Occidental Petroleum Corporation
Q1 2008 Earnings Call Transcript

Published: 27 Apr 2008

[Operator:]

Welcome to the Occidental Petroleum first quarter 2008 earnings conference call. (Operator Instructions) It is now my pleasure to turn the floor over to your host, Christopher Stavros.

[Christopher Stavros:]

I'd like to welcome you to Occidental's first quarter 2008 earnings conference call. Joining us on the call from Los Angeles this morning are Dr. Ray Irani, Oxy's Chairman and CEO; and Steve Chazen, our President and CFO. In a moment I'll turn over the call to Steven, who will review the details of our first quarter results to be followed by a question-and-answer session. Our press release, Investor Relations supplemental schedules and the conference call presentation slides, which refer to Steve's remarks, can be downloaded off of our website, www.Oxy.com. I'll now pass the call over to Steve.

[Steve Chazen:]

The net income for the quarter was a record $1.846 billion or $2.23 per diluted share compared to $1.212 billion or $1.43 per diluted share the first quarter of last year. Core results for the first quarter of 2008 were $1.819 billion or $2.20 per diluted share compared to $788 million or $0.93 per diluted share for the same period last year. Here's the breakdown for the first quarter

[Operator:]

(Operator Instructions) Your first question comes from Doug Terreson - Morgan Stanley.

[Doug Terreson:]

Steve, you talked about prices for crude oil and natural gas and the leverage that the company has, and obviously if they remain anywhere near current levels then free cash flow's going to be a lot greater than most envision, both for current period and for full year 2008. And so, in light of these circumstances, I wanted to see if we could get an update on the prioritization for such funds, that is, if they do materialize, meaning how might such surplus capital be allocated between investments, acquisitions, dividends, repurchases, et cetera. I mean, which way are you leaning as it relates to this outcome?

[Steve Chazen:]

Well, of course, this is a slightly larger number than we were anticipating so if we can't put the money to work at attractive returns, we'll return it to shareholders one way or another. Annually the Board reviews the dividend the ongoing dividend policy - and given the current environment I would expect that they would be favorable to an increase. Share repurchases, we purchased a little over 6 million shares in the first quarter. We would expect the share repurchase program to continue, depending on the exact product price. But if we look at it over the whole year, there's plenty of volatility in the stock and plenty of opportunity to buy the shares at attractive prices during the course of the year. So we'll just see where the stock prices goes but we're not going to build cash, if that's the question.

[Doug Terreson:]

And also in the Middle East, obviously execution on the Dolphin project has been very positive, and you mentioned earlier that there was progress in Oman, too, and so I just wanted to get an update on Oman and specifically whether that development is following your expectation or is it really too early to know?

[Ray Irani:]

Our projects in Oman specifically are moving along okay, and we expect to get a gas contract there. Timing is difficult to predict, especially as you approach the summer months. But we're positive about that and other projects in the region.

[Operator:]

Your next question comes from Michael LaMotte - J.P. Morgan.

[Michael LaMotte:]

Steve, if I could follow up on the Capex comment on California and the Rockies, in particular, are we seeing actual number of planned wells this year going up, and maybe you could talk about the cost per well and I'm sure the mix of inflation-deflation versus volumes on that front?

[Steve Chazen:]

Yes. We're talking about really physical increases in the number of wells. We don't see much in the way of inflation. Remember that our operating costs, which is the easiest way to compare inflation, were flat on an absolute basis even with higher production from the fourth to the first quarter. So, you know, that's sort of an immediate measure of oilfield service inflation. So we don't see a lot of signs of inflation from the kind of things that we do. So we're talking about a physical increase in the activity, especially in the Rockies and California, this year. And if we could get - with a little luck, we might spend a little more than that even.

[Michael LaMotte:]

So domestic volume should be a little higher than perhaps we were looking for in this area?

[Steve Chazen:]

Yes, I think as we go forward in the year, domestic volumes, I think, if I were looking for a surprise and praying for one that would be where I would hope and pray.

[Michael LaMotte:]

Quickly on Argentina, the exit rate in December was 40,000 barrels a day. Actually Latin American volumes overall ended up a little lower than I was looking for in the quarter. What's the latest there? I know there was some strikes in October and November.

[Steve Chazen:]

It's exited 40,000, produced about 40,000 in Argentina in the first quarter. We expect to see more improvement in the second quarter in volumes. Colombia - some of the issues were in Colombia, I think, also - but we expect to see improvement for that. We shouldn't spend too much time looking at small changes there, the trend for Argentina especially will be up sharply all year.

[Michael LaMotte:]

Okay, even with the winter season approaching.

[Steve Chazen:]

Yes.

[Michael LaMotte:]

And then the sensitivity on PSA impact last quarter, you said it was for every $5 change in oil, 4,000 barrels a day, as oil prices go higher, does that ratio change?

[Steve Chazen:]

We're down I think we're 500 barrels a day per dollar now. The contracts weren't exactly designed for this environment. So I wouldn't extend any of those numbers too far, and that's really the problem when you try to do this. It works just fine for $5 change maybe, but when you have $10 and $15 changes, our ability to figure out what's exactly going to happen is difficult because, again, the contracts really weren't designed for this environment.

[Michael LaMotte:]

And then on the PVC exports, what's the mix between domestic and export sales? I mean, that was clearly a positive surprise here in the quarter.

[Steve Chazen:]

We don't really break out the mix like that, but clearly what's happening, if you want to think about it intellectually, is that we're buying - the main feedstock is electricity, which is really natural gas - we're buying gas with U.S. dollars and exporting product into countries that have stronger currencies. And so we're able to move a lot of our chlorine that way, and some other people don't have that flexibility. It cost a lot to build that flexibility, but in environments like this it's probably worth it. And so we're able to export a lot of our chlorine. And caustic prices have been extraordinarily strong for awhile and continue to be strong. So it's hard to predict the number for any one quarter, so I wouldn't take my numbers that I gave for the next quarter as anything but the best guess we have now. We weren't very good last quarter. We missed it by 50% by the right way, but we still missed it.

[Michael LaMotte:]

Well, if I think about it just in terms of PVC as being construction oriented and, as you said, feedstock basically being natural gas, we were looking for a much worse Q1, but there's definitely an outlet?

[Steve Chazen:]

That's what changed. We didn't anticipate how strong the outlet would be when we gave you last quarter's guidance. The outlet is still very strong into South America and Asia and so, you know, there's other factors, too. Competitors might have a downtime in their plant. There's a lot of other things that affect it but right now, given how weak the U.S. construction business is, we're doing very well.

[Michael LaMotte:]

Dr. Irani, it seems that oil ministers in the Gulf today are spending more time talking about spiraling E&C costs than they are project identification or sanctioning. How dependent is your outlook on projects sanctioned not yet disclosed to the Street? Are you concerned by the slowdown in sanctioning?

[Ray Irani:]

Not really. I mean, it is a competitive world. Indeed, with $100 oil, oil exporting countries are looking more about how to spend their money than for new sources of energy, queer enough, but we're coming along fine. And, as you know, we had the Mukhaizna project, which is coming along extremely well, and we are looking at a Bahrain project, with the decision on who to select among three companies - we are one of them - by the end of the summer, and we have other programs. So we're moving along fine.

[Steve Chazen:]

Our outlook that we give you doesn't depend on those projects. We haven't baked those in.

[Michael LaMotte:]

Clearly we see in the press the big headline ones like Shaw, but there's enough activity perhaps in the smaller end of the spectrum?

[Ray Irani:]

Yes.

[Michael LaMotte:]

Is that fair to say?

[Ray Irani:]

Yes.

[Operator:]

Your next question comes from Ben Dell - Bernstein.

[Ben Dell:]

A question on Dolphin. Obviously [inaudible] of submitted plans to build a nuke in the UAE. Does that change the supply-demand outlook for the UAE, and if so, does that put sort of an expansion of Dolphin further back in the queue?

[Steve Chazen:]

The demand for energy is enormous, and I wouldn't think so. I wouldn't think that'd have anything to do with it at all.

[Ray Irani:]

We are sold out on Dolphin, and it's going to be producing above capacity, so there's tremendous demand.

[Steve Chazen:]

Yes. So another BCF a day of production, it would be gobbled up.

[Ben Dell:]

I understand, from the Qataris that the price they're obviously selling the gas at is significantly lower than they'd really like in today's world. Do you have a feel for what sort of price they'd be looking for to an expansion?

[Ray Irani:]

I think, you know, these are depending on negotiations. All I can tell you is our Dolphin project is doing extremely well. Steve said earlier that in the first quarter we made $102 million after tax, plus what we made in the pipeline. Our investment's slightly over $1 billion. And expansions in Dolphin are possible; to predict timing on them is difficult. The exact conditions depend on negotiations among us and two sovereign states, so I really can't predict what happens.

[Ben Dell:]

Can you tell us what SG&A was in the quarter?

[Steve Chazen:]

SG&A for what, for the whole company?

[Ben Dell:]

The whole company and then the split between upstream and Chems?

[Ray Irani:]

SG&A for the Oil and Gas division is down because we said at in an earlier meeting that we were cutting on SG&A in the Oil and Gas division. Steve is look at numbers right now. It's nothing for you to worry about. SG&A is under excellent control.

[Steve Chazen:]

The G&A is - for the oil company is - it looks like about - it's down from the fourth quarter. I don't have the exact number here.

[Operator:]

Your next question comes from Nicole Decker - Bear Stearns. Nicole Decker - Bear Stearns Steve, you recently made a comment regarding consolidation opportunities in Argentina. Would you talk about how you see the investment environment there and whether you'd be comfortable increasing activity there in the near term?

[Steve Chazen:]

Actually I think what I said was that we wouldn't want to be the largest producer in Argentina under any circumstances. And there might be some small opportunities, but I don't think we want to raise our profile enormously there. Argentina, you know there's been a slight increase in the realized oil price, and we're hopeful that with time there'll be more increases. It's not a - you have about a $10 a barrel finding cost and about $10 lifting cost, so we're in the high 30s on our oil price. So we're still a little below what we'd like to have, but progress is being made and production is coming up. Production will solve a lot of the problems. Nicole Decker - Bear Stearns The Latin America realization, the liquid realization, was below where we expected. What was behind that?

[Steve Chazen:]

Probably just a differential change in Colombia. Yes, I think that's right. It's the differential change in Colombia. Nicole Decker - Bear Stearns I appreciate the segregation of the Midstream unit. I'm just curious as to how we should read into this. Is this a unit that might see some growth?

[Steve Chazen:]

The unit might see some growth, for sure. We're putting a lot of capital into it, to expand the CO2 capability into the Permian and to bring the pipelines to more efficient standards, and we didn’t want to bury that in Oil and Gas capital. And when we were looking at our cost structure last year, some of the so-called lifting cost was really purchased gas for the gas plants. And so that's really adds a lot of clarity to both the lifting costs and our future capital plans.

[Ray Irani:]

But I hope you noticed also that the return on this Midstream portion is excellent. As Steve mentioned, in the first quarter profits were over $100 million after tax. I think about $123. And assets were $1.8 billion, so if you annualize it - and we don't expect much change for the remainder of the year in Midstream - it's a good part of our business; new investments we expect to make excellent returns, as we have said repeatedly in the past. Nicole Decker - Bear Stearns Do you have figures on expenditures in the unit historically and what you might be expecting to spend this year?

[Steve Chazen:]

We spent a little over $400 million last year, and we expect to spend about $400 million this year. It's fairly capital intensive. And I think some of it was distorting some of our capital numbers. Nicole Decker - Bear Stearns And just a final one, specifically on DD&A. The number was lower than we had expected. I guess we were basing our number on the full year guidance that you have. Just wanted to make sure that the full year guidance remained around 2.7 billion for the year.

[Steve Chazen:]

It looks that way. Obviously if we, it could vary $100 million.

[Operator:]

Your next question comes from Doug Leggate - Citigroup.

[Doug Leggate:]

Steve, is the Libya contract effective yet?

[Ray Irani:]

I expect to be in Libya on the 11th of May to sign it finally.

[Doug Leggate:]

Production dropped off a little bit. Is there any other reason why that have been the case? Just under lifting probably?

[Steve Chazen:]

That's lifting. Our actual production was slightly above the - we report sales not production, actually - and so the production for the company was slightly above the sales number.

[Doug Leggate:]

So assuming that contract gets enacted some time this quarter, would you take the incremental earnings backdated to December 1 in the second quarter?

[Steve Chazen:]

You can't backdate earnings. Basically it's an adjustment to the bonus or something like that.

[Doug Leggate:]

So it wouldn't flow through the P&L?

[Steve Chazen:]

No, it wouldn't flow through the full - you can't do that. It helps the cash flow, but you're not allowed to - think of opportunity for management if you were allowed to.

[Doug Leggate:]

But the cash flow will be realized though?

[Steve Chazen:]

Yes, we'll spend less.

[Doug Leggate:]

Backing into Nikki's question a little bit on the Midstream. You've mentioned you've stripped this thing out. You're not showing as, you know, how this thing is going to perhaps grow over the longer term. How does that dovetail with your plans to perhaps tap into South Texas CO2, and maybe if you could give us some idea as to what we could expect in terms of both the cost impact and likely production impact longer term out of your Permian assets, if indeed you're able to make that happen?

[Steve Chazen:]

Well, we've built in a notion of the South Texas into the capital plan that - the $400 million we've talked about. So we would expect to spend a fair amount of money in taking high CO2 methane and convert and stripping out the CO2 over the next couple of years. A good reservoir will run maybe 7 MCF of CO2 to produce a barrel of oil, so if you assume that we put any excess into not the premiere reservoirs but less premier ones - and we've got lots of those - you're talking 10 or 12, maybe, MCF to produce a barrel of oil. We ought to be able to get 500 million a day, at least, maybe 600 million a day of more CO2 the next few years, so you could divide by 10, 12, whatever you want, to get some idea of the production increases over the next few years.

[Doug Leggate:]

Are these already fields or CO2 assets that you have ownership of?

[Steve Chazen:]

Yes. If you were able to look at our long-term backlog, we flood with the available CO2 obviously the best reservoirs. There are other reservoirs that are smaller that if we had cheap CO2 or a lot of it, a surplus, we could flood those and produce more oil. Right now CO2's tight in the Basin. If we can loosen up that tightness with a project where we can get some more CO2, we can boost our oil production - continue to boost our oil production  in the Permian nicely.

[Doug Leggate:]

What size of reserves do you have CO2 in the South Texas area?

[Steve Chazen:]

I don't really know. We don't think of CO2 as reserves. It's sort of a, I don't what you want to call it. It's hard to burn. It's a sizeable number, but this 500 - 600 million a day as a deliverability is probably a good guess.

[Operator:]

Your next question comes from Paul Sankey - Deutsche Bank.

[Paul Sankey:]

Dr. Irini. the outlook for volumes this year, Steve, you said - 620 to 630, I think, is the existing guidance. You've talked about 610 to 620 for the next quarter. Should we still work on the 630 to 620?

[Steve Chazen:]

Yes, you've got to adjust for the price, that's all.

[Paul Sankey:]

But that's basically the right range to think about?

[Steve Chazen:]

Yes.

[Paul Sankey:]

And for '09 yes, you've talked about a long-term aspiration of 5% to 8%. Would we expect to see a relatively flat year given that you're above that rate of growth for '08 in '09, or do you think you'll be still in the 5% to 8% growth rate? And to the extent that you can, could you outline where the growth will come from? Thanks.

[Steve Chazen:]

I think we'll have a good year next year. We don't predict the exact number. I just don't know. But if you looked at the projects that are there to do it, we ought to exit Argentina at 50,000, and are obviously going to average that this year. Mukhaizna will be much higher next year. Permian ought to be a little higher. California ought to be higher. So I can't tell you exactly what the number is, but it's certainly not going to be flat.

[Paul Sankey:]

Yes, I guess the point I was making was whether or not the above-range growth this year would lead you to have a kind of flat spot next year, but you're telling me that's not the case, basically.

[Steve Chazen:]

That's not the case.

[Ray Irani:]

It's not going to be flat. It will be up next year.

[Steve Chazen:]

Yes, we just don't - our ability to predict isn't all that great, so we - but we do know it will be up, but I can't tell you whether it's going to be up 4% or 8%.

[Operator:]

Your next question comes from Eric Mielke - Merrill Lynch.

[Eric Mielke:]

I have a follow on on the Midstream segment on whether you see opportunities in the Middle East or you've been asked to do projects in the Middle East and if that will be part of the Midstream segment going forward, and if so, if those projects would meet your return requirements on a stand-alone basis or should be seen as part of a broader opportunity across Midstream approach for the Middle East?

[Steve Chazen:]

The answer is yes and yes. We see the projects, and they'll meet our hurdle rates on a stand-alone basis.

[Eric Mielke:]

Is that an additional reason for having split out the Midstream?

[Steve Chazen:]

Yes. It's a growth area, and we didn't want to obscure it buried in the Oil and Gas numbers. And so we think over a five-year period you'll see some nice earnings growth there, cash flow growth, and we just didn't want to bury it in the numbers.

[Ray Irani:]

And it's to bring additional management attention to the segment and to focus the Oil and Gas E&P people on producing more oil and gas at attractive costs. It's to get management attention across our projects and product lines.

[Eric Mielke:]

An additional question for you on acquisition of assets or asset deals in the North American market. Given where prices have moved in the last three to four months and your general intention to make small addon deals, is the impact of the strong commodity price environment, is that causing people to ask for unrealistic prices or are you still able to do the small addon deals that has been an important part of your strategy thus far?

[Steve Chazen:]

We haven't seen any increase in acquisition costs, so the product prices have not flowed through into the acquisition cost of the things we're looking at. Remember, it's a narrow scope and just two areas, really, maybe three. And so we really haven't seen that yet, but if it gets out of hand we can stop.

[Ray Irani:]

Remember, the credit crunch goes the other way.

[Steve Chazen:]

The competitors for buying the smaller properties have to borrow the money, so the continued Wall Street great depression is probably helpful in that. And I think I mentioned earlier what people view as a change in tax law in a couple years or a year or whatever it is is motivating buyers - sellers, I mean.

[Operator:]

Your next question comes from Bernie Picchi - Wall Street Access.

[Bernie Picchi:]

Steve, in your discussion of the investment opportunities in the Midstream, you didn't discuss CO2 opportunities at Elk Hills, and I'm just wondering if that's part of your longer-range investment opportunity set that you see within this Midstream sector? And am I right also in surmising from your comments that of the five different areas you list within the Midstream and Marketing that the CO2 source fields and facilities is your big growth area?

[Ray Irani:]

Well, it's a big growth area because we can make a lot more oil and gas. So we're not growing additional volume in CO2 to be a marketer, major marketer, of CO2. We do buy and sell CO2. However, it can give us additional growth in both the Permian and potentially in Elk Hills.

[Steve Chazen:]

Yes. In the segment, the CO2 plants are focused on the third-party business not our own. So what you're seeing is the third-party piece. The segment itself is currently constructed as a small amount of CO2 relatively in it and has large amounts of gas storage activities and natural gas liquids plants. So the CO2 in the Permian will grow because there's probably some more third-party business there, but Elk Hills would not be a third-party business. We would use all the CO2 ourselves.

[Bernie Picchi:]

So that would remain within the E&P segment?

[Steve Chazen:]

That would stay in the E&P. If the CO2 is dedicated to our facilities, it stays in the E&P segment. This is the part that's related to what we sell to other people. For example, if we operate a field, we have a 50% interest, we may sell gas to the other 50% so they have it And so that's sort of the nature of it. But if it's embedded as part of our production, our own production, it's remained in the segment.

[Bernie Picchi:]

So merchant sales, basically, as you were talking about?

[Steve Chazen:]

That's right, merchant sales and plants and parts of plants that are dedicated to merchant. But you should look at it as a fairly traditional at this point Midstream business with natural gas liquids and gas storage activities.

[Bernie Picchi:]

On the fourth quarter you made a passing comment about your emphasis on cost reductions, particularly from your contractors, and it looks as if we're beginning to see that here in the first quarter results. Can you talk about what we might expect to see in the way of benefits from that cost reduction program for the remainder of the year?

[Steve Chazen:]

It's hard to lay it out exactly as to quarter to quarter, but we are seeing some real effects. We're focusing the organization on costs, so we would expect over the year to exit at sort of a $300 billion cost run rate savings. But whether you'll see it - what exactly you'll see in the second or third quarter, hard to say. And it's also obscured by some other things that go on. So I can't tell you exactly what each quarter is but, as Ray pointed out earlier, we're focusing the E&P business on increasing margins even in this incredible environment.

[Ray Irani:]

And we've had manpower reduction both to improve efficiency and reduce G&A.

[Steve Chazen:]

So I think we're focused on that. Our G&A per barrel has declined this quarter in the Oil segment. So I think we're doing the right things here and you'll see more progress, but it's probably lumpy.

[Operator:]

Your next question comes from Pavel Mokhanov - Raymond James.

[Pavel Mokhanov:]

How many wells will you be drilling in Libya this year?

[Steve Chazen:]

Exploration wells, I don't actually know. It's somewhere in the range of half a dozen.

[Pavel Mokhanov:]

Half a dozen? And do you have any sense for the prospect sizes that you're targeting?

[Steve Chazen:]

They're 100 million to 150 million barrel prospects.

[Pavel Mokhanov:]

Got it. And of the half a dozen you mentioned, do you know roughly the split between offshore and onshore?

[Steve Chazen:]

No offshore.

[Ray Irani:]

But we're drilling additional wells in Libya for production increases.

[Pavel Mokhanov:]

Is that on your legacy assets?

[Ray Irani:]

Yes.

[Pavel Mokhanov:]

Would you, in addition to boosting the dividend - which, as you mentioned, the Board should be supportive of - would you consider a special dividend under this commodity environment?

[Steve Chazen:]

It's just hard to say. It depends on the stock price. It depends on our view of the stock price. If the stock price, we view, as buying in the shares is better for the long-term investors, we would do that. If the stock ever got to fair value, that's when a special dividend would be considered.

[Operator:]

There are no further questions at this time.

[Christopher Stavros:]

Thank you, everyone, for joining us on the call, and please, if you have any follow-up questions, call us here in New York. Thank you very much. Have a good day.