our teams realized value from these pricing abnormalities by leveraging Oxy's rich market intelligence along with our product storage and transportation portfolio. Looking back over multiple quarters, our marketing teams have frequently demonstrated the ability to outperform, with our transportation optimization capabilities playing a major role. Over the longer term, we anticipate similar marketing opportunities but we generally exclude those opportunities from our guidance because of the difficulty in predicting events occurrence. Not only does our Midstream business provide us with flow assurance for our marketed products, it also offers great diversification during periods of commodity price volatility as we saw in early 2024. Along with being one of the top performers for the products we manufacture, OxyChem is a consistent cash flow diversifier within our business, due in part to its renowned focus on operational efficiency. During the first quarter, OxyChem benefited from improved demand from our marketed products, including PVC and vinyl chloride as well as lower ethylene cost. This performance demonstrates how our diversified asset portfolio is well positioned to deliver financial results for our shareholders throughout the commodity cycle. In prior calls, we have reiterated our drive to increase value for our investors on an absolute and per share basis through cash flow and earnings growth. Today, I'd like to provide an update on the specific projects that we mentioned in our last quarterly call. Some aspects of the OxyChem plant enhancement projects are complete but there is more to be done, including the Battleground project where the team held a groundbreaking ceremony on April 4, to kickoff the site work. Employees, contractors, community partners, city leaders and elected officials attended in support of the project. The completion of the OxyChem projects and reductions in crude oil and transportation rates from the Permian to the Gulf Coast are expected to deliver incremental cash flow of approximately $725 million per year. In our Midstream business, we expect that our ownership stake in Western Midstream, or West, will also enhance our financial results. In February, West announced an increase of over 50% to their distribution. Based on the current distribution, we anticipate that West will contribute over $240 million of additional cash flow per year to Oxy. Additionally, we intend to increase free cash flow by repaying debt as it matures. Repayment of existing debt maturities through 2026 will result in approximately $180 million of annualized incremental cash flow from interest savings that can then be applied to further strengthen our balance sheet. Overall, we expect more than $1 billion of cash flow improvements that are independent of commodities' cycles. That figure does not include our oil and gas business, which is also poised for continued financial success. As most of you know, at the end of last year, we entered into an agreement to strategically enhance our Midland Basin portfolio with the acquisition of CrownRock. The free cash flow accretion and portfolio high grading to be enabled by the CrownRock acquisition are expected to provide the potential for equity appreciation and acceleration of our shareholder return priorities. In our low carbon ventures businesses, we expect to generate cash flow detached from oil and gas price volatility and further strengthen Oxy's cash flow resiliency. Construction of our first direct air capture plant, STRATOS, is advancing on schedule. And during the first quarter, we were pleased to announce a multitude of carbon dioxide removal credit agreements with customers across a variety of sectors. Throughout Oxy's portfolio, we are focused on expanding resilient cash flow and enhancing shareholder value for decades to come. I will now hand the call over to Sunil, who will cover our financial results and guidance.

Thank you, Vicki. In the first quarter of 2024, we generated an adjusted profit of $0.63 per diluted share and a reported profit of $0.75 per diluted share. The difference between adjusted and reported profit was primarily driven by our litigation settlement gain related to the Andes arbitration and gains on sales included in equity income, partially offset by derivative losses. We exited the first quarter with nearly $1.3 billion of unrestricted cash. We had a negative working capital change, which is typical for the first quarter and is largely due to semiannual interest payments on our debt, annual property tax payments, and payments under our compensation plans. During the first quarter, we delivered over $700 million of free cash flow before working capital despite third-party outage impacts to portions of our oily high-margin production in the Gulf of Mexico. First quarter free cash flow was underpinned by outperformance in our onshore domestic portfolio and our Midstream and OxyChem segments. Looking ahead to the second quarter, total company production is expected to increase to a range of 1.23 million to 1.27 million BOE per day compared to the first quarter annual low of 1.17 million BOE per day. The midpoint of second quarter production guidance will be the highest quarterly production in over 3 years. The production increase is mainly due to U.S. onshore activity levels, the completion of annual plant maintenance at Dolphin, and the return of production in mid-April from the Gulf of Mexico outage. Our second quarter Gulf of Mexico production guidance includes third-party outage impacts in April as well as plant maintenance in the Central Gulf of Mexico. Though we revised full year Gulf of Mexico production guidance down, as a result of the extended outage, it is fully offset by outperformance in the Rockies and we are maintaining our total company production guidance for the year. The modified production mix is expected to impact annual total company oil cut. We had a strong start to 2024 in our chemicals business and anticipate modest price improvements during the second quarter, combined with higher volumes as we exit the usual period of seasonal subdued demand. Though lower gas prices are unfavorable elsewhere in our portfolio, OxyChem benefits from reduced energy costs and our midstream teams are well positioned to capitalize on the gas marketing opportunities that Vicki highlighted. Solid outperformance has enabled us to raise Midstream's full year guidance range by $110 million. Oxy's first quarter performance demonstrates the benefits of our differentiated portfolio. Our diversified assets and distinguished operational capabilities offer our shareholders' cash flow resiliency throughout the commodities cycle. In terms of capital spending, our first quarter results were in alignment with the 2024 business plan and the capital program that is weighted towards the first half of the year. On the last earnings call, we stated that approximately 40% of Rockies capital for the year is associated with drilled and uncompleted wells, or DUCs, carried in from 2023. We intend to continue completing these wells and reduce DUC inventory through the first half of the year. Similarly, Permian capital is weighted towards the first half of the year due to working interest variability and the desire to high grade rigs and increase utilization rates into the second half of the year. This U.S. onshore capital profile, combined with Battleground ramp-up, is expected to result in the second quarter being the highest quarterly capital for the year. I would like to close today by touching on the CrownRock acquisition. Our teams are working constructively with the FTC and we anticipate that the transaction will close in the third quarter of this year. As a reminder, Oxy will benefit from CrownRock's activity between the transaction's January 1, 2024 effective date and close, subject to customary purchase price adjustments. Concurrent with the CrownRock acquisition, we announced a $4.5 billion to $6 billion divestiture program to be completed within 18 months of the transactions close. The high-quality assets within our portfolio have garnered much interest and our teams have commenced the early stages of the divestiture process. Sales proceeds will be applied to deleveraging until we reduce our principal debt to $15 billion or below. The near-term cash flow enhancements that Vicki highlighted are expected to deliver significant free cash flow growth per diluted share for our common shareholders and to enable us to accelerate the achievement of our debt target. After our debt target is met, we intend to resume our share repurchase program and provide even greater value per common share. As we have discussed on today's call, we are well positioned to build on a strong first quarter of 2024 and deliver a differentiated long-term value proposition to our shareholders. I will now turn the call back over to Vicki.

Thank you, Sunil. Before we move to Q&A, I want to tell you about a milestone our team celebrated last quarter. Oxy began trading on the New York Stock Exchange on March 3, 1964. On that day, our operations consisted of 252 oil and gas wells in 6 states. Today, we're an international energy, chemicals and carbon management company with the best portfolio in our history. But I believe that Oxy's employees are a true differentiator. Their expertise and drive to outperform continue to stretch the limits of what is achievable in our industry. Our employees are hard at work executing our strategy through superior operations and best-in-class assets. Their efforts result in long-term shareholder value and I look forward to showcasing more of their achievements on future calls. With that, we'll now open the call for questions. And as a reminder, as Jordan mentioned, Richard Jackson and Ken Dillon are with us today for the Q&A session.

Thank you and good afternoon. I’d like to explore the Permian outlook further, possibly including the Rockies, or what we can refer to as the Lower 48. When we examine the capital expenditures and the forecast for the entire year, I’m curious about why there isn’t more optimism regarding total volumes. I understand that in the year-over-year changes, we’re seeing an increase in enhanced oil recovery and possibly a decrease in shale wells. I was wondering if that could explain the difference we are observing or why we don’t see production expectations raised as well.

Richard?

Yes, thank you, Roger. I appreciate your question. I am very pleased with our first quarter results from both the Rockies and the Permian, which performed strongly. Let me focus on the Permian first. As we progress from the first quarter to the second quarter, we see a significant increase in production. The projected increase from the first half to the second half in the Permian is about 18,000 barrels per day, and we are achieving this while reducing the number of rigs in operation. This allows us to enhance productivity with fewer resources. This also reflects in our capital expenditures, as we have a heavier front-loading of costs for both rigs and facilities in the first half of the year to support the anticipated production growth starting next quarter. Fortunately, everything is performing well. When looking at our yearly trajectory, we want to emphasize the new well production, especially the success of secondary zones which play an important role in our portfolio this quarter, in addition to the primary zones we've discussed in previous years. Another important aspect that we haven't highlighted enough is base decline. Our Permian resources are improving this year, with a reduction in base decline from last year by about 4% to 5%, translating to roughly 15,000 barrels per day. This improvement is due to better wells and enhanced operations. Our uptime has also increased by 1% to 2% in areas like the Delaware. As we consider our full-year guidance, we appreciate the first quarter's results, but we want to closely monitor how production ramps up over the next couple of quarters, and we look forward to updating our milestones and progress. Lastly, regarding capital efficiency, we've made strides with well cost improvements in both the Rockies and the Permian, through strong collaboration with service companies and changes in well design. This year, our capital intensity has improved compared to last year, meaning we are achieving better production relative to our expenditures. We will continue to focus on that and look forward to providing more updates throughout the year to enhance our overall outlook.

Thank you for the information. I have another question regarding the performance of the midstream sector. How should we view this as we look ahead to the next 1.5 to 2 years? It seems we may face constraints in moving oil and gas out of the basin, so are there other opportunities you are considering to enhance your operations?

For us, moving oil or gas out of the Permian Basin is not an issue. In fact, our midstream performance is benefiting from the capacity we have to move and trade gas. We're equipped to transport gas to California and other markets, which puts us in a strong position for gas marketing. Similarly, when it comes to oil, we're in a good situation with excess capacity to transport barrels out of the Permian. When we discuss fluctuations in the Midstream business related to crude marketing, it's often linked to the need to manage third-party barrels in addition to our current production. This volatility, along with gas marketing, can lead to fluctuations. However, this variability is usually advantageous for us because we can leverage our capability to adapt and take advantage of favorable situations where others may struggle. Currently, while our upstream realizations are lower due to the Waha situation, our Midstream business is positioned to capitalize on opportunities that help mitigate that impact.

Vicki, or possibly Rich, you mentioned the secondary branches, particularly the Bone Spring. Why is your operation spreading out across various locations or specifically in certain countries? Are there any patterns that indicate why those branches perform so strongly? We're trying to understand how crucial this is to your overall operations and inventory levels. Additionally, your DJ has been doing quite well, consistently exceeding your guidance for several quarters, at least 7 or 8. With that in mind, do you think your current estimates for the remainder of the year in the DJ are slightly conservative? What are the main factors contributing to this outperformance?

Yes. Thanks, Paul. I'll start in the Permian and get to the Rockies. The way we describe sort of our approach to primary benches and then it's turned into our secondary benches is really unique by area. And so we spend a lot of time and we've talked about it in the past, really focused on the subsurface aspects, both from a geologic perspective and then as you think about it over time, from a reservoir perspective. And so I think as we've continued to delineate and be more broad in terms of the zones that we put together in areas, we focus on how do we put these wells in space together in the subsurface to optimize that recovery. And, of course, your stimulation design and these other factors play an important role. So I don't think it's unique by area. I think it's the same approach that we've delivered in terms of the Midland Basin with the success we've had in the Barnett, what we're doing in the Delaware Basin, whether it's upper Bone Springs or deeper Wolfcamp. And I think, as we think about the Rockies, the same sort of approach there. In terms of the Rockies, they've had great performance over the last really year plus. And a lot of that started with the subsurface approach where we really spent time thinking about how do we approach lateral length spacing, stimulation intensity and I think a lot of the early gains we were seeing there. I think what we're seeing today is a lot more operational. We talk about how do we draw these wells down. So early time flow back and then longer term. And what we're seeing is really improvements in both. So in the early time performance, it's really having the facilities and the emissions handling to do that, not only at a correct rate but to handle the emissions. And then long term, we've talked about the base recovery with things like our plunger lift assist, kind of AI. And so these types of things are really what delivered the overperformance. I wish I could say it was conservative. I just think they've improved so much. When you're improving better than 20% year-on-year, that's sometimes tough to outlook. But I think they've gotten more mature in terms of some of these advancements over the last year and I think we've done a lot better job sort of narrowing the uncertainty of those outlooks. But all the teams are still on the hook to outperform this year. We're optimistic, like I answered earlier, in terms of what we're doing in the Permian as well. So I appreciate the question and hopefully, that helps.

My first question is just around noncore asset sales, recognizing we still have some time before the deal closes. But I would imagine you continue to have conversations around the divestments. And so just curious what your perspective is on the market right now and your confidence in the achievability of up to the $6 billion of noncore asset sales that many have anchored to?

Yes. There's a lot of incoming interest. Once we announced that we were going to divest between $4.5 billion and $6 billion, Sunil started getting a lot of phone calls and letters. And so the interest is there and it's very high interest. And what we're hoping and expecting is that, that high level of interest translates into appropriate levels of offers for the things that we might consider selling. But it all comes down to valuation and that's going to make the difference for us because we do have options and as you know, lots of acreage. So we're going to make the best value decision that we can. But we don't see that there would be any impediments barring something that we haven't foreseen that would cause us to have issues with our divestitures.

And the follow-up is just your perspective on the situation, please go ahead, Sunil.

Yes. What we were going to do is just for those that haven't heard, Sunil is going to go through the kind of what we think about with respect to divestitures, just to give those who might be listening get an idea of what we're looking at.

Yes. As we mentioned earlier, we are assessing our portfolio and identifying assets that don't align with our near-term development plan but may be appealing to other companies. We are considering the strategic fit of these assets within our prioritized portfolio and determining the potential value we can extract. We are exploring whether we can enhance that value through monetization. As Vicki noted, we are receiving numerous inquiries even before and increasingly more after the announcement, and this is the criteria we are using to decide if monetization is a viable option. Regarding your question about the $4.5 billion to $6 billion, we are fully dedicated to reaching that target within 18 months of closing. Through asset sales and organic cash flow, we aim to achieve the $15 billion in principal debt we have outlined.

That's great perspective. And then the follow-up is just on Battleground. I'd just love your perspective on both the chlorine and caustic soda markets. And how do you think about the outlook there? And once the expansion comes online, do you think that changes the supply-demand dynamics for any of these products?

Looking back at what OxyChem has accomplished in recent years, the pricing of PVC and caustic soda reflects an incredible super cycle. In 2022, we recorded our highest annual earnings, followed by our second-best earnings in 2021 and third-best in 2023. As we enter 2024, prices appear to be stabilizing, and during the first quarter, we noticed some strengthening in caustic soda and PVC. However, inflation in the United States paired with weak demand from China, which is currently overbuilt in both commercial and residential sectors, suggests that we won't see a recovery in Chinese demand soon. We are optimistic that beyond this year, as inflation starts to decrease, the housing market will be set for growth. If inflation levels become more favorable, we anticipate a recovery in prices in the United States. The international market, to which we export, will continue to pose pricing challenges, but I believe that in the next 18 months, fueled by demand from India and other regions, we will see growth and a rise in prices. We feel we are likely at a bottom right now.

So just thinking about the $400 million from midstream contract roll-offs. How much of the better terms baked into those numbers are you modeling that's locked in today versus what you're just kind of expecting? And to the extent you not locked in, what's your level of confidence in terms of going the other way as we get closer to the roll-offs?

I'm sorry, could you repeat that question a little bit. We had some disturbance.

Is this better? Can you hear me now?

Okay, apologies for that, Vicki. So just thinking about the $400 million from midstream contract roll-offs. How much of the better terms baked into those numbers if locked in today versus kind of what you're expecting? And what's your level of confidence that, to the extent if not locked in, that it might not go the other way before you have to renegotiate?

I have high confidence that we'll achieve the $400 million and some of that we're already seeing today. And I do believe that we wouldn't, trust me, we wouldn't say it if we weren't pretty confident that we'll get it.

And John, it's this confidence that actually helped us increase our cash flow from $350 million to $400 million.

Yes.

Fair enough. And then apologies if I missed anything on this but I was hoping you could get into the 2Q OpEx guide a little bit, which is somewhat flattish with 1Q despite higher production with the GoM back up. So it looks like a numerator issue and not a denominator issue. Just maybe any color there on the OpEx guide.

I think the operational expense guidance was primarily influenced by the Gulf of Mexico production and its rebound. I don't see any differences there. Do you?

No, I think that's right. Yes, we are seeing improvement with Gulf of Mexico production returning. However, as I mentioned in my prepared remarks, the second quarter does include some effect from the pipeline outage, and we also have a scheduled shutdown in Central Gulf of Mexico. Therefore, by the time we reach the third and fourth quarters, you should observe an improvement in the operating cost.

Yes, John, just to add to that trajectory. Q1 actuals were at $10.31 for U.S. LOE and we're outlooking $10.10 in the second quarter.

I have a question regarding your Permian drilling and completion plans, especially concerning Slide 24, which I find impressive. You mentioned anticipating an average of about 21 rigs this year. I recall you discussed this after operating 24 rigs in the first quarter. I'm curious about the expected cadence—will it follow a typical ramp down? Additionally, if your operational efficiencies remain strong, would you consider reducing the number of rigs while sticking to the production plan, or could this lead to increased production overall?

Yes. Perfect. Yes, I appreciate the question. Like I mentioned earlier, the plan is to ramp down just sequentially kind of as we go into the second half of the year. And really, that's been the plan since we boarded and came out. So we are seeing good operational efficiencies. I'd say time to market really in every area is slightly improved. So we'll consider that as we go into the year to just kind of understand how that may accelerate any capital and how we want to respond to that. I would say one thing that has played out well, we noted these cost improvements and a couple of things to note. Beyond just operational efficiencies, we are seeing some good outcomes as we work with our service providers like SLB. And so we've been able to, kind of as we relook and hit that more level-wise, let's say, balance and activity in the second half of the year, our utilization is going up about 10% on our frac core. So that's more pumping hours per year and that's both good for us but also good for our frac providers in terms of how they manage their business. And so those types of things are delivering these savings which we think will pace well even with some acceleration in our operational efficiencies. So as the cadence goes this year, we're heavy on D&C to start the year and facilities as well, like I mentioned. And really in that back half of the year, you'll see that capital drop and you'll see the production increase. And so looking forward to that. And then that should set us up at a much more level loaded and optimized pace going into 2025. And so obviously, we'll have options depending on where Vicki wants to take us with our capital program but that's sort of the thinking going into this year and into next.

That's what I was looking for, Richard. And then Richard, quick follow-up on the Permian for my second. How do you view the typical these days, you're doing great on bulk but your typical Delaware versus Midland well economics? Why I ask is, just looking at the curves you all show on Slides 25 and 29, which is again, I think you're showing around 450,000 BOE in the Del after a year versus around 250,000 BOE in the Midland, which again, knowing that they're cheaper wells, just wondering maybe in broad strokes, how you think about the difference in the economics?

Yes, you're correct. We consider the cost factors in both primary and secondary benches, especially in the Delaware. It's not just about the drilling and completion costs; in the Midland Basin, adjustments in drilling techniques can lead to reduced costs as well. This is also true for the secondary benches in the Delaware where getting into shallower Bone Springs results in cheaper operations. We see these effects in drilling and completion. The development areas our team has organized take facility costs into account too. For instance, we recently reviewed some shallower Bone Spring wells that were drilled about three years after the Wolfcamp wells. The returns on those secondary wells, despite having lower production, were nearly double that of the primary ones due to our ability to reuse production facilities. This coordination in production scheduling significantly enhances economic outcomes. In both basins, we aim for a balanced approach that optimizes facility and maintenance costs to maximize production efficiency per dollar spent, including both capital and operating expenses. Thank you for the question; this is indeed how we approach balancing capital and seeking full cycle returns.

Staying on the topic of the Permian. Can you provide some color on what's included in the Permian unconventional inventory count when it comes to the secondary benches in the Bone Springs? And how does your success potentially push the inventory count higher?

Yes, I'll provide some perspective on our inventory management and address the Bone Spring specifically. Over the past couple of years, we've successfully replaced the wells drilled while enhancing our inventory, which falls into two categories: appraisal activity and production improvement alongside cost reduction. Both of these factors contribute to adding inventory and reducing our breakeven points to below $60, then $50, and eventually aiming for under $40. This year, we targeted adding around 450 unconventional wells with breakeven costs below $50. A significant portion of this will come from our new third Bone Spring target, where we've identified four wells yielding over 780 MBOE. This will largely drive our inventory improvements this year. In the first quarter, to illustrate, we added 90 wells with breakeven costs below $50, with about half of those from the Bone Spring. We're also achieving results in New Mexico and from shallower Bone Spring areas. This approach not only focuses on our current drilling, particularly in secondary benches, but also aims to build low-cost inventory for the future. The significance of this inventory strategy lies in extending our low-cost capital intensity as we execute our plans over the coming years.

Got it. And then how do you think about potentially codeveloping some of the Bone Springs along with the core Wolfcamp? Or you're mainly looking at coming back and hitting those zones, leveraging the installed infrastructure as you mentioned?

Yes, I believe that optimizing our approach will be a significant focus for the next few years. In the Midland area, we engage in a lot of co-development, working on multiple zones simultaneously. One advantage of the Delaware region is our ability to sequence developments with greater precision due to the frac barriers, allowing us to avoid additional co-development challenges. This provides an excellent opportunity to maximize savings from reusing facilities. Last year, we had around 20% secondary benches in the Delaware, and this year, that figure is over 30%. This trend indicates that such opportunities are becoming more integral to our development plans.

I just want to start on CrownRock quickly. You mentioned that you're still on track to close the deal in the third quarter. When we announced the deal, you had talked about 170,000 BOE per day of production from CrownRock. Just wanted to see if you could revisit that and see how things are trending there as you are getting closer to the close?

We don't have any updates on the production or any other metrics from CrownRock, just what we have previously shared. We will definitely provide an update during our next quarterly meeting. By that time, I believe we will have closed the deal, or at least it will be sometime in the third quarter.

I wanted to ask about the recent developments in Colorado regarding SB24, which introduces a production fee for producers. What impact do you think this will have on Oxy, considering you are a significant producer in the state, and what are your thoughts on this initiative?

I believe that the agreement reached in Colorado is beneficial for both the residents and the investors in the state. By agreeing to pay the fee, we have also addressed some bills and potential ballot measures that could have significantly limited the oil and gas industry’s operations. This approach creates an opportunity for the governor and the Colorado government to use the collected fees positively. We do not see this as overly burdensome for our operations; rather, we view it as manageable as we pursue other initiatives, including efforts to reduce the impact on the ozone layer and actions that promote environmental justice. Overall, it's a comprehensive agreement that we consider favorable.

I wanted to ask for a little bit more color just on the guide just so I'm clear on how numbers are progressing this year. The impact from the Gulf of Mexico, is that exclusively what's contributing to the 100-basis point reduction in oil cut this year? Are you seeing some contribution from some gassier zones and some other of your core assets or perhaps the impact of the PSE in areas like Algeria?

No, it was almost entirely due to the Gulf of Mexico shutdown. There's really nothing else trending differently that we have in our portfolio.

Appreciate that. And then maybe just a follow-up on the discussion around deleveraging and noncore asset sales. It sounds like on this call, you might be emphasizing more the cash flow returns that you would be otherwise receiving from some of these assets that maybe the market has flagged as divestiture candidates. Is that the intention here in signaling that you intend to delever more organically in that noncore asset sales either theoretically would be higher in dollar value to reflect that cash flow contribution or might take longer to materialize?

I don't think that's what we intended to say. That was not the message we intended to give. When we talk about the fact that we will evaluate everything from a value perspective, what we want to do is just ensure that we're making the right decisions and divestitures of noncore areas is something that we want to do. And we believe that based on the interest that we're seeing that we should be able to achieve.

I'd just like to thank you all for your questions and for joining our call. Have a great rest of your day.