Occidental Petroleum Corporation
Q4 2013 Earnings Call Transcript

Published: 30 Jan 2014

[Operator:]

Good morning. And welcome to the Occidental Petroleum Corporation Fourth Quarter 2013 Earnings Conference Call. (Operator Instructions) I would now like to turn the conference over to Mr. Chris Stavros. Please go ahead.

[Christopher Stavros:]

Thank you, Emily and good morning, everyone. Thanks for participating in Occidental Petroleum’s fourth quarter 2013 earnings conference call. On the call with us this morning from Houston are Steve Chazen, Oxy’s President and Chief Executive Officer; Vicki Hollub, Executive Vice President of Oxy’s U.S. Oil and Gas Operations; Cynthia Walker, our Chief Financial Officer; Willie Chiang, Oxy’s Vice President of Operations and Head of our Midstream Business; Bill Albrecht, President of Oxy’s Oil and Gas in the Americas; and Sandy Lowe, President of our International Oil and Gas Operations. We are going to change things up a bit this quarter and begin the call with comments from our CEO Steve Chazen who will review some of the achievements we realized last year with respect to the fundamentals of our business and our strategy and plan for 2014. Vicki Hollub will then provide a thorough discussion on the strategy and outlook for our operations in both the Permian basin and California. In order to provide a little more current for discussion around our domestic oil and gas operations, we will not directly address our fourth quarter results on the call. However Cynthia Walker’s detailed commentary on the fourth quarter as well as forward looking guidance items can be found in the conference call slides sent to you following Vicki’s remarks and beginning with Slide 46. As a reminder, today’s conference call contains projections and other forward-looking statements within the meaning of the federal securities laws. These statements are subject to the risks and uncertainties that may cause actual results to differ from those expressed or implied in these statements and our filings. Our fourth quarter 2013 earnings press release, the Investor Relations supplemental schedules, conference call presentation slides, as well as Cynthia’s detailed commentary on the fourth quarter results have been posted and can be downloaded off of our website at www.oxy.com. I’ll now turn the call over to Steve Chazen. Steve, please go ahead.

[Steve Chazen:]

Thank you, Chris. We just finished a successful year meeting or exceeding many of the goals we set out for ourselves and are looking to continue our performance into 2014. Let me give you a brief overview of the key 2013 highlights. We grew our domestic oil production by 11,000 barrels per day over 2012 to 266,000 a day. We exceeded our capital efficiency goals reducing our drilling costs by 24% from the 2012 levels, reduced domestic operating costs by 17%. We added about 470 million barrels of reserves equivalents achieving overall replacement ratio of 169%. Our total costs incurred associated with those reserve adds were about $7.7 billion, resulting in repair and finding and development costs of under $17. We increased our return on capital employed from 10.3% in 2012 to 12.2% in 2013. Turning now to some of the specifics of the key accomplishments of last year. As a result of our development program, we improved our capital efficiency by 24% domestically over 2012, which translates to about a $900 million reduction in capital for the wells drilled in 2013. Of this improvement, 50% came from the Permian basin, 25% from California and 25% from the rest of domestic assets. We accomplished these improvements while successfully completing our program by drilling approximately what we had planned. We also reduced our domestic operating costs by 17%, or about $470 million compared to 2012. About 48% of this improvement was in the Permian basin, 46% was in California and the remainder was in their other domestic assets. While we focused on these efficiencies, we also grew our domestic oil production by 11,000 barrels a day. With respect to reserves, we had a very successful year in growing the company’s reserve base by adding substantially more reserves than we produced. Over 90% of which was added to our organic development program. We ended the year based on preliminary estimate with about 3.5 billion barrels of reserves which represent an all-time high for the company. Our total company reserve replacement ratio from all categories before dispositions was about 169% or about 470 million barrels of new reserves, further [ph] 278 million barrels we produced during the year. In the United States, our reserve replacement ratio was 190%. Replacement ratios to California properties and the Permian non-CO2 properties were similar to the overall ratio. Our reserve replacement ratio for liquids from all categories was 195% for the total company and 228% domestically. This reflects our emphasis on oil drilling instead of gas. Our total costs incurred related total reserve additions for the year on preliminary basis of about $7.7 billion. Over the last several years we have built a large portfolio of growth oriented assets in United States. In 2013 we spent larger than normal portion of our investment dollars in development of these assets. Our GReNeC reserve replacement for the year reflects the positive results of these development efforts. Our 2013 program, excluding acquisition, replaced 168% of our domestic production with about 291 million barrels of reserve adds. In addition we transferred a 115 million barrels of proved undeveloped reserves to proved developed category domestically as a result of the program. Our acquisitions were at a multiyear low of $550 million, providing reserve adds of 32 million barrels. At the end of the year we estimate that 73% of our total proved reserves were liquids, increasing from 72% in 2012. Of the other total reserves about 70% were proved developed compared to 73% last year; 2012, that is. Increasing the share of the proved undeveloped reserves compared to last year with all the reserves added of the Al Hosn Gas Project. We expect to move these reserves to proved developed category at the end of this year, once the initial production starts in the fourth quarter. Through the success of our drilling program and capital efficiency initiative we lowered our finding and development cost over recent years, as a result we expect our DD&A expense to be around $17.40 a barrel only a small increase from the $17.10 in 2013. This is consistent with our expectation that DD&A rate of growth should flatten out as recent investment come online and finding and development cost come down. Because of our organic reserve additions and the efficiency we’ve achieved in our operations demonstrates the significant progress we’ve made in turning the company in a competitive domestic productive. One of our long-term goals domestically has been achieved, a 50% pre-tax margin after finding and development and cash operating cost, so as to generate solid returns. We believe we’re achieving that now and expect to continue to do so in the future. Consistent with what we’ve said, our focus in 2013 was to enhance the shareholder value through our results. For this goal, our program was heavily focused on growing our domestic oil production, improving our capital efficiency, that is, improving our finding and development cost and lowering our operating cost. We met or exceeded these goals in result have increased our return on capital to 12.2%, a significant improvement from the 10.3% of last year and a testament to the hard work and dedication of all of our employees. We expect to see further improvements in our returns in coming years as a result of the recent investments. Turning to this year, our 2014 program is designed to improve on last year’s strong performance. Let me highlight the key elements of the 2014 program, which I will discuss without reflecting any of the effects of our strategic review initiatives. We expect our 2014 program to be about $10.2 billion compared to the $8.8 billion we spent in 2013. The increase includes about $400 million of additional capital allocated to each of our Californian Permian operations largely for additional drilling, to accelerate their development plans and production growth. An additional $100 million will be spent in these and other domestic assets for facilities projects that were deferred from 2013. The domestic oil and gas capital program will continue to focus on growing oil production and the entire increase in capital will go to oil productions in California and in Permian Basin. We also expect to continue to find growth opportunities in our key international assets, mainly in Oman and Qatar and complete the Al Hosn Gas Project. Our capital for 2014 for Oman and Qatar will increase by about $300 million over last year. Our exploration capital will increase by about $100 million; in part, due to spending that was deferred from last year. Our midstream capital increased by about $100 million as a result of spending on the BridgeTex Pipeline and two new terminals at Ingleside. Our chemical capital increased also by about $100 million; the Mexican joint venture we announced last year and we complete the new Johnsonville chlor-alkali facility. Our success in improving our capital efficiency and operating cost structure has provided us with the ability to expand our development opportunities that met our financial return targets. The capital program production growth that I outlined, it reflects the benefit of our streamlined structure and our commitment to continue fuel growth by exploiting our large portfolio, primarily in California and in Permian Basin. We expect to our 2014, we expect our Company-wide production volumes to grow to between 780,000 and 790,000 barrel equivalents a day compared to 763,000 in 2013, with the fourth quarter exit rate of over 800,000 barrels a day excluding the planned Al Hosn production. This increase will come almost entirely from domestic oil production while we expect to see a continued modest drop in our domestic gas volumes. Our domestic oil production is expected to grow from 266,000 barrels a day in 2013 to between 280,000 and 295,000 barrels a day in 2014 or about a 9% increase. This growth will come fairly evenly from our California and Permian operations. Internationally, excluding Al Hosn, we expect production to grow slightly. While the elements of the 2014 program that I discussed assumes no changes to Company structure or its mixed of assets. We do expect the Company will look significantly different by the end of the year. Strategic view we are undertaking will result in large changes to the Company’s asset mix. Our capital program production expectation and other elements of 2014 program will be adjusted as the related transactions are concluded. Finally, some of our longer lead investments we have been making over last couple of years will start contributing to our results this year, specifically the Al Hosn Gas Project we expect to start its initial production in the fourth quarter and start contributing to our cash flow. We expect the BridgeTex Pipeline to come online around the third quarter and to start contributing to our midstream earnings and cash flow. The new Johnsonville chlor-alkali plant is expected to come online early this year and will make a positive contribution to the operations for our chemical business. With respect to the initiatives outlined in the first phase of the Company’s strategic review announced last year, we completed a sale of a portion of Company’s investment in the General Partner of Plains All-American Pipeline in October, resulting in pre-tax proceeds of about $1.4 billion. After this sale, we continue to own about a 25% interest in the Plains General Partner, which at current price should be valued at about $4 billion. We have made steady progress in our discussions with key partners in the countries where we operate, in the MENA region for the sale of our minority interest in our operations there. Due to the scale and complexities of potential transaction, we expect these discussions to continue through the first half of this year. We have made good progress in our pursuit of strategic alternatives to the select Midcon assets, we expect to provide further information on any transactions as they conclude, some around the end of the second quarter and we’ll announce material developments as they occur. In the fourth quarter, we used the Plains proceed to retire $625 million of debt, reducing our debt load by about 9% and to purchase almost $10 million shares of the Company stock of a cash outlay of $880 million. We ended the year with a debt-to-capitalization ratio of 14%. At the February’s Board Meeting we will review the Company’s dividend policy, status of strategic alternatives and share repurchase authority. Many of the steps we’ve taken in 2013, including our success in improving our efficiency and the action that our board has authorized lay a ground work for stronger results for this year and beyond. The operational improvement we expect to achieve in 2014 coupled with the strategic action we expect to executive this year, should place the Company in a position to improve its returns while continue to grow and increase its dividends to maximize shareholder value. Vicki Hollub will now provide a more detailed discussion of our California and Permian operations.

[Vicki Hollub:]

Thank you, Steve. This morning I’ll review two of our largest domestic operations

[Christopher Stavros:]

Emily, can you please open the line for questions, we’re ready to take questions thanks.

[Operator:]

(Operator Instructions) Our first question from Doug Terreson of ISI, please go ahead.

[Doug Terreson:]

Good morning to everybody. Steve, Oxy’s returns on capital rose last year by almost 20% which I think was the objective or the hope anyway but your capital spending looks like it's going to rise by another 16% or so this year. And so my question is how does management prevent capital misallocation and then retrenchment from occurring again as it did a couple of years ago? Meaning, have there been changes to the capital allocation process or in other areas of corporate planning that might enhance the result in the current scenario?

[Steve Chazen:]

Yeah, sure. Thank you, first remember that this number is for unchanged business.

[Doug Terreson:]

All right.

[Steve Chazen:]

And that’s really not going to happen so the actual spending will be some other number, a lower number because some other businesses won’t be here by year-end.

[Doug Terreson:]

Right.

[Steve Chazen:]

We’re being – we’ve changed the process, I think Vicki has pointed out that the change in the domestic business and how we’re – what we’re focusing on returns are lot better and we’re not – I think it's basically a lower risk portfolio and will generate more certain returns. We expect the returns we’re not actually excited about the 12% return on capital employed. I think we need to be closer to in excess of 15% and so our goal is to make sure that’s right. We’re -- it's like we’re very great caution on my part that I’ve allowed additional spending in Permian and California, they’ve had to convince me that they’re going to stay on the straight and narrow here. So I’m pretty sure we’re under control but if it turns out because we’re going to watch this monthly because that’s what we do now, we watch it monthly. It turns out and get off to the wagon and they’ll – the beer will be turned off.

[Doug Terreson:]

Okay, one more questions you guys also were.

[Steve Chazen:]

Or the fine wine whatever they’re drinking you know.

[Doug Terreson:]

So you guys were obviously very successfully with your cost program that helped the result last year and so most of the complete is there more work to do there on the cost product program?

[Steve Chazen:]

For sure, while I’m – I think we exceeded our goals.

[Doug Terreson:]

Right.

[Steve Chazen:]

We’ll set new goals. I think my main focus just so we were real clear, the long-term business depends on low F&D, operating costs are fine but they affect the current year but we have to develop a long-term low F&D rate and go back to what we said forever. If we have the F&D and the operating cost and local taxes we need to be below the 50% of the selling price of the product. And if you’re going to do that you have pre-tax margins of 50% and you’ll generate good returns and that’s really the objective and so we need to continue to drive as the reservoirs become more challenging, need to cost or cost need to be watched very carefully. I think you know we’ve used this year 2013 at this to really horn our ability to control costs and I think we’re there. We’ve gone through a multiyear transition of the company from you know from a very good international producer and you know an okay domestic one to a much stronger domestic business and this has been a not an easy or quick transition but I think at this point we have the people in place to accomplish those goals going forward. We’re giving them more money this year but I hold myself and them responsible, unlike football teams the coach gets fired not the assistant coaches in this.

[Doug Terreson:]

Well if you guys can make 15% returns on capital that’d be fantastic. Thanks a lot.

[Steve Chazen:]

I think we’ll be there.

[Doug Terreson:]

Nice thanks.

[Operator:]

Our next question is from Doug Leggate of Bank of America Merrill Lynch, please go ahead.

[Doug Leggate:]

I have a couple also if I may. Telefonia [ph] has I guess been judged to some extent as not been able to execute because of lack of visibility, so do you believe that’s in targets this morning obviously that suggests the step–up in activity but what comfort can you give that you have got the permitting, you have got the rig count. And I’m just curious as to where you’re headed in terms of how – whether or not separating California still a viable option and one that you think would benefit the balance of the portfolio?

[Steve Chazen:]

Yes, I’ll answer the last question first and then we’ll let Vicki, assistant coach here, get ready to answer, how certain she is. At California and the Permian and the rest of the company are quite in some ways different businesses. California can benefit a lot I think. My higher capital spending will generate more growth. We established a base with we might call boring if you want, steam flood and those kind of projects, so they will have enough cash flow to go ahead. I think it could be managed differently than we would and I think it has good prospects, I think the issue that we need to have a team together that is more aggressive growers, maybe less concerned about dividends and more like E&P, small E&P. No one will lever -- three producers or 85% of the production in California and that isn’t going to change. And so, there is never going to be a comp and make people to believe and for the management of that business to deliver, it's probable, but they should be separate. Is that clear enough?

[Doug Leggate:]

Yeah. That is clear enough.

[Vicki Hollub:]

With respect to our efficiencies, I feel like in California certainly we have a lot of potential as we outlined in detail in the earnings call a couple times ago. So we have the resources available. We have now put together a team out there that's structured in a way, that gives them the best opportunity of success. We have great people, we have very experienced people who are -- who know a lot about operating in California, who know a lot about the types of projects that we're developing, that's our core business. We know water floods, we know steam floods and that's the bulk of what we're doing. So our team understands quite clearly how to do that and they are among the best in the industry. And so, we're accomplishing what we've said we would do and what we're doing going forward that with this increase in capital is we're being very disciplined about how we evaluate and design our projects and implement our projects. So I'm quite certain that we're not going to lose our efficiency around execution and with the resources that we have, I feel confident that we're going to continue to see the same results that achieved in 2013 going forward.

[Doug Leggate:]

Given that you have been fairly clear about how this could play out, Telephone [ph] has not been spending its cash flow up until now. So as a standalone company would there be an intangible drilling cost uplift to the operating cash flow in your estimates? And I guess if I could lay on it, very quickly, latest stuff thoughts on the scale of a potential Dutch tender buyback if that's still in your thinking and I'll leave it here. Thanks.

[Steve Chazen:]

Obviously, California would spend more money and drill more wells until they could generate a lot of tax shelter, if that's the question.

[Doug Leggate:]

Yeah.

[Steve Chazen:]

A separate business who competes with – a separate oil company that competes with other medium size or whatever you want to call on producers, obviously is a business that would generate, you basically burn, you use its cash flow. California has the flexibility however so that it could cut back its capital and use money to repurchase shares or something like that, if the right sort of environment came down. Unlike some other things, it's a pretty complete business that has -- fair amount of gas opportunity when that's available. It has all saves [ph], long term oil and has some exciting oil things to do too. So I think it's a fairly complete business and it’s a business where, if things get bad for regulator regions or price or whatever, it can cut its capital back, still do well, doesn't get caught on a cred mill of higher decline, could even buy back shares. I don't think it's going to be a big dividend producer but I think I think on share repurchase, it could do that if conditions warrant, but if conditions don’t warrant, I am sure they will spend all that money. The process of repurchasing the shares from whatever we do, it just depends on the situation at the time. When we have the money we'll figure it out, when we have the money in the hand, we'll figure out exactly what the process will be. But I’d point out that we repurchased around 10 million shares in the fourth quarter, we wouldn't have done that with the shareholders’ money if we thought that, all this wasn't going to happen. So I think the process of doing it remains to be seen, because you might have -- one oil, one stock price you might do one thing and another you might do something else. But, there’s no other place to put it. I mean, it’s either some kind of share repurchase or – you know, there isn’t really any debt that we can do much with. So, I think we’ve taken down the debt. I think the next maturity is in 2016 and I’m not up for, you know, some kind of windfall for bond holders.

[Doug Leggate:]

I’ll let someone else jump on. Thank you.

[Steve Chazen:]

Thank you.

[Operator:]

Our next question is from Ed Westlake of Credit Suisse. Please go ahead.

[Ed Westlake:]

Yeah. I mean, I guess I got a bigger picture question just on Permian and then some follow-ups on California. So, those two question and just on your Permian, I mean how do you think you’re going to get a fair price for the light oil that you’re producing in Permian? What is Oxy going to do about it over and above what you’ve already announced, you know, with the BridgeTex Pipeline extension? Thanks.

[Steve Chazen:]

We’re going to let Willy answer that since he’s the expert in oil.

[Willie Chiang:]

Yeah, Ed. Obviously, we’ve seen a lot of disruptions in pricing between regions and we’re seeing a lot of infrastructure getting built in and when we look at our production of roughly 15 million barrels a year or 150,000 barrels a day out of the Permian, between the BridgeTex Pipeline which goes from essentially Midland or Permian directly to the Gulf Coast as well as taking capacity on other pipelines down to Corpus we essentially go from a two market business, Midland and Cushing to ultimately getting to Houston Ship Channel as well Corpus and then we also get the ability to go to U.S. East Coast and lots of different places. So, I think the infrastructure is going to help us tremendously in that area.

[Ed Westlake:]

As a follow-on. I guess, people are concerned that when the crude goes down to the Gulf it’s still going to be impact. Any thoughts around that, what work you’ve done on that?

[Willie Chiang:]

Well, the thing everyone looks at is the Brent/TI. And as I think about it, Brent’s really tied to world prices and I think what you’re going to see is all the grade as well TI kind of come to transportation parity.

[Ed Westlake:]

Okay. So, no major discounts in your thoughts for the crude once it gets down to the Gulf other than quality and logistics?

[Willie Chiang:]

No, I think prices fix the price issues.

[Ed Westlake:]

Okay. So, just –

[Steve Chazen:]

I’ll also point out that

[Ed Westlake:]

I thought you might.

[Steve Chazen:]

Yeah. That, you know, $97 is probably okay for us. I mean, this isn’t some bargain basement price. So, yeah, we feel pretty comfortable that we could be reasonably profitable at $97 and much lower, so. You know, sometimes you lose sight of the absolute price in all this talk about differential.

[Ed Westlake:]

Yeah, it’s a good point. Just on California then. I mean, you gave us sort of some initial resource estimates for the Permian, would you be willing to give us the resource estimates for California? I know people are obviously trying to have confidence and resource numbers from yourselves would obviously help their confidence.

[Steve Chazen:]

I think what I prefer to do is leave that for another day and another kind of announcement.

[Ed Westlake:]

Okay. Well, thanks very much.

[Operator:]

Our next question is from Arjun Murti of Goldman Sachs. Please go ahead.

[Arjun Murti:]

Thank you. Just another follow-up on California where you have a nice growth trajectory here. It sounds like the greater confidence and it is there is a bit of a mix here where some of the stuff that’s declined is now smaller and you’re shifting more to water and steam floods which you’ve historically been very good at and maybe less reliance on the unconventional, at least in the scope of the years presented here, is that accurate? And, I guess, if so where are you on the unconventional from the confidence standpoint? Thank you.

[Steve Chazen:]

I’ll let Vicky answer about the unconventional but just so you understand, I think you’ve got it but, you know, we have the high decline and really no decline – high decline at Elk Hills and really no decline at THUMS, which was the bulk of the production of the Company and originally was nearly 100%. And so what’s happened is that the little wedge has grown and we’ve made a lot of progress in improving the decline rate in Elk Hills, so we’re not fighting as big a decline curve. And so what we’re doing is we’re filling it in with things that are real certain so that the business has sufficient cash without being on a treadmill with the go forward. And I’ll let Vicki talk about the unconventional here, since she’s more knowledgeable than I am for sure.

[Vicki Hollub:]

This year we’re drilling 170 unconventional shale wells versus 111 that we drilled last year. So we increased the number that we are drilling this year and actually we had hoped to drill even more than we currently have on the schedule. But we felt like that from a regulatory standpoint, it was best to take a more conservative approach this year and be our best before. We do have some exciting unconventional projects that are in the permitting process and we expect to bring those on in 2015. So basically part of its permitting, just trying to get the permits in line and ready to go. The other part of it is that we are continuing with the strategy that we developed and that is to as we’ve said lower our decline and build up a larger solid base of those types of projects. And that really helps prop us up for the unconventional development.

[Arjun Murti:]

Is it a question Vicky of the scope of what you have there? You aren’t sure you have enough running room between confidence in the resource and the ability to get permits, or are there still questions on all those points?

[Vicki Hollub:]

Yeah there are questions on all of them. We do have, as I said, unconventional plays that we feel very comfortable with the development of because there are things that we understand that we’ve already started the process of development. So there is a portfolio that we feel like we could move forward at a fairly fast pace if we had the permitting in place. There is still some shales that we haven’t really tested and evaluated yet and we’re taking the same approach in California as we are in the Permian where we are doing a more measured approach to go out, drill a few wells, do some evaluation, then start some pilot projects and then from there progress to full field development. So we are trying to be very prudent in the way that we approach our shale plays that are outside where we’re currently drilling.

[Arjun Murti:]

Steve, maybe just a follow up on the MENA comments. I certainly appreciate the scale and complexity here and that’s going to take some time. Can you comment that you have identified maybe a partner group which is a key group you are negotiating with and these things can still take time or is it earlier stage than that where there is still multiple parties that are involved here?

[Steve Chazen:]

No, there is a partner group.

[Arjun Murti:]

That’s great. And then just a final one on the stock buyback. Should we think about this primarily as asset sale proceeds are used for stock buyback or your balance sheet is strong that it can be an ongoing program even without proceeds?

[Steve Chazen:]

The business fundamentally, the overall business or whatever remains in the company is able to generate free cash. And so we should see a part – I think I said it at your conference, part of the program will continue to grow the dividends at a healthy pace. We’ll have a little more share repurchase than we’ve done historically. You will see share reductions from whatever happens in the asset sales or whatever dividends we might take from anything we separated from company. So I think you’ll see the share count come down and therefore the dividend requirement, the dollar amount of dividend requirement come down. So I think you’ll see a mix, but we’re very – I’m very focused on the value of the stock we’re buying. It isn’t just about buying shares for fun, certainly easier than drilling wells. But I think that we’re – and you’ll see us come and go as the stock price changes and of course there are periods when we can’t buy where we have material information. So there may be periods when we can’t buy. But generally you should expect to see a regular program at some level but also some fairly sizeable reductions over the next year I would expect.

[Arjun Murti:]

Great. Thank you so much.

[Steve Chazen:]

Thanks.

[Operator:]

Our next question is from Faisel Khan of Citigroup. Please go ahead.

[Faisel Khan:]

Thank you. Good morning. Steve, I was wondering if you could clarify some of the comments you had around return on capital employed. So are you saying that – and you guys have made a tremendous effort in getting return on capital employed up over the last 12 to 24 months. But I want to make sure I understand. So are you saying that with CapEx going up next year and with sort of the double end of the rig count in the Permian over the next few years and adding seven rigs on California, overall, you’re seeing ROC should trend up over the next one to two years, all else being equal?

[Steve Chazen:]

Product prices aside, yes.

[Faisel Khan:]

Okay, okay, fair enough. And then in terms of your comments on California, given that most of your growth in California is sort of longer life production and some of your growth in the Permian has sort of a higher decline rate, I mean doesn’t it make more sense to kind of keep those assets together as a portfolio? What’s the – I’m just trying to understand like how you balance the cash flow and decline rate over the two portfolios over time.

[Steve Chazen:]

Remember the Permian is respectively two businesses, there is the EOR business which generates large amounts of free cash flow. So the question really is how do you – and it has a potential to add this high growth stuff but still generate large amounts of free cash flow as a business, we can manage that reasonably well. California, the potential is currently managed to generate free cash flow and it will generate a base ultimately of these long lived projects, which basically the way answers to some extent your question about the returns because you could turn on a long live project your D&A rate will be relatively low and so your earnings will be better because you got a lot of reserves over long period. But – and so every business, a standalone business has to have a base of money to pay for itself, now I understand there is a whole bunch of companies out there that don’t. But that’s not the way to build the long term oil business. So California can spend more fairly I think easily and continue to grow. And in the Permian there is a lot of competition for rigs and people and so I think it’s a little more challenging in the Permian. I think California, I have a map in my office from 1679 which shows California as an island and there is some proof to that.

[Faisel Khan:]

Do you guys have an estimate for the return on capital employed for California at the end of the year?

[Steve Chazen:]

I don’t think so. I think we will leave those kinds of questions for some other announcement.

[Operator:]

Our final question will come from Roger Read of Wells Fargo.

[Roger Read:]

You mentioned in the preview part the costs and the learning curve issues, have you done anything in particular to hire people out there or has it been learning by watching, learning by sharing info and data with some of your partners out there.

[Steve Chazen:]

I think Vicki went through a long – we have got a lot of gross wells that – bulk of the production and outcome comes from our own net wells. So we see enormous exposure what other people are doing. We don’t actually have to experiment or hire other people, we can actually see what they are going. We hire people all the time but we are not hiring people from radically different cultures. We need people who are trained in a return driven free cash flow kind of culture. And to hire somebody from some small company they really have a different kind of culture, they’re more an IRR getting their money back quick and drilling more wells culture. So we don’t want to destroy the notion that this is a business by generating money and generating returns and we are not going to spoil – we’re not going to spoil the stew with a bunch of others [ph].

[Roger Read:]

I guess as a follow up, even to those comments, if I remember correctly, we are in a new CEO search mode here. Is there any update you can provide on that front?

[Steve Chazen:]

I think the board will have something to say about that next month. But I expect that I’ll be doing significantly more earnings calls than I had planned.

[Operator:]

In the interest of time this concludes our question and answer session, I would like to turn the conference back over to Mr. Stavros for any closing remarks.

[Christopher Stavros:]

Thanks everyone for joining us today and please call us with any follow up questions in New York. Thanks again.

[Operator:]

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.