Occidental Petroleum Corporation

Good morning and welcome to the Occidental's first quarter 2020 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your touchtone phone. To withdraw your question, please press star, then two. Please note this event is being recorded. I would now like to turn the conference over to Jeff Alvarez, Vice President of Investor Relations. Please go ahead.

Thank you, Brandon. Good morning, everyone, and thank you for participating in Occidental Petroleum's first quarter 2020 conference call. On the call with us today are Vicki Holub, President and Chief Executive Officer, and Rob Peterson, Senior Vice President and Chief Financial Officer. This morning, we will refer to slides available on the Investors section of our website. The presentation includes a cautionary statement on slide two regarding forward-looking statements that will be made on the call this morning. I'll now turn the call over to Vicki. Vicki, please go ahead.

Thank you, Jeff, and good morning, everyone. In the short period since our last earnings call, the actions taken by Saudi Arabia and Russia, as well as the worldwide spread of COVID-19, have pushed oil prices to the lowest level in recent memory and created significant uncertainty with the macro environment. As Oxy adapts to this challenging and evolving market, our thoughts remain first and foremost with those who have been impacted by COVID-19, and we hope that this tragic situation passes quickly and that you and your families will be safe through this crisis. We are taking extra precautions to preserve the safety and health of our employees and contractors with minimal disruption to our operations. And before I go any further, I want to express my appreciation to all of the Oxy employees for your focused performance and delivered results despite the stress of the past couple of months. I'll also thank you in advance for the success I know you will achieve as we realign our goals to maximize value through this recovery period. Since mid-March, we have taken a series of decisive financial and operational actions so that Oxy has the resiliency to weather this difficult period. In addition to reducing our capital budget by more than half, we expect to deliver an additional $1.2 billion of overhead and operating expense reductions in 2020. All of our long-term differentiators remain intact, and we are well situated for success when market conditions improve. We have the best people in place to leverage our superior assets and we will continue to deliver outstanding operational results, including our ability to safely and quickly reduce activity in this low-price environment while preserving the integrity of our valuable assets. Before I highlight our first quarter results and our efforts to achieve cash flow neutrality in 2020, I would like to welcome Rob Peterson to the earnings call. Rob was named to the position of Senior Vice President and Chief Financial Officer. Before becoming CFO, Rob served as Senior Vice President of Permian EOR. Since joining Oxy in 1996, Rob has held key leadership positions, including serving as the President of OxyChem. In a few minutes, Rob will cover our financial results, revised guidance, and debt management options. Now moving to slide four. To survive in this environment, we must continuously deliver best-in-class operational results and be a low-cost operator. In the first quarter, our core business did just that, delivering industry-leading results with lower capital spending and faster time to market. Our Midland Basin team set a Permian Basin record by drilling over 7,300 feet in one day, and they did it twice in the quarter. Our Texas Delaware team drilled a 10,000-foot horizontal well in the Silvertip area in 15 days, over four days faster than our previous record. In the DJ basin, we drilled a 10,000 foot horizontal well in under four days and reached our lowest average cost per foot for all drilling during the quarter. We also set a new record for both major frac providers in the Permian with 18 stages fracked in one day. These accomplishments completed by different teams demonstrate consistently high performance across all of our businesses. Our midstream business continued to provide flow assurance to deliver our products to market. a differentiator that has become more valuable in the second quarter as the industry faces storage restrictions around the globe. While we are shutting in barrels that have become uneconomic at extremely low price realizations, which Rob will touch on in a few minutes, our midstream business provides us with optionality and routing barrels to obtain more favorable realizations. Turning to divestitures, we did not disclose any additional material transactions in the first quarter as travel restrictions and the falling commodity prices have severely disrupted the market for asset sales. While we remain committed to closing divestitures over time, we will not sacrifice value to close transactions quickly. Given the market condition, we are no longer confident in raising sufficient funds from just divestitures to address all of our near-term debt maturities, but have numerous options available, which Rob will highlight. Since acquiring Anadarko, we've been working toward the sale of our Africa assets and previously closed on the sale of Mozambique and South Africa. Over the past few months, Oxy has had several meetings with our partners in Algeria to discuss areas for mutual collaboration, and in April we decided to continue operating in the country. The Algeria assets have high potential and generate free cash flow at low commodity prices. At the current Brent Strip, we expect to generate $100 million of annual free cash flow from Algeria while investing $30 million of capital in 2020. We continue to discuss the sale of our Ghana asset but recognize that this transaction is at increased risk given the current environment. Now moving to slide five and slide six. We are taking aggressive action to protect our long-term financial stability and the integrity of our assets. We are lowering cost and moderating activity to achieve cash flow neutrality while maximizing liquidity. Within four days of OPEC's failed Vienna meeting, we moved quickly to reduce cash outflows by reducing our SG&A and operating costs beyond our original synergy targets, and we cut our full-year 2020 capital budget. Our operating teams immediately launched initiatives to capture an additional $1.2 billion in SG&A and operating cost reductions. This will get us to a $2.3 billion reduction from Performa 2018, which is more than double our original synergy targets. This has lowered our quarterly overhead consisting of SG&A, other operating expenses, and exploration overhead to approximately $400 million on a run rate basis, and will reduce our operating expenses to $6.25 per BOE in the second quarter. Our capital reductions will result in a full year budget of $2.4 to $2.6 billion. To achieve these cost savings, we have modified our operating processes, replaced a significant number of contractors with employees, and reduced executive and employee compensation. We are leveraging existing inventory to reduce orders for new and replacement equipment, and we're further consolidating vendors, and we're utilizing creative solutions such as reverse auctions to source commodities and services. The speed and magnitude of our reaction demonstrates our recognition that the oversupply of crude must be addressed by all of us. Within a few weeks, we dropped down to two domestic rigs and had substantially reduced activity in Oman and Columbia. We are also currently minimizing well interventions by taking a disciplined approach to downhole maintenance that preserves the long-term integrity of our assets and reservoirs. Despite these changes, our operability remains high, which we believe positions us strongly compared to other operators. As this downturn will inevitably stress all producers, an operator's base management proficiency will become increasingly important. Oxy is well positioned with a large asset base, and we have the reservoir management expertise established in our conventional EOR operations to recover more barrels from existing reservoirs without the need to build a growth wedge. Many of the same teams that established our capital intensity leadership and have innovatively applied our advanced subsurface modeling to the shell reservoirs are now applying their knowledge and skills to base management across our portfolio. To preserve liquidity, one of the most difficult decisions the Board made was to announce its intention to reduce our common stock dividend. Those who know Oxy understand that this was not a decision that we took lightly, but one that we had to take to protect long-term value. We also paid the April 15 preferred stock dividend in common stock to boost our liquidity position, which is an option our Board may consider each quarter. Going forward, our focus will remain on strengthening our balance sheet. I will now hand the call over to Rob, who will walk you through our financial results, revised guidance, and debt management options.

Thanks, Vicki. Turning to slide eight, we are approaching the remainder of 2020 with a cautious outlook and have withdrawn our four-year guidance and cash flow sensitivities. To prepare for a prolonged low-price environment, we are taking decisive action to reduce cash costs. The progress our teams have made in reducing activity and collaboration with our partners and service providers while minimizing adverse impacts has been remarkable. As Vicki mentioned, we have fully captured $1.1 billion of overhead and operating expense synergies and are repositioning our 2020 cost base with an additional $1.2 billion of overhead and operating expense reductions that we expect to be fully realized this year. We have also further reduced our full-year capital budget to a range of $2.4 to $2.6 billion, which will lower our second quarter capital spending to approximately $500 million. Looking towards our 2021 and 2022 debt maturities, we are taking significant steps to preserve liquidity, including the Board's announced intent to reduce our common stock dividend and the payment of the preferred dividend in common shares in lieu of cash in the second quarter. We are intent on raising as much cash as possible from divestitures and expect to raise over $2 billion in the near term. It may take us longer to close divestitures in excess of this near-term estimate, as we are not prepared to sacrifice value in today's challenging environment conditions. As we pursue divestitures across our portfolio, we are also actively reviewing and evaluating our capital structure and options available to manage our near-term debt maturities. In this context, we continue to review our debt management options, which could include the utilization of free cash flow, continued asset divestitures, utilization of liability management solutions, such as debt exchanges and potential maturities, the refinancing of debt, and accessing capital markets. Additionally, we are monitoring the 2036 zero coupon notes as they could be put to us in whole or in part this October based on where the security is currently trading. We may be required to retire up to $992 million of debt depending on the number of zero coupon holders that choose to exercise their redemption option. At April 30th, we had $6 billion liquidity including cash of approximately $1 billion and our unutilized $5 billion credit facility. To date, we have provided financial assurance through a combination of cash, surety bonds, and letters of credit made available to us on a bilateral basis, and have not issued any letters of credit under our credit facility. Moving to slide nine. Turning to our financial results, the first quarter of 2020 is the first quarter since the acquisition closed that we reported Oxy's financial results without consulting Wes. In the first quarter, we announced an adjusted loss of 52 cents per diluted share and a reported loss of $2.49 per diluted share. The difference between adjusted and reported results is mainly due to $1.8 billion of charges, including the impairment of goodwill related to WES and other oil and gas properties, and $148 million of cost-related acquisition, partially offset by a net positive market-to-market gain on crude oil hedges. Through the first quarter, we have expensed approximately $1.8 billion in acquisition-related costs and anticipate expensing an additional $150 million in integration costs this year. In the first quarter, we had cash outlays of approximately $800 million related to these expenses, bringing the total, including the amount paid in 2019, to $1.7 billion. For the remainder of 2020, we expect to have acquisition-related cash costs of approximately $250 million. Moving to slide 10. We have provided guidance for the second quarter of 2020 and expect to return to providing full-year guidance and cash flow sensitivities once basin differentials and market conditions stabilize. The production ranges we have provided for the second quarter are wider than in previous quarters as we are accounting for the uncertainty of potential shut-ins beyond our forecast. In the second quarter, we are forecasting shut-ins averaging 45,000 BOE per day, of which approximately two-thirds is voluntary due to individual well economics, with the remaining one-third due to OPEC Plus restrictions. We expect shut-ins to peak in June around 75,000 BOE per day. Our guidance does not account for potential involuntary shut-ins related to flow constraints. All oil and gas guidance now includes Algeria as a continuing operation. I will now turn the call back over to Vicki.

Despite our activity reduction, all of our long-term core differentiators remain intact. Our leadership is a low-cost operator, track record of operational excellence, and a portfolio of world-class assets or competitive advantages that better position us for success when market conditions improve. These attributes combined with our differentiated low-carbon strategy are expected to drive our success and sustainability into the future. We're now open for questions.

Thank you. We will now begin the question-and-answer session. To ask a question, you may press star, then 1 on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then 2. Please limit questions to one primary question and one follow-up. If you have further questions, you may re-enter the question queue. At this time, we will pause momentarily to assemble our roster. Our first question comes from Paul Chang with Scotiabank. Please go ahead. Thank you. Good morning.

Ricky, I know maybe it's too premature and then you guys are just focusing on putting out of fire. But with COVID-19, if we're looking at some point that it would pass on the post-COVID-19, how this event has changed your operating and financial parameter on a going forward basis?

I'm sorry, what was the last part of your question, Paul?

That in the post-COVID-19, if we're looking over the longer haul, how that may have changed your financial and operating parameter. Like before that, I think after the merger, you have been talking about potentially a 5% long-term growth rate that you guys may be targeting, and that may be a step to EBITDA ratio in the one and a half time. With the event that we just passed through or went through, how that may have changed on those parameters?

So certainly for us, what the COVID-19 situation crisis has done for us is it's caused a bit of a near-term focus for us to do differently than what we had set out. As you know, and as you mentioned, we had a 5% growth plan going forward. But what our near-term priority is is to continue is to protect our cash flows, so preserve cash and generate then growth in our cash. But the way we'll do it, we have plans for the near term. We have plans for cash flow neutrality, break even, and eventually a low growth plan. But for the next few months and into maybe the end of this year and through the recovery, our focus is going to be on base production management. We have not abandoned our long-term future growth plans, but for now, what we're going to do is keep the capital, as we've just said, for 2020 and focus on mitigating our base decline. As you know, as we've often said, our base decline right now is about 25%. So our near-term focus will be on optimizing the performance of our existing wells and existing reservoirs to ensure that we're getting all we can out of those. And focusing on for incremental barrels that help to mitigate the decline, we'll focus on developing behind-pay pipe in the existing reservoirs. So there's going to be a lot more focus on our base production and our current assets rather than drilling new growth wedges in this near term. So we're really excited about the fact that with this vast base of assets that we have, Everywhere we are, we have stacked pay. So that stacked pay enables us to, in the wells where we don't see opportunities to optimize existing production, to develop other intervals and bring those intervals on at much lower cost than it would cost to drill and develop new wells. So the near-term focus is just that. It's to mitigate our base production decline. That's optimizing performance from existing wells and using that infrastructure to to help to lower our cost on a per-unit basis. Doing that probably through the rest of this year and into the recovery, depending on how long that lasts, will be our focus. Ultimately, I'm sorry.

I fully understand near-term what you're trying to do, but I'm trying to understand that on the longer-term basis, has the event changed the way how you look at the business model? And have you changed what is the criteria or parameter that you're going to use? Are you going to use it at a lower growth rate going forward from the 5% and that even a more stringent target for the debt to EBITDA or that a lower leverage ratio or that you think, yes, still business as usual. I think that is really more of my question.

Yeah, our highest priority will be to lower the debt. So rather than generate or have a growth target, our target is more to take free cash flow to lower debt. And we'll structure our capital programs around ensuring that we can do that. We believe that with the assets that we have, we can get to a scenario where our our sustainability prices such that we can generate free cash flow in a lower price environment, that free cash flow would then be used to lower debt. So debt will be the highest priority in the near term. And when I say near term, I'm talking over the next couple of years.

Our next question comes from Pavel Molchanov with Raymond James. Please go ahead.

Hey guys, this is Mohammed on behalf of Pavel. Thank you for taking the questions. So can you guys provide an update about the status of discussions with the state of Wyoming regarding the sale of surface acreage there?

Yes, we are running a process to sell the land grant and that process we kicked off this year, early this year, we have just completed round one of the bidding process for the land grant. And we were pleased that we had 13 bidders for the land grant. So now we will take that to round two of the bid process. And that is really about all I can disclose about that. But we are excited about what we have seen thus far. We would expect to be able to close on that asset in probably late Q3 or early Q4.

Okay, understood. And so you guys have talked in the past about some of your carbon capture projects or investments in carbon capture technologies. Given that the 2020 budget hasn't cut so much, can you guys talk about how carbon capture fits into that program? Are any of the projects being postponed?

The way we're structuring our development of the carbon capture was such that we were not going to have to put out a lot of Oxy capital because what Oxy is providing to potential partners in our low carbon ventures projects going forward is the opportunity for others to come in and be a part of it. We bring the reservoirs for the CO2 sequestration. We bring the land to build the facilities. And we bring the expertise to take the CO2 from those facilities and sequester it in our reservoirs. So what we bring to the table is our experience and our existing assets. What others could, as partners to us, bring to the table are the funds that will help us build those facilities.

And I'd like to add to that and also say that in the pursuit of the cash generation and lower cost basis, that this not only drives the cash flow neutrality, but there's also the opportunity to reduce our overall cost through it. So it's still very much part of our portfolio or our cornerstone to future development.

Yeah, and the way we do that is that for our CO2 enhanced oil recovery operations, the two largest costs in that operation, in fact, 40% of the cost is associated with the cost of CO2 and the cost of the electricity that's required to inject that CO2. We're addressing both of those. This low-carbon venture, it's a lot more about sequestration. It's just sequestration. It's also about lowering our cost so that we can make our current CO2 business better, as Rob was saying. But by making it better and less expensive, we can also expand that out into our shell play. So that gives us the option to to grow that a lot more and over the expanse of all the shale play, not only in the Permian, but then taking that once we have that model built and working and applying it in Wyoming and Colorado as well.

Our next question comes from Doug Leggett with Bank of America. Please go ahead.

Thank you. Excuse me. Thank you. Good morning, everybody. I hope everybody's doing well out there. And Rob, welcome to a bit of a baptism of fire, I guess, I wonder if I could start, Rob, with you, your slides on the options for debt. And I would just wonder if you could walk us through how realistic these options are. What discussions have you had with banks on potentially exchanging refinancing? Is a convert a possibility? And if you could clarify why it looks like you burned over a billion dollars of cash in April. I've got us four up first. Thank you.

Okay, Doug, let me hit the second question first. The primary reason of the cash was the payment of the dividend in April, so that was the predominant use of cash in the month of April. Normally, obviously, we don't provide an April cash on hand during the earnings call, but we thought it was important to put the most current information out in front. You know, with regards to discussions with specifically how to internally, you know, I won't comment on those. But we do believe we have adequate liquidity for the near future based on the cash flow from operations, the known asset divestitures and the cash savings with the associated operational expense reductions that we talked about already today. We're also well hedged for the balance of 2020 and we've taken that in combination with the steps to reduce our cash neutrality which is going to help conserve the cash in low-price environment. You know, we continue to look across the portfolio, but recognize we may not be able to satisfy all those 2021 and 22 debt maturities without a significant market recovery. But we do believe that at our disposal, we certainly beyond the, what we currently have in place is we do have the free cash flow, asset divestiture proceeds, exchanging the debt and extending maturities, and then refinancing the capital markets. So I think we're taking those actions. I do think there's opportunities for us to address those near-term maturities that are in front of us.

So to be clear, you think refinancing the markets are open to you?

Absolutely.

Okay. My follow-up is on the underlying decline. Vicky, this one's probably for you. You talked about 25%. I assume that's unmitigated on the base business, but can you walk us through what that looks like as an exit rate, including what assumptions you have for And obviously the back of my mind is Ghana, now Algeria isn't going forward. So what does that exit rate look like? And if you could, what do you think the sustaining capital for that exit rate is if there is such a number going into 2021? I'll leave it there. Thank you.

Well, we've said our base decline is 25%. And the reason I'm hesitant to give you a number for what it's going to look like in Q4 is because of what we're doing now to refocus our teams. As I said in my script, we're going to take these incredibly talented people who have done a great job growing Permian resources, and we're going to supplement them into our base production management teams. And that's not to say we don't have also great people operating our base production management. It's just that when you're in a high-growth mode, sometimes some of the base management doesn't get done as diligently as it should and can in an environment like this. So we don't expect that our decline will stay at 25%. What we expect is that we're going to have teams that find ways to mitigate that decline by, again, by optimizing production from existing wells, by virtue of changing artificial lift types, by reducing back pressure on the wells, and or by doing cleanups, just doing acid treatments on perforations and things like that, So there's optimization opportunities with the existing wells that are producing today. The other thing that's there is we've always had this inventory of zones above and below the existing producing intervals in our wells that have capability to produce. It's just that those were not going to get us to the higher growth rates that we were executing over the last few years. They are perfectly suited for mitigating a base decline, but not for an intense growth program. We expect that those will help to mitigate the decline, that 25 percent. It is hard to tell you right now what a Q4 exit rate would be. We have not put together all of our plans. The teams are working them, but I am very confident that from Q3 to Q3, we're not going to have a 25% decline. We're going to have something much less than that.

Hey, Doug, and this is Jeff. I'll hit on your sustaining capital. And like Vicki said, I think the important thing to remember, and you've covered us for a long time, if you go back before the unconventional boom when we really brought all that great inventory forward, we were a base management company. You look at our EOR business and what we were doing in Oman and Colombia and Qatar, that is what we did. So You know, a lot of the parts of our business have been continued to stay focused on that. Now we'll bring that to the rest of the business, even to a higher degree. And we have a whole new data set to do that. But on sustaining capex, I think what Vicki said, you know, it's worth pointing out why we don't give a specific number. So let's talk about what we have disclosed. Previously, we said in 2021 at our previous plan, our sustaining capital would be $3.9 billion at 40 WTI. And remember, that was growing into 2021. So let's now talk about the building blocks and how we're doing against those. You know, Vicki talked about the decline rate. You know, we've mentioned that. It's going to continue to get better. The other thing that helps that decline rate is we're not bringing on a bunch of unconventional barrels, high decline barrels this year. So you'd expect that to be better than what we said before. Starting production level, it was going to be higher than what we previously or what we think now, just because we're not growing into 2021 like we previously thought. So that also gets factored in. capital intensity, as we've shown, best-in-class capital intensity on our growth areas, and we continue to get better. So when you look at the barrels we can add for every dollar spent, not only is it best-in-class, it also continues to get better. So again, a helper on what the sustaining capital will be. Now, what's going to work against that is obviously, as Rob said, spending $350 million a quarter in the last couple quarters is that sustaining capital that we put out before was kind of, you know, on an ongoing basis to where you spent something somewhere the year before and you had an activity set. So when you start back up from the level we're at, we do expect to have, you know, some startup capital. Let's call it that. You know, it's things like, You know, just when I spend a dollar today, I don't get production for a couple months from that. That will impact that period when you look at that first year of sustaining capital. You know, the learning curve impacts, you know, which always happen when you start back up on programs. But the great thing about that, if you look at the records Vicki talked about, and the Midland Basin, that's an area we shut down and restarted and within a few months we're setting records from an execution standpoint across the business because they took learnings from other parts of the business and were able to immediately apply them. So while we do expect in that first year you would see some of that startup capital come through and that sustaining capital number, we don't think it'll be huge and then we'll quickly work through that. So, again, as you think about the sustaining capital, you can take all those components in place and look at how the business is changing and what you would expect it to be. But we do continue to be able to believe we can drive that down.

I'll just use one more example. You know, back in 2000 when Steve Chazen bought the Permian Basin Altura, he The criticism of that was that he was buying harvest mode assets. And I can tell you in Denver City now, all these years later, these decades later, we're still adding reserves to the Denver unit, still finding ways to increase the reserves and the production there. So that is our niche, and we do it well, and we've just got to refocus on it.

Our next question comes from Brian Singer with Goldman Sachs. Please go ahead.

Thank you. Good morning.

Good morning.

I wanted to first start with just a couple of clarification questions on a couple of points that you made. First, I think you said, Vicki, in your comments that you expect $2 billion of divestitures coming in the near term. Can you clarify whether that includes versus excludes Ghana and includes versus excludes the land grants? And then also I think it was also mentioned that accessing capital markets was a possible solution on the financial side. Can you talk to whether that is or whether there is a consideration of equity, common equity issuance?

So I'll talk about the divestiture. The $2 billion does not include Ghana. And that's all I can say specifically on that. And Rob?

Yeah, and with regards to the issuance of common stock, it's not something that we're considering right now in light of the price of the stock.

Great, thanks. And then my follow-up is more of a bigger picture. You have a slide on the change in corporate governance on the back of today's presentation. And given some of the recent changes both in the board, parts of management, the dividend, can you broadly discuss in the conversations you've had with the board any changes shifts in focus or priorities generally or specifically relating to the urgency and levels of delevering M&A and the breadth versus concentration of assets within the company?

Well, I'll say one thing that from a personal perspective, I'm incredibly excited that Steve Chazen came back onto the board. and as chairman of the board because specifically we did need help with dealing with a debt situation in this environment. And so from my perspective, what I see with the board now is his ability to help lead us through what's a very, very challenging environment for every company in the world, but especially for us since we had these maturities coming up. I think the other experience that was brought onto the board in Nick Graziano and Andrew Langham is also an ability and experience with debt exchanges and also with dealing with the debt situation. So the experiences of those three that we just brought on is going to help us through this environment and already helping us and creating value for us. So I think that we've strengthened our board in the way that we definitely needed to do in this environment.

Our next question comes from Ryan Todd with Simmons. Please go ahead.

Great. Thanks. Maybe a couple questions on the – or a question first, I guess, on the CapEx and OpEx cuts going forward. Pretty impressive cost reductions in the near term, in particular the additional $600 million on the OpEx side. Can you – Can you talk about how you view the sustainability of those cuts going forward, I guess, both on the CAPEX and the operational side? Are those the kind of things that necessarily ramp back up as you start ramping back up activity levels, or how much of those do you think you can kind of structurally capture?

I think that certainly the full 600 million incremental in the OPEX is that that full 600 is not sustainable because one of the things that we did was Just to get us through this quarter, because we expected Q2 to be the worst quarter, while some people are encouraged by prices where they are, we still have a concern about storage. So we expect the end of May, 1st of June, to be particularly challenging for us. So we wanted to make it through Q2 at the lowest possible cost structure. So the $600 million in OPEX, probably about 60% to 65% of that is sustainable. The part that's not is where we're going to need to bring back some of our well service rigs because currently we're in a mode where since we need to reduce production anyway to help with the oversupply issue, as some of our wells fail right now, we're not putting those wells back online. As we get beyond this difficult period over the next month or month and a half and start into the recovery, that's when we'll start bringing some well service rigs back. at the point where we feel like it's necessary to start, and we have the cash to be able to do that. So that'll increase our cost a little bit, but we dropped those rigs significantly. There are some other minor things that we would do differently, but I believe that our teams may find, as we're doing this, other opportunities to offset some of the cost and the activity that we'll need to start back.

And I'll just add to that, I mean, building on Vicki's point that, you know, You know, one of the unintended benefits of the slowdown is it has allowed us to really step back and take a very deep look at the way we do things and how we pursue the business. And it gives us time to really impart this passion for cost reduction, margin generation, and make that equal our passion for the growth we've had in the past so that we can really internalize into our culture that this is the way we do business and hold on to that as things turn the other direction eventually on the recovery. One of the challenges if you... If it's such a short shock to the system, it's really difficult to move the culture of the business. But the things that we've done and the inspiration we've given to our people to really get passionate about cost reductions and margin generation, to hold on to that moving forward will pay dividends for the company.

I think it speaks to the quality of our employee base that they are motivated, that they found these things so quickly, and that they're excited about the challenge that we have and ready to address it and achieve it. And your next question is?

Hey, Ryan, can I add one thing? Because I think it's a pretty remarkable thing with what Rob and Vicki said. If you look at our SG&A, where we'll be on overhead, we'll be at a level lower than we were as Oxy standalone in 2018. So the costs that have been driven out of the business by the teams is remarkable, and we've basically doubled the size of the company and we're back to the same overhead before we did that.

That's impressive. I appreciate all the clarity there. Maybe a follow-up on the Permian. I mean, it gets lost under everything else that's going on right now, but well-performance year-to-date, and the Permian is again showing pretty significant year-on-year improvement. Maybe any comments on talks about the drivers of this? Is this high grading from lower activity levels, or is that something that's more sustainable as activity eventually re-ramps in the basins?

Yeah, definitely sustainable. It's basically a continuation of everything we were doing and applying those things on the new assets and combining the learnings from the boat. So taking some of the learnings from the legacy Anadarko acreage and applying that in New Mexico on things like regional sand or landing points and development philosophy on the APC acreage. I mean, we show you that silver tip slide. You can see the level of improvements that are being made. I mean, that's probably the most disappointing thing for me in the whole thing that's going on is all of that momentum that the teams have built up and those improvements. that we expect to be sustainable are now going to kind of be put on the back burner, but we strongly believe we'll get it back quickly. The other thing I'll point out on the slide you're looking at, Ryan, is that now includes wells on the former APC acreage that has the new design that we've talked about, that Atlas design. Those are in there, and they're driving that performance improvement as well.

I'll just build on that too. One of the investment thesis still remains, and if anything, coming out of this, because we have such a vast portfolio, we can high-grade even further than we would have been able to a standalone oxy. Our ability to come out with lower cost, lower capital intensity wells and choosing those is much greater than it would have been without the original oxy assets.

And I can't let this conversation end without also adding the DJ Basin. The performance there has – that team, that drilling team has been incredible. So we have to give a shout-out to them. They continue to improve their performance.

Our next question comes from Paul Sankey with Mizuho. Please go ahead.

Thank you. Good morning, everyone. In trying to forecast your volumes, can you give us a bit more detail on the base decline rates and talk about the various regions and the various mitigations so that we can try and get towards a number that is obviously less, as you imply, than the 25% decline, but exactly where we should come out on that? My question essentially is can you talk through the decline rates and the various components of your portfolio and how you're going to mitigate them? Thanks.

Well, I think that it's important to note what Jeff has said earlier is that when you, as you know, the highest decline for the shale play is right in the first year, first year and a half, two years. So as we're slowing down, the decline of our shale production is going to start to mitigate itself just by virtue of the fact that we won't be drilling as many new wells, in fact, very few new wells. So that decline is going to be less than it traditionally is. The EOR business, we've said in the past, is normally a 4 to 5 percent decline, and that's when we're fully using our CO2. We have shut some of our CO2 wells in, so that decline now could be actually a little bit mitigated, but it's going to be versus a slightly lower volume. Not a lot of production is shut in there. So the Middle East, the conventional reservoirs are lower decline. But overall, it's hard to go through and look at each of those as we are modifying what we do everywhere. So it's really hard to give you a number that you could then roll up into a single number. It's just know that we're working on the decline everywhere. The shale decline will be less. EOR will be less with the production that's on. So lower than that, 5%, probably down to 4% with what's producing today.

And I guess the other piece of that, too, is that unlike typical or historical quarters when we've been executing a development growth plan, we're building a significant backlog of wells, of existing wells that won't need to be re-drilled or anything to bring that production back online. It's really that activity set that that Vicky mentioned around downhole maintenance, et cetera, that will bring barrels back online in a way different than we've seen in pre-year quarters, which is really difficult to measure in light of not knowing where prices are in the recovery trajectory right now.

Thank you. And then the second and final, this was an awkward quarter to calculate the cash flows because of the mix of oil price. Can you talk about what sort of cash flows we can expect from you at the current price environment and – Let's say, for example, the sensitivity if we believe the strip, which is currently about $25 a barrel for next year. Actually, excuse me, $32 a barrel is the April next year strip. Could you give us a sense for how much cash flow would be generated in those two environments, current and future? Thanks.

Paul, I can tell you this is not going to help you at all. I was trying to think of a way to help you with your model here, but pretty much once we get past Q2, we'll be able to balance our cash inflows with our outflows. So we'll be neutral in Q3 and Q4, but I don't think we've given you our price assumptions either. So I'm not sure that helps you at all. But the sensitivities, I would say that as our production declines a bit, the sensitivities have gone down a bit. They're not at the dollar change in oil prices equal to 250, so they're not quite there yet. They've declined a little bit. Again, what that sensitivity ends up being depends on how much we can mitigate the decline as we go.

Our next question comes from Jeffrey Campbell. with Toohey Brothers Investment Research. Please go ahead.

Good morning. We've kind of beat on the dead drum quite a bit, so I thought I'd ask a couple of different questions. One is looking forward, is Oxy continuing to test technical solutions to reduce headcount and improve performance? And to give an example of what I'm thinking about, automated directional drilling seems to be gaining some increasing traction.

Yes, we're going to push the envelope on everything now, and that's part of the reason we've been able to reduce our SG&A significantly is our teams are leveraging technology and automation as much as we can. We probably have one of the most automated areas in our Permian EOR business. With respect to the drilling, yes, we're pushing the envelope there, too, because you've seen the improvements in how we're drilling our wells. As much automation as we can install, we are, and part of that automation has gotten us beyond where in the drilling area where we need the typical tool pusher on the drilling rig or the driller to manage the process. We actually build models by which the computer can basically do the drilling of the well. but it takes an engineer to help to build those models. But once they're automated, then it's a process of just then tweaking to get better. That's on the drilling side. On the field operations side, our CO2 operations are very highly automated. We can actually manage those from a central control room. So we're managing that. As we've improved and started to better rely on our artificial intelligence with respect to well productivity and those sorts of things and what wells should be doing versus what they are. That's part of what I was talking about when I said we're modifying our production processes. We'll depend more on managing, letting those tools help us manage which wells really need any kind of physical or visual on-site versus being able to completely manage from a control room. So there's a lot of automation that we've installed that's going to help us move toward this, toward a lower, much lower SG&A environment.

Yeah, and I think also on that too is also, you know, we're doing a vast look at our portfolio too. When you have a portfolio as large as Oxy's and you can't apply the same sort of techniques and approaches to every bit of the portfolio, And so this is allowing us time again to reprioritize and bucket our portfolio in areas where in some cases we may be very quick to bring a well back production or in other cases we may leave wells down for an extended period of time or not use the same type of approach to actually how we're going to maintain the well or how we're going to automate the well. And this sort of not a one-size-fits-all approach is also bringing a lot of savings. And not only that, but also the number of people required to continue to operate the fields we operate in.

Thanks. I appreciate the detail of color. And just to quickly get back to something that you mentioned in the prepared remarks regarding Algeria, I just want to make sure I understand this. Is it your intention to operate there now until price recovery, or have you decided that it is a core asset going forward, notwithstanding receiving an offer to buy that can't be refused?

It's a core asset going forward, and if we got an incoming offer for Algeria that was something that we couldn't refuse, we would certainly need to coordinate that with Sonatrac and with the Ministry of Oil because we do have partners and that's the way it is working internationally. Sometimes the decisions need to be coordinated and we need to be committed there. We're committed to be there and to do our best to increase value and enhance the operations and we believe we have the opportunity to do that. It's a great asset. It's one of the one of the best assets that's in that region. So we're excited about it, and we're going to stay. Again, if someone came in and made an offer that we can refuse, I'm sure the ministry would be interested in that as well.

Okay, great. Thank you.

I appreciate it. Our next question comes from Leo Mariani with KeyBank. Please go ahead.

Yeah, hey, guys, just wanted to ask a couple housekeeping items on some of the guidance here into the second quarter. You guys talked about 45,000 BOE per day of shut-ins. I was hoping to get a little bit more detail around, you know, kind of what regions, you know, that's kind of split up to. And also on your midstream guidance, I think you guys are saying negative 310 and minus 350, I guess, pre-tax income, you know, significant change, you know, versus first quarter guidance. I was just hoping you could kind of, you know, elaborate on some of the reasons and the big change on the midstream.

Hey, Leo, this is Jeff. I'll start with those, and then Vicki and Rob can jump in. So, you know, as you mentioned, you know, for your Second quarter, we're estimating 45,000 barrels of, you know, shut-in production. One-third of that, as Rob said, is OPEC Plus related. So you can realistically assume that's from Oman and Algeria. The remainder is domestic, and that's economically driven. And the best way to think about that, half of that, the domestic part, is from the Permian, which is the EOR and resources, and then the other half is in the Rockies. And just to give you a little color, so that 45,000 barrels, about 3% production compared to our guide. The number of wells we're shutting in is about 9% of our well count with that. So as you would expect, you know, you've got, you know, a proportionate, you know, a lot more wells being shut in because you're on the low end of that economic curve than you do production being shut in. That first 1% of production we shut in is about 5% of our wells. So that just gives you some perspective and color. And when people talk about shutting in wells, they use all kinds of descriptors, you know, whether they're temporarily abandoned with a bridge plug or just, turning off the artificial lift or things like that. And we're definitely doing this in a way that ensures we protect the reservoir and the well integrity, and also that we can start back up at the lowest possible cost. So your question about midstream, we can go through this offline in a lot more detail because, as you know, that business has a lot of moving pieces. But the primary difference in the Q2 earnings estimate versus what we saw in Q1 is almost entirely timing-driven. We recognize a large mark-to-market gain related to our hedge position, and as prices fell at the end of Q1, that impacts Q2. So in Q2, those same low prices are impacting the revenue we'll realize on our physical barrels when they're delivered. We can talk through that more offline, but that's the primary driver of that change.

Okay, no, that's helpful for sure. And I guess just, you know, second question here in terms of, you know, philosophy, I was just trying to make sure I'm sort of reading it correctly in terms of what Oxy's plan is, you know, for the next couple years. It sounded to me as though just given the pending 21 and 22 maturities that the company is going to continue to, you know, focus on just mitigating declines until there is much better line of sight for taking care of a lot of those maturities or for actually taking care of them with refis or exchanges or whatever. Just wanted to make sure I'm sort of understanding that correctly, if that's the message you guys are trying to deliver today.

It depends on the price environment, but primarily this year, it'll be decline mitigation. Going into 2021, it depends on how strong the recovery is and what prices we see in 2021. There's the potential that we could add a few more rigs back but it would still be a scenario where we need to generate some free cash flow as well. So we would balance what were the activity level with achieving some free cash flow generation after capital.

Our next question comes from Josh Silverstein with Wolf Research. Please go ahead.

Thanks. Good morning, guys. As part of the debt pay down strategy, and I'm sorry if you touched on this before, but Would you consider equity as part of this as well? You know, it looks like at least the base plan right now is to pay the preferred with $200 million in shares each quarter. So why not just do a larger equity deal to help de-risk the balance sheet right now?

No, we did touch on that a little earlier. And the current share prices, we don't have an intention on establishing additional equity to pay down debt.

Okay, sorry about that. And then you mentioned the $5 billion credit facility that you have available right now. How much of that can you use to pay down debt right now? And then secondly, you had an asset sale target before that was used to pay down debt. Do you guys now have an absolute debt reduction target of where you want to get to?

So we can draw on the credit facility at any point in time. We're not drawing on it because we don't feel like there's any risk of drawing on it at any point in time that we need it. In terms of a debt restructure, a total debt number to get to, the goal is ultimately over time to get back to an investment grade type rating. That's what our current path is.

Our next question comes from Janine Way with Parkway. Please go ahead.

Hi, good morning everyone. Thanks for taking my call. I just wanted to follow up quickly on Josh's question right now. In terms of debt management and the revolver, right now I believe it's unsecured and I don't think there's a trigger on it just because you're going from IG to high yield status. But do I have that correct? Do you anticipate that sometime down the road that you might need to move to an RBL facility that might have a leverage covenant as opposed to a current debt-to-cap covenant?

Yeah, Janine, you do have that correct on the current RCF facility, and we don't see a need to go to an RBL-type facility.

Okay, great. Thank you for taking my question.

Our next question comes from Richard Tullis with Capital One Securities. Please go ahead.

Thank you. Good morning, everyone. Going back to the midstream quickly, I know you guided pre-tax losses the first half of the year, partly driven by the timing issues that Jeff just discussed. What do you see as a more normalized yearly pre-tax income run rate for that business going forward?

Hey, Richard, this is Jeff. I'd put that in the category of we didn't guide full year. So, I mean, there's just so much volatility in all of those markets that we didn't feel comfortable providing guidance beyond the quarter until we see more clarity on how things play out from a recovery differential standpoint and all of that. So, yeah. We'll defer that. I would tell you, I mean, you understand the building blocks of the business, you know, or assets that go into that in the Middle East and Cogen and some of the other things, those are still there and still good assets. So they're there. It's just the volatility around, you know, all the other aspects on the marketing side.

Sure. Fair enough. And as a follow-up, if Total does not move forward with the Ghana project, Do you see almost immediately putting the asset right back on the marketing sale block, or maybe you're doing that now? And then secondly, are there other assets that maybe you weren't looking at divesting at the time of the Anadarko acquisition announcement that maybe you look at now in a better commodity environment, just given the difficulties there? closing the Algeria deal, et cetera?

I would say yes to that. Ghana is an asset that we still consider to be up for sale. Whether Total buys it or not, it would still be up for sale. And there has been some interest in it. So that's something that we would still pursue divesting. And I might have, I think I said earlier, but let me reiterate that At the early beginning of the year, when we looked at Algeria and Ghana as divestiture targets, we wanted to have an alternative. And the alternative that we came up with would deliver similar proceeds with a similar reduction in cash flow. So we started marketing early this year an alternative to the sale of Algeria and Ghana We started that process, and as we got into the process, all the travel restrictions were applied, and this is one of those things where we need people to come in and we need to do management presentations and we need to dive into details with the technical team that's assessing the value of that asset. So it's one that requires a little more interaction. So we have put that on hold right now as we wait for travel restrictions to be lifted. and for the environment to get better. But we do have other assets to sell. That's the alternative that I'm talking about is just one. There are other things that we can do with some of the acreage in the Permian and potentially even in the DGA with respect to even if it's not outright sales, it's JVs where we could generate some cash up front and then a potential carry. There are lots of other options, but But what we don't want to do is do it in this environment. So it really depends on when the recovery occurs, how strong it is, as to the timing of those. And that's why we're not going to put ourselves in a situation where we get closer to debt maturities and then we found we can't execute the divestitures before the maturities occur. But we've still got asset sales that we can do. And we'll do it as they make sense to do, but we're going to make sure that we get maximum value for those.

In the interest of time, this concludes our question and answer session as well as today's conference. Thank you for attending today's presentation.