Occidental Petroleum (OXY) Q3 2023 Earnings Call Transcript | The Motley Fool


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Occidental Petroleum (OXY -1.75%)
Q3 2023 Earnings Call
Nov 08, 2023, 1:00 p.m. ET

Contents: Prepared Remarks Questions and Answers Call Participants Prepared Remarks:

Operator

Good afternoon, and welcome to the Occidental’s third quarter 2023 earnings conference call. [Operator instructions] Please note, this event is being recorded. I would now like to turn the conference over to Neil Backhouse, vice president of investor relations. Please go ahead.

Neil Backhouse — Vice President, Investor Relations

Thank you, Anthony. Good afternoon, everyone, and thank you for participating in Occidental’s third quarter 2023 conference call. On the call with us today are Vicki Hollub, president and chief executive officer; Richard Jackson, president, operations, U.S. onshore resources and carbon management; Rob Peterson, executive vice president, essential chemistry; Ken Dillon, senior vice president and president, international oil and gas operations; and Mike Avery, president and general manager of 1PointFive.

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.

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I’ll now turn the call over to Vicki. Vicki, please go ahead.

Vicki Hollub — President and Chief Executive Officer

Thank you, Neil, and good afternoon, everyone. The team and I would like to discuss two key topics today. First, how our portfolio of assets managed by excellent teams once again drove record performance this quarter, which flowed to the bottom-line. And second, as we promised, an update on 1PointFive and Direct Air Capture, which we expect to play an increasingly important role in our portfolio over time.

One important note before we begin. Rob Peterson, executive VP of essential chemistry, will cover our financial results and guidance today. Senior VP and chief financial officer, Sunil Mathew, is unfortunately attending to a family emergency. We send our thoughts and prayers to Sunil and his family.

I’ll begin by reviewing our third quarter performance. Our teams again performed exceptionally well with our assets this quarter and delivered strongest earnings and cash flow from operations that we’ve had to date this year. This positions us to further advance our shareholder return framework and established a strong trajectory for the fourth quarter. This follows the molecules from producing oil and gas to moving and marketing it to where it is most valued, to our OxyChem team making the products that the world needs to improve lives.

And finally, returning the molecules back underground as we capture emissions and sequester them forever. First, let’s review the exceptional results in oil and gas. Strong third quarter operational performance in oil and gas production exceeded the midpoint of our guidance by 34,000 BOE per day, enabling us to increase full year production guidance by 11,000 BOE per day. Our third production guidance increased this year.

Production outperformance was driven by strong new well performance in the DJ and Delaware basins, as well as higher uptime due to favorable operating conditions in the Gulf of Mexico. In the Permian and Rockies, our high quality inventory, combined with our team’s subsurface expertise, continue to drive record cumulative well performance improvements. This exceptional well performance and our activity plans for the remainder of the year drove our full year production guidance increase. In the third quarter, our Delaware operations team set a record with a continuous pumping time of over 88 hours, doubling the previous, and at that time, audacious record in the second quarter.

Our teams are hyper focused and diligent. Their advancements are continuing to drive high performance. Additionally, during the third quarter in the DJ Basin, we began deploying a new and innovative natural gas hybrid frac pump with Liberty Energy. We believe that deploying this forward looking technology, which is an e-frac alternative, will reduce completion cost over time, as well as emissions.

Our midstream business performed better than expected due to the timing of cargo sales amid rising commodity prices. And finally to OxyChem, which exceeded earnings guidance for the quarter, largely due to improved PVC and caustic soda export demand. I can’t say it enough. OxyChem provides so much synergy and cash flow generation to our portfolio and as you’ll hear, plays a large role in our Direct Air Capture story.

During the third quarter, we repurchased $600 million of common shares and have now completed 60% of our $3 billion share repurchase program. Share repurchases and our dividend enabled additional redemptions of the preferred equity. We have now redeemed over 15% of the deferred equity outstanding. Now, I’d like to turn to the second big topic for our call, an update on the progress that our subsidiary 1PointFive is experiencing with Direct Air Capture or DAC.

The DAC technology we are using leverages the skills and expertise of our chemicals business and our enhanced oil recovery business. Our team’s achievements in DAC will drive benefits to Oxy in three ways. First, it will advance DAC for commercial use. Second, it will increase Oxy’s slow resilience and generate solid returns to our shareholders over the long-term.

And third, it will broaden our pathway to carbon neutrality and help others to achieve the same. Some of the team’s recent achievements include the agreement we announced last night with BlackRock as a partner in our first DAC plant, STRATOS. This is a huge signal to the marketplace that we are attracting capital, as well as customers to this exciting technology. We are very happy to have BlackRock as our partner.

Our team also reached a Memorandum of Understanding with our long-standing partner, ADNOC, to explore opportunities with DAC and carbon dioxide sequestration hubs in the U.S. and the UAE. And in just eight weeks, we announced our first initiative together, a preliminary engineering study with ADNOC for a megaton scale DAC facility in the UAE. And shortly after the second quarter earnings call, the U.S.

Department of Energy announced that it had selected 1PointFive to receive a grant for development of our South Texas DAC hub. And just this morning, Oxy Oman announced an agreement with OQ Gas Networks, the sole transporter of natural gas in Oman, to jointly study potential carbon capture, utilization and sequestration projects in the sultanate. I’ll now turn the call over to Richard, who will delve deeper into the momentum and progression of the carbon dioxide removal market and our DAC development plans.

Richard Jackson — President, Operations, U.S. Onshore Resources and Carbon Management

Thank you, Vicki. Today, I’m glad to provide a business update focused on Direct Air Capture and the carbon dioxide removal credit market. I also want to reiterate Vicki’s comments on how thankful we are to welcome BlackRock as our initial investment partner for STRATOS, our first DAC facility. This is the most recent milestone in our DAC development strategy and is aligned with our execution approach, which we will discuss today.

Across the Oxy, we are determined to solve challenges to both improve our business and provide essential resources for the world. Our low carbon business is an expansion of that strategy and is positioned to be a key value differentiator for Oxy in emerging markets. I will begin by highlighting several of our key DAC-related accomplishments. As we advanced our low carbon business strategy, Direct Air Capture was recognized as both a necessary and valuable technology.

Removing CO2 from the atmosphere provides a required solution for businesses across hard to abate emission sectors. Near-term, we believe our DAC technology can provide carbon dioxide removal credits, or CDRs, at a lower cost and at larger scale than other product solutions, especially for businesses in the heavy duty transportation sector that are working to hit decarbonization targets this decade. Longer term, cost effective access to atmospheric CO2 to create innovative new fuels or other products can provide a pathway to lower carbon materials and commodities for many industries. From strategy to development, our team has been forward-thinking and deliberate with a roadmap to advance technology, partnerships, and markets.

We continue to view technology to commercial product through the lens of capability, scale and systems thinking. In the case of DAC, we believe Carbon Engineering created a unique and innovative large-scale carbon removal process that has a strong fit to our OxyChem capabilities. This process uses equipment and materials that are ready to deploy at scale. Additionally, capturing large volumes of cost effective CO2 improves Oxy’s larger integrated oil and gas, CCUS, and low carbon businesses for today and tomorrow.

Early teamwork with Carbon Engineering led to a more advanced innovation center at CE and the U.S. development partnership with an exclusive license for Oxy. The formation of 1PointFive followed to allow more partnerships focused on market development for CDRs. Carbon removals reached critical momentum both through early voluntary market leaders like Airbus purchasing CDRs and through new policy support measures like the U.S.

Infrastructure Investment and Jobs Act set to catalyze early commercial development for technologies including DAC. This progress was recognized worldwide and enabled new global development and CDR demand scenarios for 1PointFive to begin to take shape. Meanwhile, measurable project progress was being made with CE process innovations, the groundbreaking for STRATOS, our DAC 1 plant and with key zero emission power and emissions measurement actions to support a durable and a well-defined CDR product. Our DAC development took another step forward through the partnership with the King Ranch that enables a 30 megaton hub in South Texas both to improve future back costs and to provide a more certain supply of CDRs for an increasing demand.

In 2022, the U.S. Department of Energy announced a $3.5 billion regional Direct Air Capture hubs program. In August of this year, we were notified that 1PointFive was selected by the DOE for a program grant to develop our second DAC in this South Texas hub. This follows strong policy momentum over the last several years for CCUS through U.S.

45Q tax credit enhancements, including specific recognition for the role of carbon removals in the recent Inflation Reduction Act. Recently, we’ve seen major project momentum with ADNOC support for the UAE DAC development and especially BlackRock’s key investment in STRATOS, which bolsters our ability both to build and capitalize our plans. Further support comes from recent CDR purchase agreements with ANA, a key aviation partner; with Amazon, which purchased 250,000 metric tons of carbon removals; and with TD Bank Group with one of the largest purchases of CDRs by a financial institution. These further showcase the growing appreciation for the necessity of CDRs from leaders in core industry sectors and the need to scale them in the near-term.

Finally, the acquisition of Carbon Engineering comes at a time where the need to accelerate DAC innovation is critical. We are excited to fully support CE as they advance DAC technology while also rapidly integrating next generation of innovations into our DAC plant builds. This helps to make sure we maximize value across our partnerships and supports our ability to meet this growing CDR demand. Our DAC strategy has been visionary and deliberate, aligning investment with advancements with technology, partnerships, policy, and CDR markets.

This approach has enabled Oxy to deploy capital responsibly, while establishing leadership in this critical technology and growing CDR market. Our accomplishments to date have positioned us as a DAC technology and market leader. The next phase of our DAC strategy is focused on growth through accelerating cost reduction and expanding partnerships. With full ownership of Carbon Engineering’s technology now in-house, we expect to supplement and support the highly talented Carbon Engineering team to accelerate the innovations that ultimately reduce the cost to capture years earlier than initially anticipated.

By pairing the strengths of Carbon Engineering, Oxy Major Projects and OxyChem, we will continue to reduce costs for the life of the plant. Early innovations could reduce the cost of DAC and could improvements the air contactor geometry, where we believe we can materially reduce the number of air contactors per facility. We are also designing air contactor fan motors that consume less power. Additionally, our teams are leveraging OxyChem’s electrochemical and chlor-alkali expertise to evaluate advanced sorbents and improvements to chemical reaction rates that could increase DAC efficiency.

Oxy has a proven track record of innovation, improving operational efficiencies, and large scale project development. The application of these core competencies will be key in the successful deployment of large scale DAC. Both the CDR demand and global development opportunities continue to increase. By accelerating the cost reduction of DAC, we aim to provide a low cost, large scale supply of CDRs that we believe we can provide at a cost effective solution to help businesses achieve their climate targets and improve the value proposition for DAC developers.

We believe that DAC generated CDRs will play a significant role in corporate emissions reduction strategies and specifically for several hard-to-abate sectors like aviation and marine, and markets like low carbon fuels. Future regulatory and compliance frameworks that cap emissions growth are driving companies in certain sectors to purchase measurable and durable CDR credits like DAC CDRs. As we reduce the cost of DAC, we expect companies will increase the share of DAC CDRs in their portfolio of solutions. We have included three market demand scenarios in our earnings presentation to illustrate how the DAC CDR market may grow rapidly through the end of this decade as the cost to capture is reduced.

Reducing…



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