Occidental Petroleum Corp (OXY) — Q2 2024 Earnings Call Transcript

Thank you, Drew. Good afternoon, everyone, and thank you for participating in Occidental's Second 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 will now turn the call over to Vicki.

Thank you, Jordan, and good afternoon, everyone. I'll begin today by highlighting another quarter of exceptional execution across our business segments. Our teams delivered strong operational performance during the second quarter. Our technical and operational excellence, paired with a high-quality asset portfolio, continued to deliver value across our businesses. Last week, we further strengthened our portfolio through the addition of CrownRock's assets in the Midland Basin. We were also pleased to announce that our strategic divestiture program is progressing, and we have a clear line of sight to meeting the debt reduction targets we set out when we announced the deal last December. This afternoon, I'll cover our second quarter results and operational performance as well as our CrownRock integration plans. Sunil will then review our financial results and guidance, including an increase in full-year guidance for our midstream earnings. In the second quarter, we delivered Oxy's highest quarterly production in 4 years for both total company and U.S. onshore. This exceeds the midpoint of total company production guidance, generating $1.3 billion in free cash flow before working capital. This was driven by exceptional execution across our business segments, with notably strong Permian new well performance and higher production uptime, along with outperformance in the Gulf of Mexico. We're exceeding our production expectations for onshore new wells across all our basins and are continuing to achieve operational efficiencies as we execute our capital program. This year-to-date, we've seen approximately 10% improvement in our unconventional well costs compared to the first half of last year, putting us ahead of our planned well cost savings. These savings have been achieved through lower nonproductive time, increased frac utilization, operational efficiency gains, and facilities optimization as part of our focused program to lower well costs, decrease time to market, and increase free cash flow. We anticipate further acceleration in time to market in the second half of the year. Importantly, we continue to deliver industry-leading performance and secondary bench development, supporting long-term economics and inventory replenishment. The momentum we are generating on development costs across many facets should translate to capital efficiency improvements as we look toward the end of the year and into 2025. In addition to improved capital efficiency and continued well performance leadership, our teams have driven down lease operating expenses across our domestic assets to enhance our cash margins. In the second quarter, our per BOE lease operating expenses decreased over $0.60 a barrel, a 6% improvement relative to the average of the prior 3 quarters. We have several more optimization initiatives planned for the second half of the year, which should give us a favorable outlook toward year-end. For example, in our Permian EOR business, we are finding ways to utilize CO2 more efficiently in our reservoirs. We're also optimizing our artificial lift, which has led to reduced failure rates and associated downhole maintenance costs. In the Delaware Basin, we've decreased water disposal costs by doubling the volume of water recycled relative to the first half of last year. Water stewardship remains a key priority in our operations, and I'm pleased to highlight a recent milestone in which we recycled a cumulative 50 million barrels in our Midland South Curtis Ranch treatment facility. In addition, we have now recycled over 150 million barrels in our New Mexico operations since 2019. Overall, we have built solid oil and gas segment momentum as we move into the second half of 2024. This gives us confidence to maintain our full year production guidance, excluding CrownRock for our total company and Permian assets despite the expected divestiture of 15,000 BOE per day in the fourth quarter. Our midstream business significantly outperformed in the second quarter with an adjusted pretax income more than $180 million higher than the guidance midpoint. Our domestic gas marketing teams followed up on the success of their first quarter by utilizing their extensive market intelligence and transportation capability to benefit from regional pricing dislocations. Furthermore, as healthy storage levels and stable Permian output continued from earlier in the year, the second quarter presented abnormally high planned and unplanned maintenance on takeaway pipelines. Our teams capitalized on this opportunity, highlighting the value and the diversity our asset base provides. As we look ahead to the second half of the year, we anticipate fewer opportunities for optimization after the Matterhorn pipeline was placed in service, which is expected in the coming months. However, our teams will be prepared to act if additional bottlenecks arise. Looking now at our low carbon businesses, we're excited by the advancements we are making. As construction of STRATOS, our first direct air capture facility moves forward, our Low Carbon Ventures team continues to demonstrate that demand for carbon dioxide removal credits is growing. In July, we announced an agreement with Microsoft for the sale of 500,000 metric tons of CDR credits over 6 years from STRATOS. The agreement is the largest single purchase of direct air capture CDR credits to date and highlights the increasing recognition of carbon engineering technology as a solution to help organizations achieve their net-zero goals. I would now like to talk about how pleased we are to integrate CrownRock into the greater Oxy portfolio. We closed the acquisition on August 1, and we continue to be impressed with CrownRock's efficient operations and employee talent. As we have discussed previously, this acquisition complements and enhances our premier Permian portfolio with the addition of high-margin production and low breakeven undeveloped inventory. We're excited about the subsurface and geologic potential of these assets, and our technical teams are eager to apply their subsurface expertise and workflows to generate maximum value. We're also looking forward to leveraging our newfound scale in the Midland Basin. Over the years, we've seen how scale has driven significant technical advancements and operational efficiencies in our other basins. We are confident that as we integrate our Midland Basin assets, we'll unlock meaningful efficiencies through infrastructure sharing, resource utilization, and by bringing together best practices from each of our organizations. Our combined teams have made great strides in the past several days getting to know each other and integrating CrownRock into Oxy's organization. On our next call, we're looking forward to telling you more about our post-CrownRock enhanced portfolio and how the integration is advancing. One of the many benefits of this acquisition was the opportunity to high-grade Oxy's existing portfolio of assets. In December, we laid out plans for our $4.5 billion to $6 billion divestiture program to be completed within 18 months of the acquisition's close. Given the inventory depth of our onshore portfolio, we welcome the opportunity to monetize some of these assets at an attractive price. And as we announced last week, the divestiture program is progressing well. Since the start of the year, we have closed or announced approximately $1 billion of Permian Basin divestitures. The proceeds from these sales will go directly towards debt reduction. This progress on divestitures, coupled with a robust organic cash flow underpinned by our steady focus on operational excellence, has positioned us well to reduce our debt in the near term. Sunil will address this in more detail, but we're excited that we're on track to retire approximately $3 billion of debt during the third quarter, which speaks to both the quality of our assets and our future cash flow potential. Now, I'll hand the call over to Sunil to provide more details about our second quarter financial results, our guidance, and progress on strategic financial action.

Thank you, Vicki. We are excited with the recent progress we have made in executing the portfolio high-grading plan we outlined in December. Oxy has realized an immediate enhancement of our U.S. onshore portfolio with low breakeven inventory and expansion of free cash flow generation potential upon the closing of CrownRock last week. The opportunity to build scale in the Midland Basin made this transaction a strategic fit for Oxy, and the newly acquired assets will immediately compete for capital. In late July, we issued $5 billion of senior unsecured notes. We used the net proceeds of the offering and term loans to fund the cash consideration of the CrownRock acquisition. Overall, we were highly pleased with the investor demand for the bond offering. We placed notes maturing in 5 tranches at 3, 5, long 7, 10 and 30 years at a weighted average coupon rate of less than 5.5%, creating a manageable debt maturity profile given our deleveraging plans. Our efforts to strengthen our balance sheet remain a top priority, and we are achieving early success in debt reduction. In July, we retired $400 million of debt at maturity, and our strong organic free cash flow is enabling further deleveraging progress in the coming weeks. By the end of August, between additional Oxy maturities and the early redemption of CrownRock's notes, we will have repaid an additional $1.9 billion of debt, bringing the total to $2.3 billion. Add to this the proceeds from the Barilla Draw divestiture, and we expect to have repaid over $3 billion in debt by the end of the third quarter, which is almost 70% of our near-term reduction commitment of $4.5 billion. We will continue to prudently advance deleveraging via free cash flow and proceeds from our divestiture program. We were pleased last week to announce the agreement to sell certain Delaware Basin assets for approximately $818 million. The core of this divestiture centers around approximately 27,500 net acres in the Barilla Draw field of the Texas Delaware basin. While these assets have been core to Oxy's Southern Delaware position for over a decade, the remaining inventory is long outdated in our current development plans. We anticipate closing the sale late in the third quarter and estimate a 15,000 BOE per day reduction in fourth quarter Permian production. Separate from this transaction, we also announced additional completed disposals from earlier in the year, involving several smaller undeveloped acreage positions throughout the Permian, approximately $152 million in total. This brings total year-to-date closed or announced divestments to $970 million. Consistent with our cash flow priorities, all net proceeds from these sales will be allocated to debt reduction. We are satisfied with the progress of our divestiture program and the trajectory of debt reduction plans. We are ahead of schedule on our near-term debt reduction commitments, and we will continue to focus on strengthening our balance sheet through a combination of divestitures and excess cash flow until we reach our principal debt target of $15 billion or less. In the second quarter, we generated both an adjusted and reported profit of $1.03 per diluted share and exited the second quarter with $1.8 billion of unrestricted cash. As Vicki highlighted earlier, we generated over $1.3 billion of free cash flow before working capital, driven by sustained success across our diversified business segments. More specifically, the second quarter was marked by strong production performance in the Permian and Gulf of Mexico, driving high oil volumes. In the Midstream segment, substantial value capture was realized, particularly in gas marketing as evident through the greater than $180 million adjusted pretax income outperformance when compared to the midpoint of guidance. We are delighted with how operational excellence drove financial results in the second quarter and continue to benefit from a complementary asset base that positions us for success through a wide range of pricing environments. Our second quarter capital was largely in line with the first quarter, consistent with our business plan of front-half AV and domestic oil and gas activity. We reported a negative working capital change in the second quarter, primarily due to higher oil volumes and increased barrel shipments on the water at quarter end. Rockies-related property tax payments, which are based on a 2-year revenue lag and incorporate a period of higher oil and natural gas prices from 2022, also played a contributing factor. Now looking ahead to the second half of 2024, we have provided pro forma guidance based upon the following assumptions. We included CrownRock in our guidance beginning August 1, and we excluded from guidance the 15,000 BOE per day of fourth-quarter production associated with the Permian divestment as we expect the transaction to close late in the third quarter. Even after adjusting for this disposition, Oxy's total and Permian full-year production, excluding CrownRock, is expected to remain flat due to a higher Permian outlook. Including CrownRock, the midpoint of our total company production guidance has increased from 1.25 million to approximately 1.32 million BOE per day. Building on the operational momentum generated in the first and second quarters, we anticipate an improving production trajectory in the back half of the year in all our domestic assets. This includes the Gulf of Mexico even after incorporating some downtime for potential disruptive tropical weather in our guidance. Excluding CrownRock, the midpoint of our third-quarter production guidance would represent a new record for the highest quarterly production in over 4 years. In the appendix, we have summarized some of the key full-year guidance changes associated with consolidating CrownRock into our portfolio. Aside from the production benefits, we anticipate a notable improvement in domestic operating costs from adding these high-margin barrels. Excluding CrownRock, we are also pleased with Oxy's improvement and favorable trajectory of operating costs and capital efficiency across our U.S. onshore assets, as highlighted by Vicki earlier. OxyChem's 2024 business is performing well, with results largely in line with the plan we laid out at the start of the year. However, challenging economic conditions in China, combined with the continued deferral of interest rate reductions, have dampened OxyChem's trajectory for the year. As a result, we are revising OxyChem's full-year guidance down to a range of $1 billion to $1.1 billion. We continue to anticipate that 2024 will be another strong year for OxyChem by historical standards. With midstream and marketing strong second quarter, we have raised full-year guidance by $220 million. We anticipate a more muted third quarter as additional Permian gas takeaway capacity is expected to come online, reducing gas marketing optimization opportunities. We continued to execute our 2024 capital program as scheduled. While the legacy Oxy capital will decrease in the second half as a result of tapered domestic activity, maintaining CrownRock's 5-rig program will reshape the investment profile as we increase the full-year total company net capital range to $6.8 billion to $7 billion. In closing, I want to discuss how Oxy is delivering on the financial milestones we laid out in December. A sustainable and growing dividend is the foundation of our shareholder return priorities. Earlier this year, we followed through on a commitment we made when we announced the CrownRock acquisition and raised our quarterly common dividend by over 22%. The free cash flow accretion that we anticipate from CrownRock, along with the expected improvements from our non-oil and gas segments of our portfolio, provided us with the confidence to raise the dividend. Maintaining our investment-grade credit rating is a key priority. In recent weeks, we received ratings affirmations from all 3 rating agencies, including our investment-grade credit ratings from Moody's and Fitch. We are focused on our deleveraging strategy, and we remain on track to return at least $4.5 billion of debt well before next August. We are off to a promising start with our divestiture program. We will continue to evaluate our high-quality asset portfolio for divestment opportunities and will apply those proceeds to further debt reduction, thereby strengthening our balance sheet. Oxy is methodically delivering on these key financial commitments. The strategic and financial actions we have taken over recent quarters are converging to benefit our portfolio, increase cash flow generation capability, and ultimately, accelerate shareholder value. I will now turn the call back over to Vicki.

Thank you, Sunil. Before we move on to the Q&A, I would like to close by focusing on a few of Oxy's differentiated value catalysts. Our subsurface expertise, technical excellence, and operational strength allow us to continuously achieve basin-leading well performance while simultaneously driving efficiency and savings. The addition of CrownRock further enhances what I believe is Oxy's strongest portfolio in our century-long history and kicks off another phase of Oxy's cash flow growth with future upside through improved resource recovery and lower-cost opportunities. I can't wait to see the value that the newly combined teams deliver given the quality and depth of development opportunities coming with this new asset. Beyond oil and gas, we expect our OxyChem and midstream businesses to continue to provide material cash flow durability in the years ahead. And finally, Low Carbon Ventures continues to develop practical decarbonization solutions that are solidifying our leadership in this important emerging market. These businesses together position Oxy's common shareholders to benefit financially for decades to come. We will now open the call for questions. As Jordan mentioned, Richard Jackson and Ken Dillon are on the call with us today for the Q&A session.

Vicki and team, good progress here on deleveraging. That's kind of where I want to start. Recognized the Barilla Draw announcement here a couple of days ago, but what's the asset sale market look like? And can you talk about the opportunity set to continue to make progress on monetization?

Yes. As you know, we have a deep inventory of assets, and our portfolio is very, very strong. And I certainly appreciate your interest in the details, but we feel like talking in detail about what the assets would be would compromise our ability to maximize the value of those divestitures. We've said previously that we get a lot of incoming offers, but it's clear that this is not a fire sale, and it is not. This acquisition has actually enabled us to improve our inventory quality and scale, which provides us now the opportunity to bring forward value. And that's what we did with this CrownRock acquisition. It's not that the assets that we just sold are, as Sunil said, a part of our core for 10 years; it's that we knew that we needed to bring forward the value to our shareholders. And we did it in a way that makes our inventory stronger, so it was the best possible way to do it. But in terms of talking about the other assets, I can just assure you that we have high confidence we're going to be able to achieve our debt reduction targets. And as you saw and as you mentioned, definitely, we're off to a good start, and we're excited about where we're headed with this and think that certainly, the $15 billion that we are targeting to achieve is doable by the end of 2026 or first of 2027, we've previously said.

I would like to follow up on the CrownRock acquisition, referencing Slide 27. I’m interested in your initial thoughts, understanding that you'll provide more details next quarter regarding potential synergies and insights into the production profile. You mentioned this being a 170,000-barrel-a-day asset, and although the guidance is somewhat lower, I recognize that it doesn't represent a full year yet, and that you have your hands full managing these assets. Could you share your perspective on the production profile and the associated synergies?

Now bearing in mind that with the SEC rules and regulations, our teams have had the opportunity to get together and to talk but not to dive into the details or their plans. And so we've had now just a week for the team to start looking at what the situation is now with CrownRock. And we're, again, incredibly excited about the assets. But I think Richard's team has found some additional details that have differentiated what we were expecting versus what happened over the past couple of quarters.

Yes, that's great. Thanks, Vicki. I will address this question in a few parts. I'll start with our current status. Like Vicki mentioned, I'm thrilled to work with our new team and recently spent time with them after the close last week. They are everything we anticipated, and I'm genuinely excited about the opportunities ahead. First, I'll discuss our current position and then address some synergies and our overall thoughts about them. As we noted in our prepared remarks, we will provide more updates as we approach the end of the year. To begin, this plan originated from CrownRock's 2024 strategy, which we didn't have much insight into initially. We've spent time assessing the situation, and there are many positives. We see long-term upsides, not just for this year. Concerning our latest guidance of 170, we’ve communicated with the team about a few points. Like us, they experienced some downtime earlier this year due to weather and other operational issues, which were more isolated events rather than ongoing problems. Most of the changes in their current program stem from their development plans aimed at optimizing returns beyond this year. They focused on shallower zones, which had tighter spacing and shorter horizontal lengths, resulting in a different approach compared to our original plan. We're currently in the process of analyzing this. Although progress toward reaching the 170 has been delayed, the potential benefits are still there. A couple of positive notes include well costs. I'm encouraged by their current costs and the improvement opportunities they see, which we will explore further. From a performance perspective, we have the chance to collaborate on well spacing and the sequencing of our development plans. This will be crucial for our work in the coming year. Additionally, scale and efficiency offer significant opportunities as we consider rig and frac core utilization. Improving resource utilization will enhance our time-to-market. As Vicki pointed out, our water management capabilities are a point of pride, and in combination with the CrownRock team’s strong position and scale, we anticipate achieving both cost and operational synergies. In summary, I am excited to be with the team and see the same opportunities and upsides ahead. We're looking forward to sharing more details as we move toward the end of the year.

Sorry, I was on mute. Sorry about that. Maybe I want to switch gears a bit. I want to ask about the STRATOS project. Really, congratulations on signing the agreement with Microsoft this quarter. And I wanted to get an update on where that project is today, the start-up timing on that. And any goal on what percentage of the carbon credits that you want to sell ahead of time? And yes, maybe start from there.

Right. No, thanks for the question. We're excited certainly with the STRATOS project and the progress, and I'll flip it to Ken after a few remarks, kind of give you more detail on that. I'd say generally, we continue to see great progress in the business. Obviously, the sales with Microsoft not only be the largest CDR kind of block sale to date, but really, that counterparty meant a lot to us. We know they're very diligent in the way they think about what the product of a CDR can mean to the business, and it's just great constructive dialogue that ultimately rolls into the future market and what that product can deliver. So beyond just the monetary aspect of that, we're very pleased with that outcome. I'd say the other thing I'd like to highlight, and I think again, as we roll into STRATOS next year and then think about the future, continue to see great progress out of our carbon engineering R&D team. And so as we think about the core elements of that process, being able to process air, capture CO2 in our sorbent, liquid sorbent, and then how do you efficiently release that and either sequester or use it. We're seeing some very innovative things that we can see direct line of sight to cost down, which is ultimately what we're trying to do as we get into the development. And so those are sort of the catalysts we're paying closely to intentionally. I would say, to your point, we'll continue to monitor CDR sales. We remain very optimistic on the outlook of that market. We hadn't set any specific parameters in terms of what that target is going forward, but it will be a major component of our FID criteria for that DAC too, for certain. I think as we get closer to that, over the next period of time here, we'll be able to give more disclosure of how we think about that from a commercial project to FID. So maybe with that, I'll turn it over to Ken.

Overall, we remain on track for start of next summer. We currently have around 1,200 people on site, which is our peak. We'll start rolling off soon. We've been able to staff all trades as necessary. Worley continues to do an excellent job. The efficiency of each of the trades is at or above where we expected them to be. We're now moving away from bulk fill, by that, I mean putting in the large piping, equipment, etc., into completing the systems one by one. So we're at that stage now so that we can commission in the right sequence. We get power live this month, which then means we can start getting the control room up and running and testing all of the instrumentation throughout. So it's going really well at the moment. Also, as Richard highlighted, we are constantly learning during construction and also from the Carbon Engineering Innovation Center. We're seeing really great potential for performance improvements and cost down improvements, and we're looking at how to incorporate these learnings as quickly as possible. Companies like Technip Energies are also focused on how to achieve cost down for their equipment, and that's driven from the top of the company. So we're getting great support from our visionary vendors who have bought into the long-term DAC future. So I hope that answers your question.

Yes, it does. Shifting back to upstream, I have a follow-up regarding the Rockies. After several quarters of strong performance, do you anticipate that the third quarter guidance will show sequential growth? However, as activity is expected to slow down in the second half, I would like to know your thoughts on the trajectory of production activity moving forward.

Yes, no, appreciate that question. The Rockies has been a significant part of our outperformance over the last couple of years. So a couple of things are going on there. I think, continue to do well in the DJ and the Powder River basin. So as we highlighted in the slide, each of those are seeing sequential well performance improvement, even in the DJ, where we've been more mature in operations. And so I'm very, very pleased with that. From an activity standpoint, we really have done work in the early part of this year in the Powder River basin, where again, the well performance has been very good, not only against the industry, which we note, but also against our internal expectations. What we're planning to do there is we'll lower activity in the second half of the year while we pause and really rework our development plans. Similar to what we've kind of laid out generally in our highlights slide, we're looking at how do you take primary and secondary benches with the Turner and now even the Mowry and think about that longer term as we build out our infrastructure. So what we're expecting is to be in position at the end of this year to be able to put together a development plan and then have that compete with capital as we go into 2025. So again, just very pleased with that, but I would call it steady activity in the DJ with a couple of rigs and then really putting a competitive case forward for Powder River basin in 2025.

I think the first one is maybe for Sunil. I think you guys have said you have discussed with Ecopetrol for them to purchase 30% on divided interest in the CrownRock and then that fell apart. So from that standpoint, what is the sticky point on that? And perhaps more importantly, the reason why you purchased CrownRock must be you think the asset is better or at least better than the average of your portfolio. So why that will be one of the first assets that you're trying to sell down? So trying to get some understanding of the logic behind when you're initially talking to Ecopetrol for the deal. Second question is that I know it is a little bit early for 2025 for CapEx and production, but can you give us some idea that maybe the moving part, plus and minuses for next year on both the CapEx and the production number.

Paul, thank you for the question. I'll take the first question you had. I can tell you we absolutely believe that the CrownRock asset, as a combined asset, is one of the best we've seen. Tim Dunn did a great job of putting together the portfolio of assets that CrownRock had, and they did a great job of developing it. There's a lot of really good possibilities in there for continued expansion. And as you know, the inventory came in mostly in our Tier 1 inventory. So the way that worked is that we wanted to buy 100% of CrownRock. I actually informed Ecopetrol on numerous occasions that our preference was to purchase 100% of CrownRock. But as a part of the Rodeo Joint Venture, we had an agreement with Ecopetrol within that JV agreement that they had the right to purchase 49% of anything that we purchased within a certain area and vice versa. If they were to purchase something, we would have had the right to buy 49% of what they had purchased within a given area within the Midland Basin. So we wanted it all, but they also wanted to be a part of it. They saw the assets. They know they were high-quality assets. They wanted to be a part of it. Since they are a valued partner to us, we've been in partnerships with them for decades, and we have a great relationship with them, we negotiated a 30% working interest that we felt like would be fair and beneficial to both us. We worked on that deal from March to just last week, and we thought we were done, but President Petro of Colombia didn't approve of it. He's made it very clear to the world that he's anti-oil and gas, anti-fracking, and anti-U.S. With those 3 strikes, he pretty much dealt the Ecopetrol out of the deal. That's all according to news reports. But we wanted it all; they wanted a part of it. Unfortunately, there are others in the world like Petro. There are some, actually in the United States, like Petro, who believe that oil and gas should go away and that we shouldn't be an industry anymore and that renewable energy will be all that's needed to go forward and help with the climate transition. But the reality is that, as you know, oil and gas will be needed for many decades to come. The other part of what Ecopetrol had some interest in was our strategy. Our strategy in the Midland Basin with respect to CO2 and enhanced storage recovery is very important to the world as we're taking CO2 out of the atmosphere and putting it in the assets that we have in the Midland Basin, including CrownRock to get more oil out of the ground. They were very, very excited about that and wanted to be a part of it.

Just sticking with the Ecopetrol joint venture, how much production is associated with that JV? And just out of curiosity, if they did not want to continue in the Midland for some reason, would you be potentially interested in that asset?

So the way that would work is that if we continued on beyond the ending of the potential ending of the JV, the interest would just be divided 49% for Ecopetrol and 51% for Oxy. So a discontinuation of the JV would just result in a couple of scenarios, one being, if we just broke it off and didn't go forward at all with the JV, we would each just have a normal operating situation where it's 51% us; 49% them. Did that answer your question?

Yes. I was just sort of curious if you would be interested in that asset and just sort of curious as to how much production may be associated with that joint venture currently.

I believe that's around 40,000 barrels a day.

Yes, that's right. Yes, it's around 40,000.

That's very helpful. And then for the second question, very quickly, what was the run rate spending at CrownRock?

Was it 900?

Yes, it's been very steady. I think we gave the guidance midpoint around indiscernible, and it's been very steady with their 5 rigs. We looked at that, and I think that's part of their success. They've been able to maintain a flat performance, which translates into a strong production profile as well. So you can consider it very steady.

Yes, I just wanted to clarify on the Midland production, the 40,000, that's our net production.

So my first question is on the asset sale program. To date, you've sold or agreed to sell about $1 billion worth of assets. Is there anything you can offer on the lost cash flow that you expect from these assets? We know the production impact from Barilla Draw, but I was just wondering on the cash flow side, if there's anything you can give us there.

We can't yet because we really haven't made decisions on what the next set of divestitures would be. We're still under evaluation of that.

Okay. Yes, I was just referring to the $1 billion that you've already announced, but okay. So my follow-up is just on the DAC program. Maybe you can talk about how it's developing, kind of looking past STRATOS. Are you in serious or advanced discussions with potential partners and/or licensees for future DACs? Or do you expect that those discussions would ramp once you have sort of a proof of concept out there with STRATOS being operational? Just trying to understand how you expect the program to evolve post STRATOS.

Yes. Maybe I'll answer that, kind of yes to both. I think one thing we've done is with the King Ranch sequestration hub, we continue to develop that. We're pursuing really across all of our sequestration hubs in the Gulf Coast, our stratigraphic wells that prove the subsurface storage capability. We're going through permitting for class 6 wells. We put that front-end work together to accommodate both direct air capture and our point source. That continues to go well. King Ranch is really what we've targeted for the next development beyond the Permian. It really has a lot of scale advantages that we've talked about in the past, both with the subsurface and as we think about the balance of plant. You think about key power inputs, emission-free power inputs, water, or other advantages. That sort of engineering work, we continue to do for South Texas as it relates to the subsurface and DAC. But yes, to your first part of the question, we do think it's essential to see STRATOS as we continue to show this great line of sight on cost down, both in STRATOS and the construction and then as it turns into operations next year and also how we think about the carbon engineering innovation center and the R&D improvements that Ken and I talked about earlier roll in. We think that's a very important thing to factor into that South Texas FID in addition to the continued CDR sales that I mentioned earlier. The exciting part about that King Ranch development is it's a 30 million-ton per year hub. You get these tremendous economies of scale that we really think add to the R&D improvements in terms of cost down. That's really how we see that play out if you go back to our early presentations on the development plan into the next decade. That's a big part of that ramp-up. Let me stop there, and hopefully, that answered some of the intent of your question.

Yes. I guess, I'd kind of like to come at the question on the cash returns. Comments were made in the presentation on the catch-up calls yesterday, getting the debt paid down and then getting back to buying back shares, potentially even going after retiring the preferred. And I'm just curious kind of how you're looking at that in terms of what you would want to do once the balance sheet is where you want it. Meaning, do you want to get all the way back to buying back the preferred again? Or does it make sense to be a little more steady with the share repos, raise the dividend, and then leave yourself the flexibility for acquisitions?

It really depends on the overall economic situation. The acquisition we made today, in my view, provides better value than buying back shares. That's why we chose to go ahead with that deal. However, share repurchases are still part of our strategy, especially since our share price is currently much lower than we think it should be. Once we manage to reduce our debt down to $15 billion, we will resume share repurchases, depending on the economic conditions at that time. If we find ourselves in a situation where we can buy back enough shares to achieve the $4 per share threshold, we would also start repurchasing the preferred shares. We cannot dismiss the possibility of acting in a prolonged high-price environment. Although the Berkshire preferred will be available to us at a 5% premium instead of 10% starting in 2029, if we haven't repurchased it by then, we would certainly initiate a campaign to buy the preferred shares at that time. That would probably happen mid- to late quarter is the last update that we've had.

My first question, Vicki, is about the Gulf of Mexico. Could you provide some insight on your activity with tiebacks for the rest of the year? It seems like there are numerous opportunities available, and with all these prospects, do you expect to see an increase in exploration projects starting next year?

The exploration won't be as aggressive as it's been in the past because we launched an evaluation using data analytics and AI. We want to give our teams the tools that we believe will help even further understand what's happening in the subsurface of the very complex deepwater prospects within the Gulf of Mexico. But the exciting thing is we have numerous other things that we can do in the Gulf of Mexico that Ken can describe.

Thanks, Vicki. I think overall, the teams are performing really well on all fronts, the base, including primary, exploration, and the waterflood designs. On the base, for example, as a result of recent OBN seismic data, we moved further northwest at one of our fields and brought on a 15,000 barrel a day well, which came on in early May. From further analysis of the OBN data, we're seeing more potential in that area than others. In exploration, we're currently involved in 2 recent discoveries in GoM, Ocotillo and Tiberius. Ocotillo can tie back to Marlin, Tiberius to Lucius. These are like 3.5 mile to 8 mile tiebacks. Both projects are going through our process to FID at the moment, and we can discuss more after sanction. We're continuing our waterflood project designs. We'll be capable of commencing execution next year. These have the potential to add substantial low-cost reserves in these projects. We're in our wheelhouse as a company where waterflood is one of our strengths. Operationally, we've safely completed all our major turnarounds for the year. So positive overall in GoM as we lean into the AI pilots that Vicki highlighted earlier.

Great update. I'm curious about OFS services. Are you noticing any impact from the recent volatility or slight downturn in oil prices? Have you detected any recent softness, and how are OFS prices differing between onshore and offshore?

Let me start by mentioning that we are seeing an improvement in overall capital efficiency, specifically in well costs and facilities. It's important to highlight this because our teams have been actively working this year to enhance operations while also collaborating with our service contractors to increase utilization and develop a sustainable program. We noted a 10% reduction in well costs year-to-date, which we believe adds significant value looking ahead to 2025, alongside the operational expenditure improvements that Vicki mentioned. I want to express my gratitude to the teams and now turn it over to Ken.

Yes. Same as Richard, onshore U.S. from a supply chain perspective, we see deflation continuing. Between last summer and the end of this year, we see north of 10% rolling through in our drilling and completion basket. We also see OCTG significantly higher than that in terms of deflation, which also benefits all the other functions. We see continued focus by the contractors to improve efficiency and technologies of e-fleets, auto frac. They're really pushing the technology aspects and they're working with us on utilization. It’s not only the efficiency that comes with utilization, but because of the planning that Richard's teams are doing, it releases those contractors to use that equipment in the spaces we're not, so they can maximize their margins also. Having mass matters, so CrownRock will enable more value in that space in the Midland Basin. So it's definitely accretive. Hope that answers the question.

I was curious if I could ask a little bit more just on the CrownRock progression into next year. I think you all still are standing by getting towards that 170,000-day target and then perhaps growing it from there. So when we think about CapEx for next year, given that this was a high-graded transaction, do you see the CrownRock assets sort of feeding some capital from some areas that you were spending money on in '24 as we think about that program? And I guess in part of that, is there some savings on the CapEx side associated with selling Barilla Draw?

I would say that we would keep the same activity level with CrownRock going into next year. They've had this, as Richard said earlier, this same activity level for quite a while. It's worked well for them. We think with the capability of our teams working together that we'll actually be able to maybe do more with less. So we think that's going to be good news. So likely no increase in activity in CrownRock. In the Barilla Draw, part of the reason that we divested is because we weren't investing capital there because we had development going on in other areas that were taking the capital away from Barilla Draw. Our philosophy has always been that if we have an asset that doesn't compete for capital and/or would have competed under different circumstances but we won't get to it for 5 to 10 years, then that's why we divest it.

I appreciate the color there. And then maybe my second question, just on direct air capture, just following STRATOS. I know there was some enthusiasm, especially last year around ADNOC and their interest in direct air capture. Would you characterize most of your conversations with most parties at this point as sort of being in a wait-and-see mode around STRATOS and how some of these first projects perform?

There is a significant amount of interest in STRATOS. At conferences worldwide, companies are discussing STRATOS. Recently, a major international operator visited our site due to the strong interest. However, as Richard mentioned, our priority is to get it operational. We believe that as we continue to develop and enhance it, its value will greatly exceed current perceptions. Richard, do you have anything to add?

No, I just think that's right. I mean I think we continue to talk our ambitious plans. We think that there's a lot of scale in terms of development. You've seen some of our development plans. And so as we prove it, as we give a line of sight to cost down, we're very confident that both strategic and capital partners are going to have an investable development that will be actionable to help us. So that is our strategy, but I mean we're doing a lot of engagement on multiple fronts, both from offtake and future capital partnerships. So I appreciate that question.

I'd just like to say thank you all for your questions and have a great rest of your day.