Occidental Petroleum Corporation
Q1 2010 Earnings Call Transcript

Published:

  • Operator:
    Good morning. My name is Christie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Occidental Petroleum First Quarter 2010 Earnings Release Conference Call. [Operator Instructions] Mr. Stavros, you may begin your conference.
  • Christopher Stavros:
    Thank you, Christie, and good morning, everyone. I'd like to welcome you to Occidental Petroleum's First Quarter 2010 Earnings Conference Call. With us this morning from Los Angeles are Dr. Ray Irani, Oxy's Chairman and CEO; Steve Chazen, our President and CFO; Bill Albrecht, President of Oxy's U.S. Oil and Gas operations; and Sandy Lowe, President of our International Oil and Gas business. In just a moment, I'll turn the call over to Dr. Irani who will give you an early glimpse of some of the topics we're planning to address at our upcoming Analyst Meeting on May 19 in New York. Steve Chazen will then review our first quarter 2010 financial and operating results. Our first quarter earnings press release, Investor Relations supplemental schedules and the conference call presentation slides, which referred to Steve's remarks, can be downloaded off of our website at www.oxy.com. I'll now turn the call over to Dr. Irani. Dr. Irani, please go ahead.
  • Ray Irani:
    Thank you, Chris, and good morning, ladies and gentlemen. As Steve Chazen will provide details on our financial results for the first quarter in a moment. But I want to give you a brief preview of our meeting with all of you in the financial community in New York on May 19. Both Steve and I will present at the meeting, but so with four of our senior executives who are responsible for international oil and gas operations, U.S. oil and gas operations, the California oil and gas operations and also for the fourth addition, will be the worldwide exploration preview. We will give you details on development and numerous key areas of our operations, which we know are of keen interest to you. Among the areas we will cover at the May 19 meeting are
  • Stephen Chazen:
    Thank you, Ray. Net income was $1.1 billion or $1.31 for diluted share in the first quarter of 2010 compared to $368 million or $0.45 per diluted share the first quarter of last year. The first quarter of 2010 income from continuing operations and core income were $1.32 per diluted share. 2009 first quarter core income was $0.50 per diluted share. For comparability purposes, all of our prior period volumes, as well as volume-based statistics, such as operating costs per barrel are being stated on a pretax basis as we previously discussed with you. Please see the Investor Relations supplemental schedule for the previous five year and the 2009 quarterly sales volumes presented on a pretax basis. Here's a segment breakdown for the first quarter
  • Operator:
    [Operator Instructions] And your first question comes from the line of David Heikkinen of Tudor, Pickering, Holt.
  • David Heikkinen:
    As I think about one of your future sources for CO2 that has made a strategic shift towards more oil activity. Can you talk about any of the specific terms of your contract regarding deliverability? Any penalties around the deliverability that would be helpful for us?
  • Stephen Chazen:
    We're going to cover this really in a lot more detail in the May meeting, but there's a sizable penalty for failure to deliver if, for some reason, they don't deliver. But we currently anticipate that they'll make their early numbers based on what they told us. But there is a sizable penalty which would will allow us to buy new CO2 elsewhere at an attractive net price [ph] (25.23). There's been a lot of detail in May.
  • David Heikkinen:
    Just specifically on second quarter guidance and liftings, you mentioned growth in specific areas and no expected downtime. How much of the delayed liftings in first quarter come in to that second quarter number? And then how much volume would you expect to come in the third quarter?
  • Stephen Chazen:
    Actually what we said in the remarks was we expect that production will exceed sales again in the second quarter. The numbers I gave you are sales numbers, and we expect currently that production would be higher than that. So the answer to your question is, effectively none of the liftings will show up. Traditionally, what happens is that they lag just a little bit and it catches up by the fourth quarter. So it's just off a little bit, it seems like a lot, but it's just off a little bit.
  • Operator:
    Our next question comes from the line of Ryan Todd of Morgan Stanley.
  • Ryan Todd:
    Just a quick question on cash flow. You obviously generated a lot of free cash flow this quarter, and I realized that the CapEx spend was going to be a bit more back-end loaded throughout the year. But as we look at commodity prices and we look at relative levels of free cash flow, I realized you bumped up your CapEx a little bit, but how can we expect you to think about your uses of cash in terms of more aggressive deployment of organic capital versus cash return to shareholders? And also the increase in CapEx, can you tell us were that in any particular area or it's just inflation across the board?
  • Stephen Chazen:
    We're not going to talk about the use of cash. I view it as strategic question as opposed to quarterly question, so we'll talk about the use of cash in much more detailed in May. But the first quarter tends to be very strong quarter for cash because there's no tax payments. So more tax payments in the second quarter, so it will be a little different. The $200 million of capital is largely going to California.
  • Ryan Todd:
    Is that a result of increase activity from what you originally anticipated, or is that just higher cost?
  • Stephen Chazen:
    No, that's increased activity.
  • Operator:
    [Operator Instructions] And your next question comes from the line of Paul Sankey of Deutsche Bank.
  • Paul Sankey:
    Just on the tax rate, was there anything wacky or unusual other than your standard line, which obviously is a question of the mix between international and domestic, was there anything other that you would highlight as being particularly unusual about -- lower than guidance tax rate for the quarter?
  • Stephen Chazen:
    It's probably the most difficult number to estimate. We do the best that we can, but the tax department likes to always be a little more aggressive on what they think they're going to -- tax rate's going to be. What I think what happened was lesser liftings out of Qatar and Libya, made the tax rate appear a little lower, because those were high-tax rate areas.
  • Paul Sankey:
    On kind of new flow in the quarter if you like, Conoco notably backed out of project that you had expressed interest in. Is there any change now to the way you're looking at that project? Obviously, I'm referring to an Abu Dhabi. And generally, Steve, any comments you could make about the M&A environment that we're seeing?
  • Ray Irani:
    Ray Irani here, we have consistently said over the next two years that the term of the contract that was negotiated between ConocoPhilips and Abu Dhabi, the terms, economically, are not attractive to us. However, if the government wishes to approach us with different terms, we'll look at them. Nobody has called us yet and that's our position. With regards to M&A activity, Steve has mentioned that yes, there's more stuff asset wise are becoming available and Steve will give you more detail. Steve?
  • Stephen Chazen:
    Yes, I think activity clearly has picked up and we're seeing a good flow of mostly Permian opportunities. And we expect to have a pretty good year for acquisitions in Permian.
  • Paul Sankey:
    Okay, and just going back to the Abu Dhabi thing, would you expect the government to potentially pursue that project alone, or is that your understanding that they would...
  • Ray Irani:
    No, definitely. I was in Abu Dhabi recently. The government plans to proceed with that project either alone or inviting partners, but the project will go ahead.
  • Paul Sankey:
    Just back to the M&A question, much less internationally is that a function of just the nature of opportunities that will pursue internationally, or is that more to do with your own interest?
  • Stephen Chazen:
    It's just a flow from quarter-to-quarter, I don't think I'd read much in any of this. A lot of the individual sellers in the Permian as they fear is the rising tax rates, so we've seen a quite a flood of lot of small oil deals that people want to cash out before the tax rates go up.
  • Operator:
    Line of Doug Leggate of Bank of America.
  • Douglas Leggate:
    Steve, in Argentina, if I could just ask you for a little bit of clarification as to what's going on down there. Have you now actually got the extension on your contract then?
  • Stephen Chazen:
    Its a three-step process. You start with the government, the legislature passing a law, which enables the -- and the parameters of any extension. So there's a law which says these are the parameters of any extension. That's from the provincial legislature. The government of Argentina then negotiates with us about the detailed terms complying with underlying legislation, and that's where we are now. Then they'll have to submit the final contract to the legislature when that's all negotiated. So the answer to your question is we've made progress, although we have not crossed the finish line. That's ten years from when it expires and I think it expires in about three years, so talking about 13 more years of production on average.
  • Douglas Leggate:
    So the ramifications if you got the extension, I'm guessing, you would have reasonably substantial reserve bookings and so on along with that, but it's too early to make that kind of assessment, or...
  • Stephen Chazen:
    That's right. I think we'll tell you the numbers in a few weeks, But clearly, you're going to have a significant amount of reserve bookings just from not cutting the decline curve of loss in three years, and a fairly sizable decline in the DD&A rate in Argentina.
  • Douglas Leggate:
    The jump in DD&A, anything specific there that you can point to?
  • Stephen Chazen:
    I think the two areas that are the major increases are, when we took the gas down, the amount of gas in the Piansu [ph], using the $4 gas that results in less gas reserves and a higher DD&A rate in the Rockies. And the second area is Argentina. We continue to expand in anticipation the contract being extended, but it hasn't been extended yet, and therefore, you boost your DD&A rate. The second one, once the contract extended, we'll clearly go down. And the first one, we hope goes down of the natural gas prices were to cooperate, which I guess they're not doing today.
  • Douglas Leggate:
    Can you quantify the loss opportunity cost from the under lift in the quarter?
  • Stephen Chazen:
    No, I really don't. I can't quantify it. It's a sizable number, though. On an after tax basis, you could probably take that number somewhere around $20 a barrel.
  • Douglas Leggate:
    You've given us end of quarter run rate or production rates out of Kern County discovery. Would you care to share what they were at then end of the first quarter?
  • Stephen Chazen:
    No, because we'll have some story here for two weeks from now.
  • Operator:
    Next question comes from Monroe Helm of Barrow, Hanley.
  • Monroe Helm:
    Why you are seeing these opportunities to buy more reserves in the Permian. And I guess, you said, especially because small operators are worried about tax rates going up?
  • Stephen Chazen:
    And royalty owners, too. Small working interest royalty owners, it's expected to really have a lot of small deals.
  • Monroe Helm:
    You may not want to say this, but can you tell us what the processing capacity was in California in the first quarter and we expect it to be when you get the additional capacity on?
  • William Albrecht:
    Monroe, our current infrastructure capacity at Elk Hills is $420 million a day, and the skewed amount of gas plants is name plated for an additional $90 million.
  • Operator:
    At this time, there are no further questions. Are there any closing remarks?
  • Stephen Chazen:
    Thank you very much for dialing in today. And I'm in New York for any further questions, and we certainly look forward to seeing you in New York at our May 19 meeting. Thanks very much.
  • Ray Irani:
    Thank you.
  • Operator:
    Thank you. This does conclude today's conference call. You may now disconnect.

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