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spk06: Good afternoon, and welcome to the Occidental's first quarter 2021 earnings conference call. All participants will be in a 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. And 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, sir.
spk07: Thank you, Chuck. Good afternoon, everyone, and thank you for participating in Occidental's first quarter 2021 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 investor 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.
spk01: Thank you, Jeff, and good afternoon, everyone. I'd like to start this morning by saying how pleased we are with our first quarter operational and financial performance. The momentum generated by our improved cost structure and capital intensity leadership was a catalyst for our strong results this quarter and is expected to continue to provide a solid foundation for free cash flow generation. This morning, I will cover our first quarter operational performance and divestiture progress. Rob will cover our financial results and balance sheet improvement, as well as our updated guidance, which includes an increase in guidance for Midstream and OxyChem's 2021 earnings. Our first quarter results are a perfect example of how our ability to consistently deliver strong operational performance has strengthened our financial position. In the first quarter, we generated $1.6 billion of free cash flow, which is our highest level of quarterly free cash flow in a decade. We also closed almost $500 million of divestitures, repaid $174 million of debt, and exited the quarter with approximately $2.3 billion of unrestricted cash. Our plan to stabilize 2021 production at our fourth quarter 2020 exit rate is on track. We delivered first quarter production from continuing operations of over 1.1 million BOE per day, with total company-wide capital spending of only $579 million. We're particularly proud of this achievement given the operational challenge posed by winter storm Yuri. Our domestic oil and gas operating costs of $7.20 per BOE continue to demonstrate the lasting impact of our cost reduction measures and includes about $83 million of atypical costs related to the winter storm. I want to note that we have fully recovered from the storm with no lasting impact. Even with incurring storm-related costs in the first quarter, our full-year domestic operating guidance has only increased by $0.10 per BOE, which represents a significantly smaller increase than the approximate 25 cents per BOE that the $83 million in total OpEx would have otherwise added. This is a significant achievement made possible by our teams continuously seeking efficiencies and finding innovative ways to safely and effectively lower costs. In the first quarter, OxyChem benefited from robust CDC pricing and gradual strengthening in the caustic soda market. Oxychem's integration across multiple chlorine derivatives provides us with the ability to optimize our caustic soda production while opportunistically adjusting our production mix to maximize margins. Oxychem's ability to adjust to rapidly changing market dynamics was invaluable during the downturn last year, and we were able to provide critical products to the medical, pharmaceutical, and disinfection markets to respond to COVID. Given the recent improvements in the chloro-vinyl and caustic soda markets, we expect Oxychem to extend its track record as a market leader and consistent generator of free cash flow. Additionally, during winter storm Uri, our team was able to safely protect our assets as well as provide essential products to our customers. Our team's effective response limited the storm's impact on facility maintenance costs to an immaterial amount. Midstream and marketing's outperformance compared to guidance in the first quarter was primarily driven by our ability to optimize long-haul gas transportation in the Rockies, along with the timing impact of export sales. Following the increase in activity in the fourth quarter, our oil and gas business continued to push the envelope with new efficiency gains as we seamlessly transitioned into the first quarter. Our Permian teams outperformed expectations in the first quarter by setting new drilling records in New Mexico, the Texas Delaware, and the Midland Basin, while also driving down costs. Our first quarter premium achievements are especially impressive as we have now augmented the efficiency of our oxydrilling dynamics with remote directional drilling, an exciting innovation that allows the drill bit to be steered from a separate location. Being able to control and optimize our operations remotely and instantaneously apply shared expertise to similar activities has numerous advantages that we expect our operations to benefit from in the future. We also continue to achieve significant efficiency improvements in the Rockies, where in the first quarter, our DJ drilling team reached our lowest average cost per foot in program history. I'd also like to highlight Oman for their best ever HES performance with no recordables in the first quarter while drilling the longest laterals in OxyOman history and achieving record drilling times. After a pause in the issuance of new drilling permits on federal land earlier this year, we have now started to see the process move forward again with the approval of new permits. We currently do not expect the permitting process to have an impact on our activity levels as we still plan to run an average of 11 rigs in the Permian this year and two in the Rockies. In late April, I testified before the U.S. Senate Energy and Natural Resources Committee in support of lifting the federal leasing moratorium. As I told the committee, Continued onshore oil and gas development means high-paying jobs, community reinvestment, and meeting energy and product needs during the transition to a low-carbon economy. We look forward to working with Congress and the administration on ways to create clarity and shorten long-term regulatory certainty. After we announced the sale of our Columbia onshore assets last year, we updated our divestiture plan to sell $2 billion to $3 billion of assets by the middle of this year. Our progress towards this target continues as we closed almost $500 million of sales in the first quarter. Post-Columbia, we now have closed approximately $835 million of divestitures and are well on our way to achieving our target, but we will continue to make the best value decisions by weighing the impact of future cash flows in our current environment versus the benefits of meeting a deadline or divestiture target. Looking back over the last year, I'm particularly proud of the accomplishments our teams have achieved and look forward to the opportunities that lie ahead. Not only have we optimized our portfolio, improved our balance sheet, and continue to reduce costs, we've also created the pathway to achieve net zero emissions. As we take our next steps toward achieving our future goals, including further balance sheet improvement, returning additional capital to shareholders, and bringing our first commercial-scale direct air capture plant online, we will continue to maintain our low-cost, capital-efficient, stable production base with the goal of maximizing free cash flow generation through capital discipline and margin preservation. Our cash flow priorities are structured with the aim of positioning our company for future success. While we are encouraged by the improving macro environment and are especially proud of our team's ability to maintain and sustain our production base, We will continue to improve our balance sheet until we reach the point where our financial position will support a more meaningful return on capital and return of capital to our shareholders throughout the commodity cycle. I'll now hand the call over to Rob, who will walk you through our financial results for the first quarter and guidance for the remainder of the year.
spk10: Thank you, Vicki. I want to echo Vicki's comments on our strong performance in the first quarter. cash flow priorities illustrate the importance we continue to place on capital discipline, free cash flow generation, and balance sheet improvement. As we look ahead to the steps necessary to transition from our current to our medium-term cash flow priorities, our focus on balance sheet improvement will continue to influence our financial policies. Throughout 2020, which was one of the worst years our industry has endured, we focused on deleveraging and continuing to reduce debt in the first quarter of this year. We were paid approximately $9.6 billion of principal since August of 2019. more to come as we complete our divestiture program, combined with leveraging our ability to generate excess free cash flow and maintaining our commitment to capital discipline. On past calls, I've highlighted our preference for a viable path to return to an investment grade credit rating or allocating excess cash flow to our medium-term priorities. While credit ratings are based on several factors, including a certain level of debt, returning to an investment grade in a mid-cycle commodity price environment may include reducing debt to the mid-$20 billion range. We are not here today but we believe this goal is achievable given our potential to generate free cash flow. We were paid $174 million of debt in the first quarter and now have less than $225 million of maturity through the remainder of 2021. As we generate cash from organic free cash flow and close our remaining divestitures, we have several options available to deploy that cash to improve our balance sheet. We have the option to call the 2022 floating rate notes prior to maturity and may at times allow our cash position to build until maturities come due. We have additional options available to address future maturities, which we are currently evaluating. We may also consider retiring $750 million of notional interest rate swaps later this year for the fair value amount, which was approximately $665 million at quarter end. This would improve cash flows by almost $50 million per annum at the current curve. In the first quarter, we announced an adjusted loss of $0.15 per share and a reported loss of $0.36 per share. The difference between our adjusted and reported results is primarily due to a gain on asset sales, and positive fair value adjustments offset by planned lease expiries, and a legal contingency related to our 2016 settlement with Ecuador. This quarter, we classified all derivative instruments with mark-to-market adjustments as items affecting the comparability. We expect this change will be helpful to investors comparing underlying business performance between periods and reconciling actual results for our guidance, which had previously excluded the mark-to-market adjustments. We were able to add additional gas hedges in the quarter and have now hedged approximately half of our 2021 domestic natural gas production with a floor of $2.50 per NCF. We are on track to spend within our four-year capital budget of $2.9 billion, having incurred capital expenditures of only $579 million in the first quarter. Our operational success, combined with our focus on sustaining production in a more supportive commodity price environment, enable us to generate $1.6 billion in free cash flow and exit the quarter with almost $2.3 billion unrestricted cash in hand. Our business incurred a negative working capital change in the quarter, which was largely driven by higher accounts receivable and inventory balances due to commodity price recovery. Over half of the working capital change was due to commodity price, which reflects a timing difference between whenever it is recognized and when the cash is received. We also made several payments that are typical in the first quarter, including property taxes, gas interest payments, employee benefit payments, and pension contributions. We see the potential for the working capital chain to partially reverse over the remainder of this year as expenses that were accrued last year are already paid in the first quarter of this year. We are pleased to be able to update our full-year guidance for midstream and Oxychem, reflecting strong first quarter performance and improved market conditions. Our revised guidance combined with our operational achievements have enabled us to lower our 2021 break-even to the mid-$30 range on a WTI basis before the preferred dividends. I would like to reiterate that despite the first quarter weather impact to our permanent production of approximately 25,000 BUE per day as guided in our last call, combined with the production impact associated with divesting $285 million of minerals and a negative TSC impact that were 5,000 BUE per day related to higher oil prices, our four-year production guidance of 1.14 million BOEs per day remains intact as does our four-year capital budget of $2.9 billion. I will now turn the call back over to Vicki.
spk01: Thank you, Rob. We are encouraged by the positive reception our 2020 climate report received following its release in December, as well as the enthusiasm our low carbon strategy continues to generate. We understand that many of our stakeholders have a desire to learn more about our low carbon projects and the returns these projects will generate. While we are not yet able to share the economics, we will have created partnerships to finance and deploy cutting-edge CCUS technology, which leverages our expertise and our tens of billions of dollars worth of CO2 infrastructure, assets, and pore space. We are creating these cross-industry opportunities for others to invest alongside us to maximize the deployment pace and carbon removal impact. We look forward to sharing more information when possible. As part of being a socially and environmentally responsible operator, we consistently make operational improvements in addition to working toward our net zero goals. In the first quarter, we started a water recycling facility in the Midland Basin and began utilizing recycled water in our South Curtis Ranch development. In partnership with an industry-leading water midstream company, we were able to increase our water recycling efforts and lower costs. Recycling water has been a large focus of ours in New Mexico for several years, and we are pleased to have been able to expand this effort into Texas. Before we begin the Q&A, I want to announce that in April, we became the first U.S. oil and gas company to commit to adopting the World Economic Forum's stakeholder capitalism metrics. This commitment will guide our process to incorporate the forum's metrics most relevant to our business into our environmental, social, and governance reporting. We believe this is the appropriate framework to supplement our reporting on ESG progress, enhance transparency, and strengthen our engagement with investors and other stakeholders. We'll now open the call for your questions.
spk06: Thank you. We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. your questions to one primary question and one follow-up. And if you have further questions, you may re-enter the question queue. And at this time, we'll pause momentarily to assemble our roster. And the first question will come from Dan Boyd with Mizuho. Please go ahead.
spk02: Hi, thanks. So, you know, I want to ask one on direct air capture, but I think, you know, first just kind of starting with the free cash flow outlook here. Can you give us an update on your dividend break-even? I think last time you talked about it, it was in the high 30s. Presumably it's lower given the improvements that you've seen in chemicals and midstream. And maybe also just comment on your free cash flow generation this year at the strip, you know, adjusted for work, you know, even if you include working capital, I think there's probably a lot of questions on that today, given what the stock's doing.
spk10: Sure, Dan, thanks. So our revised guidance, when you combine an operational achievement, did lower our break-even in what I would say the mid-$30 range on a WTI basis before the preferred dividend. Specifically, we give a range because it is influenced by a number of factors that you listed, including the cash flows, including the natural gas prices, realization for our products, investor timings, and where chemicals and midstreams fall with respect to earnings guidance. And obviously, this quarter, we were able to significantly improve our guidance on both the chemicals and midstream business, which has a material impact on that range. But in addition to that, as we take that organic cash flow, and we can further improve the break-evens in doing things like I mentioned in my opening comments regarding interest rate swaps, where we retired the $665 million investment of notional value or $750 million notional value that was $665 at the end of the quarter, we're able to eliminate about $50 million of interest costs for the year using the current curve. So there's a lot of things that go into that. In terms of forecasting out cash flow at the end of the year, we don't forecast cash flow forward on that side of it. I think you can see a pretty representative quarter. It's a fairly clean quarter outside of a few things. And I think you can see, eliminate the working capital and get an idea what kind of cash we would generate at similar prices moving forward.
spk02: Okay, I'm sure you're going to get more on that. So Vicki, I wanted to go back to the direct air capture. I came across a document with a presentation that someone on your team made to the California Air Resource Board, I think back in October, that talked about building or at least having four facilities online in 2025. And there was also a petition to get credits or I guess generate the credits during the construction phase. So can you just talk about that and what that might be able to do in terms of your ability to finance this in creative ways as you just touched upon?
spk01: Yeah, I'll say that we don't have any concerns about being able to finance our first direct air capture facility. The first one, once we have both trains built, we'll be able to capture one million tons per year of CO2. So to us there are no financing concerns, but it's helpful when we can to generate some cash as we're building the facility. That's what that request was about. And if we could get that request, what that enables us to do is accelerate development of the next facility. So what we're trying to do is what I believe CARB and others want to do, and that is accelerate our ability to be able to have a positive impact on the environment and also to be able to create value for our shareholders. We're trying to accelerate that where we can. And so we believe that... that we will be able to provide or obtain some funds either from that or potentially from some modifications that we think is critically important to 45Q. Currently, 45Q is a tax credit. If that were a direct pay to us for the carbon that we capture, that's another enabler that allows us to accelerate the construction of the technology, get that advanced faster. and more built sooner. So we're looking at multiple ways to accelerate all that we're doing in the Permian with respect to direct air capture.
spk06: The next question will come from Neil Dingman with Truist. Please go ahead.
spk12: Good morning, all. Vicki, I know you mentioned on the prepared remarks that you were fine with as far as permits and it's not going to influence the two rigs in the Rockies. Just wondering if and when the decisions come out in August, What might, you know, I guess changes could we see either in the Gulf of Mexico or Iraqis, I guess, depending on, you know, how to the degree of what comes out?
spk01: I think the changes that will come out will not impact current leases. I do believe that we'll be able to continue permitting on current leases. My concern is that... that there could be a moratorium, a longer-term moratorium on picking up additional leases. That would be bad for our industry. It would be bad for the United States. It would put our country in a position where we would likely have an even tougher time increasing production above where the United States is today. As you know, we were at one point over 13 million barrels a day of oil production from the U.S. That's a scenario that gave us strength in world politics. It gave us the ability to completely supply our own oil and products domestically. We would not have to import very much at all at a 13 million barrel a day level because I believe our refining capacity is somewhere near 17 million. So we would have some capability to be almost completely independent. with a moratorium on federal leases, that would really drive down our industry's ability to react. Now, where we are in that, we've got 9.5 million acres to develop in the U.S., and out of that 9.5 million acres, I think only about 1.6 million are federal, and about half of that is offshore. So from a new lease standpoint, There are some companies that are in better positions than others, and we believe we are. But what I'm advocating for is the industry and for the country, because the other thing about this is some of this is being touted as a way to reduce emissions for the United States, which would be definitely a bad move, because we are very prudent with what we're doing in the United States compared to a lot of countries around the world. We've reduced emissions significantly in the U.S. and continue to push technologies to further reduce. API, we're part of API, and a lot of companies within API have committed to a voluntary partnership where we're all working to share technologies and to help each other reduce emissions and to get the best available technology in place to address emissions and climate change. So I think that, for me, the biggest worry is It's not on existing leases. It's just the moratorium could be extended for a long time on anybody picking up any new releases.
spk12: No, I like the details. Thanks. And then just to follow up, I'm just wondering, will your financial investments, and I guess sort of two-parted here, just talk about maybe what type of financial investments you see in your carbon capture and initiatives, other clean energy initiatives, because you seem to have an advantage, especially out there in the perm, on some others. And really my main question around that is, will the funds that you spend on that, is that going to influence what you're able to spend on either on some of the upstream, or are they too sort of independent there? Thank you.
spk01: No, our low carbon strategy is very connected to our CO2 enhanced oil recovery project. And as we have mentioned before, we started working on this low carbon strategy because we wanted a more sustainable source for CO2 and a lower cost CO2 for our enhanced oil recovery. Where we're positioned today is incredibly exciting because in the Permian Basin, we have such a footprint of not only reservoirs, pore space, and resources, We have the processing plants. We have the pipelines and all of that necessary to further accelerate development of additional 2 billion barrels in our conventional reservoirs. And this, we haven't even been able to calculate yet what we could get from CO2 enhanced oil recovery in the shale. But doing that in the Permian, doing that in the DJ Basin and the Powder River, that sets us up for decades to come of of generating new reserves and production from existing reservoirs. And so really it's tied to that. It's tied to being able to create value for our shareholders through the extended production of more reserves than what can typically be produced out of conventional or unconventional resources. For example, in conventional reservoirs with CO2, you can get up to 70% or better recovery Whereas with just primary development, normally you get 20 to 25% at most. So we can get better than 70% with CO2 flooding. In the unconventional where most companies will tell you that you'll get at most 10% to 12% recovery of the hydrocarbons from the shell play. But with CO2 enhanced oil recovery, we've tested it. We've run four pilots and we now know that we can potentially get 75% additional recovery or maybe even double it. So we're sitting in a position now where we have a significant amount of future potential development and we have it in the areas where we operate, the areas where we already have the infrastructure. So as we go forward, our incremental production and recoveries are just going to continue to be at lower and lower cost beyond the point where we were able to get these direct air capture facilities built. But what's also going to help us there too and help further lower costs is executing on our net power technology, which we're also an equity investor in. Net power is a process that generates a lower cost of electricity by combusting hydrocarbons with oxygen and it therefore spits off a pure stream of CO2 and no other emissions, so we can take that CO2 and use it in our reservoirs. So it's essentially a lower-cost, emission-free electrical generation process for us. So we have a lot of ways as we go forward, and this is why we're incredibly excited, a lot of ways to get more oil out of the ground for lower costs And so as we go forward, our cost structure will continue to decrease, not just from the debt reduction that Rob has talked about, but from the actual development and operations in the field. And in addition to that, we will be able to provide aviation and maritime industry with a net carbon zero oil. So we're going to be... the solution for actually aviation and maritime. And that's why United wanted to join with us on building this first direct air capture facility. So it's exciting for us. Sorry if I'm talking too long on this. I'll stop here and see if you have anything else to ask. But it's exciting for us, and we're really looking forward to being able to talk more about this. And as I said in my script, we can't yet because we're in the middle of some processes and some discussions and interactions with others. But we hope that... in the fall or close to the end of the year, we will be able to share more about it and get you a model that you'll be able to see and understand at that point.
spk06: The next question will come from Doug Legate with Bank of America. Please go ahead.
spk13: Thanks. Good morning, everybody. Rob, I hate to speak on the tax break-even question, but I want to do a little math with you real quick. $1.6 billion of free cash, obviously before working capital, annualized is $6.4 billion. $250 million per dollar is $30. And the average WGI price in Q1 was $57.61. So how do you get mid-30s? Even if I add back the prep, that still only gets you to low 30s. What am I missing?
spk10: So I think that... Part of what is missing from that is certainly the CapEx. And then also, whereas I would say the chemicals, the performance in Q1, as you can see in the guidance, is sustained throughout the year. The midstream inclusion in Q1 is more of a one-time event associated with Winter Storm URI. So I think part of annualizing the Q1 numbers, that's what I would modify your analysis by.
spk13: I realize they're not repeatable, but still, Delta is about seven bucks. Okay, I'll take it offline. My follow-up is, Vicki, I guess it's a regular question every quarter, the disposal update. A little bit more progress this time, but still a long way to go to get to the $3 billion. Can you give us any color on timing, visibility at this point?
spk01: Yeah, I would say that if I include the unsolicited offers that we've gotten, we currently have offers in hand that would get us well above the $2 billion minimum target. However, in this environment, we expect that we will meet the $2 billion. But whether or not we go above the $2 billion really depends on how the macro continues to look for us. And in everything that we're getting in and every investiture that we have the potential to do, we always want to evaluate what it delivers for us versus what the cash flow in the future would generate. So it's a value proposition for us, and it's also ensuring that the other part of the consideration is making sure that we have enough cash flow to meet our maturities, and even to go beyond that to, as Rob was saying, to deal with the interest rate swaps and some other minor costs that we have. So it's all about lowering our cost structure and making sure that we maximize our higher margin cash flow, keep that intact, So we still have Ghana up. We have not announced any others that we have, but we do have several things actually in process, a couple that are higher priorities for us to do. One is Ghana, as we've talked about it before. But because we have several processes running now, we feel comfortable that we'll get to the $2 billion. Going beyond that is really going to be a preference based on and a decision based on the valuation.
spk06: The next question will come from Neil Mehta with Goldman Sachs. Please go ahead.
spk09: Thanks so much. I just wanted to build on some of the cash flow questions from the quarter. Can you just walk us through again why the cash flow working capital number was so large in the How should we think about the reversal? A lot of this just sounds like timing stuff, and certainly export barrels will eventually hit their final destination. So I would think a lot would come back, but just walk us through that.
spk10: Yeah, sure, Neil. Happy to do that for you. So if you look at a typical first quarter, we would historically see somewhat of a significant draw in the first quarter because of the but it was certainly more sizable in the first quarter of this year. If you go back to 2018, Q1 withdrawal was about $700 million. 2019, it was about $900 million. And for the opposite reasons of this quarter, 2020 was about $200 million draw because we priced going the opposite direction, obviously, in March when the pandemic hit and with the price wars going on. So regardless, the 1.3 billion draw we experienced in the first quarter is exceptionally large. The majority of that was driven by the change in commodity prices. It was the timing difference between revenue recognition and cash received. So at the end of 2020, WTI was about $48 a barrel, and it was $61 a barrel at the end of March. And so this price increase of 30% impacts both our AR balances and our inventory significantly, especially when you consider our midstream business and how many barrels are on the water at any given point in time. And even that's a bit exacerbated because we discussed a bit last time that Europe essentially has been shut down to significant cargoes of oil from the Gulf since the third quarter of last year. And as a result, we've had to change our mix or portfolio of export shipments, which are now, for the most part, heavily weighted to, if not exclusively weighted to shipments to Asia, which is longer voyages, more crude in the water, longer because of the transit times. And then obviously, compared to other years, We have a pretty modest capital budget, and so we're not creating a significant amount of payables through our capital spending. And so when you look at it as a combination of the price impacts coupled with all those first quarter events like the semiannual interest payments, the payments for property taxes, we made a significant contribution to the ABC pension plan during the first quarter. And then so when you put it all together, we do expect, as you pointed out, as you know, perceivable start to come in that some of that will reverse itself as the year goes on.
spk09: Is it fair to assume Q2 should be a deep working cash, working capital cash inflow all out equal then?
spk10: I guess it depends largely on what happens with price going into the second quarter also. You would expect it to.
spk09: And the follow-up is just on the chemicals business. Obviously margins are really strong, so just get your guys' big picture view of where we are in the chemical cycle and how your business fits into that.
spk10: Yeah, so absolutely, nothing happier to do than talk about our chemical business, which had an excellent start to the year. You know, when you look at the chemical business, it has both some impacts from Winter Storm Uri to some extent, but also because how Winter Storm Uri impacted the overall business itself. And so Caracolite production struggled significantly in March post-storm. If you think about URI, it had a much wider impact than any individual hurricane would have had in the past. And so you still had a lot of inspections, et cetera, going on and restarts in the month of March. And that has extended into after a very difficult hurricane season last year. And so going into the end of 2020, we already had a pretty tight supply-demand balance in the second half of the year. and that was coupled with a pretty significant amount of demand. As you know, building products are in very high demand right now, so our PVC demand and margins were significant already going into the year. And so if you look at our operating rates as an industry, they're only about 71.5% for the first quarter of 21, whereas last year they were 89%. And so the combination of the stronger demand coupled with the production offline to start the year has already tightened up an already tight supply-demand balance. And so in the case of PBC, you know, construction investment is very strong. Demand is expected to range strong with the housing starts outlook, you know, low mortgage rates, a lot of emphasis on remodeling, et cetera, right now that is driving PBC demand. So PBC demand domestically is up almost 5% compared to the same period in 2020, which drives down, you know, the amount of PBC that's actually being exported. And exports are actually down about 30%. compared to the same period last year. And so with resin type in the domestic market, we're able to expand margins, just like we would in the other commodities under our site supply-demand balance. And then what we're seeing in the caustic soda business is, whereas previously when we guided, we anticipated to start, we were seeing caustic soda bottom, and we thought we would start seeing improvements in the second half of the year, the year we pulled that forward a bit, and so now we're seeing caustic soda prices improve the second quarter as we move forward. So we're just getting more of that as the year goes on. And so we're expecting not only continued high margins in the PVC business and resilient demand through the balance of the year, as construction continues to pull. I mean, PVC is really no different when you're seeing prices of wood and everything else. We'll also see caustic soda benefits in that process at all. And as Vicki mentioned, you know, Oxy's significant amount of other derivatives beyond just PVC that we sell are gives the company a lot more variability in the molecules that it can sell, produce additional caustic soda, and produce additional value in other parts of the chlorine chain, which is going to expand our ability to increase the value delivered by the business. It's the reason why we talk about how much value is locked in the chemical business and why when people talk to us about the chemical business a lot of times and why we don't do something different with it is because it's just hard for people to grasp But a small commodity chemical business, they can turn up these types of cash flow on this asset base. And it's really, it's a remarkable business.
spk06: The next question will come from Janine Wei with Barclays. Please go ahead.
spk00: Hi, good afternoon, everyone. Thanks for taking our questions. My first question probably may be for Rob. I just want to make sure I heard your comments right in the prepared remarks. Getting down to the mid-20 billion range on gross debt, that's where you think you need to be to hit IG status at mid-cycle prices. And I think ultimately that's an important goal for you all. So about 10 billion more to go from there. Can you just remind us what your view of mid-cycle prices are at this point? And how does this jive with your prior target of three times leverage as the trigger for growth, which I think was also at mid-cycle prices?
spk10: Yeah, it's around the $50 range. And if you look at the price decks that are being used by a lot of rate agencies, they're in the high 40s right now to close to $50. So they don't move their price decks with the current environment of being in the mid to low 60s. So that makes a significant difference on where that break-even location is at. So is it exactly $10 billion? Obviously, there's a lot of different things that factor in, as I indicated in my remarks. but it's somewhere in the neighborhood of that. Other things will go into that that could mitigate it to be a little higher than that would be possible or even a little lower than that. But obviously, there's a lot of things that go into it, but it's somewhere in that range. Even though you can probably move forward and get pretty close to that or below that three times in your model for the second half of the year, by the end of the year, based on if oil prices were to continue, it's not at that price deck that we're going to be considered for investment grade.
spk00: Okay, got it. So in terms of the moving pieces on – my follow-up is in terms of the moving pieces on the medium-term goals, there's a few. There's the sustainable dividends. There's growth capital. Now we kind of have a bogey roughly on growth debt. So how do we think of the trade-off for all of those things? It will take some time to reduce the debt. We've got the preferreds. but you do have, like, very healthy oil prices as well as asset sales that are coming in. So I'm just kind of wondering, when we're looking at our free cash flow profile and the new debt targets, when we can kind of revisit the growth conversation versus the dividend and paying off other things.
spk10: Yeah, so, Jean, I would say that, you know, obviously, as was in Vicky's remarks, that we're squarely focused on the leverage reduction right now and looking at the opportunity to get down to that investment grade type level. Embodied in that is going to be using the proceeds both from the free cash or from the business, using the proceeds of any divestitures that take place, and combining those two things together to reduce what we have outstanding. And that can be through a host of different things, as I discussed in my remarks, between what we're evaluating near term on an ability to put that cash to work to reduce debt. That conversation will eventually rotate over into medium-term priorities, focusing on the dividend. But we haven't established a policy on what the dividend might look like. It's going to need to be sustainable, as we've indicated in our priorities. So it could be a combination of something that's fixed and some variable component. We haven't decided on that at this point. But that conversation will come after we've made more progress on our debt reduction.
spk01: I would just add to that, you know, we have this great production profile right now. And with the production profile that we have, the chemicals business supporting it, what we're really focused on is margin expansion. We have lots of opportunity for that, and that's what we're most excited about. So there will be continuing shareholder value growth, but through margin expansion.
spk06: The next question will come from Devin McDermott with Morgan Stanley. Please go ahead.
spk11: Hey, good afternoon. Thanks for taking my question. So my first one kind of builds actually on that last point, Vicki, on margin expansion and just the comments you had in the prepared remarks as well on cost reduction. You had said that you were able to identify some cost reduction opportunities in the quarter that offsets offset some of the winter storm impacts. I was wondering if you could comment just whether that was deferrals or more structural reductions. And then as part of that, as we think about the margin expansion opportunities going forward, are you still identifying things like upside that's introduced from the Anadarko transaction? Or maybe said another way, is there still more room to run on reducing the cost structure here? And where are some of the levers to drive that cost structure down?
spk01: Yeah, you're right. There's more opportunities to continue to reduce our cost structure in both capital and office. And one example I'll give is we went back recently and took a look at our drilling performance between 2015 up through what we're doing in 2021. And I can tell you we rolled out our physics and logistics-based oxydrilling dynamics in our domestic operations in 2015. and then rolled it out internationally in late 2016. And I think I've said before, we haven't seen an area where we've rolled this out that we haven't had about a 20% to 30% reduction in our costs. And the exciting thing in looking at our data today is we've decreased our drilling costs from $200 a foot back in 2015 to $135 a foot in 2021 for our global drilling. That's everything around the world. And so we've individually pointed out the performance improvements in the Permian, but we've not only seen it in the Permian, we've seen it in the DJ, in the Powder River, and now Oman is seeing a lot of good things happening there by using this process, and it's proprietary to us. We developed it. So it's making a difference. We've also started applying it to the Gulf of Mexico and seeing some good things there that we'll be able to quantify and report on here in the near future. So it's drilling. On the drilling side, it's still, and I will say before I leave drilling, some people might say that you've probably got all of that and right now we're not improving. From 2019 to 2020, even in the downturn, we improved by 14% what we were doing there. So there's The improvement is happening even today. So far this year, we've improved by about 4%, only one quarter into it. This is as we were picking up rigs. So what we're doing there is working. But also on the completion side, we're still setting records for how many fracks we can do in a 24-hour period. And so that's improving. The other thing we're seeing is that our Permian team Every one of them actually is continuing to work on the subsurface model. And this has been a point of extreme emphasis for us because of the variation in the shell plate. So we started really enhancing our subsurface expertise about six or seven years ago and working hard to get that to where we needed it to be. We have some incredible people in-house that now do that work. And what we've learned in the shell play, we've extended also to looking at conventional and to doing more with seismic. And part of that was driven by the good efforts that the Anadarko staff had accomplished and achieved with some of the 3D seismic. And our team, some of our domestic people started looking at how others were doing things and taking what others are doing and made it better. phase of what we're doing, we're trying to do better and we're seeing still continuing improvement. Oman is using what they call an oxy-jetting system where in existing wells they can go in and jet with a process that ensures maximum contact with the reservoir through each phase of the jetting process, both in vertical and horizontal wells. That's delivering better recovery from the existing reservoirs too. And to me, the more you can get out of a reservoir that you've developed, the better off you are, and even better when you can go back into existing wells and get more out of those. So I'm quite confident that we will continue on both the OPEC side and the drilling side, completion side, and facilities to continue to lower our cost. Our teams are driven to do it and did it even during this pandemic and did it in a big way. I think in New Mexico, in several of the areas that they worked really hard there, they lowered our break-even on some of those areas by $10, $10 a barrel. So all of that's incredibly encouraging for what we have going forward, considering the footprint that we have and the areas that we know the best.
spk10: And I think I'll just add to that. I mean, I think that when you hear about all the exciting things underlying the business, that Vicki talks about, and I know externally the thesis of paying down debt seems incredibly boring for an external thesis. That's part of the reason why we're working so hard and committed to this and getting it behind us, so that truly we can focus on the story of the company being beyond that, what it's going to be. We do fully expect that as debt goes down, it will translate into equity value and a total enterprise value, which is good for our shareholders. But we understand that talking about reducing debt doesn't seem totally exciting, but there's so many other exciting things going on, and at times we miss the fact of all the great things that we continue to break through what we thought was the best we could do before we beat it, you know, excessively since the acquisition.
spk11: Yeah, no, that all definitely makes a lot of sense. And the progress board and line of sight on the debt reduction is definitely a good story as well. And maybe then shifting focus to some of the other initiatives, I know carbon capture and low carbon has come up a few times already, but I'd have one follow up there. As we think about the milestones from here to reaching FID on some of these potential projects, including the direct air capture project in the Permian, just walk us through what's remaining there. It sounds like policy and financing isn't one of the milestones at this point, but what are we looking for in order to bring that project to fruition?
spk01: Well, the big step was to select our engineering and construction partner. We did, and that's Worley. So the feed process is ongoing now in front of engineering. So we're working that now. We expect to have FID early next year and start construction by the end of next year. So I don't see... that there would be anything, barring some weird macro thing happen to us, that would change our schedule right now. Our teams are, what they have done, our major project team, led by Ken Dillon, along with Worley, they've put together a sub-team that as the front-end engineering is happening, they're looking for ways to, already ways to optimize the designs as they're in progress. And so I'm really excited that the first one, I believe, is going to be surprising to some people in terms of its design and how we're going to be able to build it. There are some things already in process around deciding how do you do this at a faster pace and on a larger scale as we go forward. Some of that work's in place. But I do expect that there's that we will begin construction at the end of next year. And I don't see anything in the way of stopping that right now.
spk06: The next question will come from Leo Mariani with KeyBank. Please go ahead.
spk08: Guys, what it looks like your first quarter CapEx did come in quite a bit below expectations. And if you just annualize that number, it looks like it's quite a bit below budget on the year. Just wanted to get a sense, what was driving the lower first quarter, you know, CapEx, and just wasn't sure if maybe there were some costs or some expenditures that shifted from 1Q into other quarters, and kind of how you guys are feeling about this $2.9 billion budget.
spk01: Part of it was driven by the ramp-up, and, you know, we will have our highest-spend capital quarter next quarter, so if you average the two, That's going to be the first half spending will be about the same as second half spending, maybe slightly less. But generally speaking, this was part of the startup process. And then we had a little bit of a delay on some of our activities as a result of the storm. So some things moved from Q1 into Q2.
spk07: Okay, that's very clear. It's what Vicki said when she said next quarter Q2. would be our highest spend. And you can see that with Permian, where we only spent a couple hundred million in the first quarter of its $1.2 billion. So you can definitely see that.
spk08: Okay, that's very clear. And then just a question on the midstream for the year. Obviously, a very strong first quarter, and you guys enumerated some of the reasons why in the press release and the prepared comments. But just looking at your second quarter, you know, midstream guide, obviously expecting a loss. When I look at it, it's, you know, not a big loss, kind of a small one. If I just add kind of the first quarter benefit to the second quarter loss, you're expecting, let's call it roughly break-even. When I look at your full year of midstream guidance, you're still expecting a very large loss, kind of implying significant loss in the second half of 21. Can you kind of just explain a little bit the dynamic, you know, there in terms of what you might be expecting later this year?
spk07: Sure, Leo. I think if I understand what you're saying, if you look at the first quarter, we beat our guide by $234 million. And then we raised the full year outlook $200 million. So basically, last quarter to this quarter, we're expecting deterioration of about $34 million on the remaining three quarters. And basically, what's driving that is our view on gas differentials and and on our oil export differentials. So if you look at, and I think we talked about this a bit before, when differentials collapse, that helps our upstream business, because realizations get better, but it hurts our midstream business. And so that's the piece you have going on. So most of the benefit of the Q1 rolls through to the year, and then you get a little bit of change for the remaining quarters, primarily driven by that differential collapsing.
spk10: Okay, thank you.
spk06: The next question will come from Rafael Dubois with the Society General. Please go ahead.
spk03: Hello. Thank you very much for taking my question. It's about the DAC plant that you intend to FID. You mentioned a couple of conf course ago that you will benefit through OxyChem. Can you maybe share with us what quantity of caustic soda will be required for this very first plant? And looking forward, do you think it could be any issue to access caustic soda to deploy this technology?
spk10: Vicky and I can kind of tag in this a little bit, but I would say, so first of all, the working fluid in the direct air capture unit is caustic potash, not caustic soda, so it's AOH, not NaOH, but we haven't disclosed utilization or what that first fill volume might be or like the first direct air capture unit moving forward.
spk01: Yeah, just to repeat, we're still in the engineering phase of that and still optimizing it, so we probably would not have that information until the end of this year.
spk10: Another thing I would mention to you is the other piece is the majority of the infrastructure inside the actual direct air capture unit is also PVC, which obviously there's a synergy with the OxyChem business on the amount of PVC that goes inside the direct air capture unit.
spk03: Great. Thank you very much for the clarifications.
spk06: The next question will come from Paul Chang with Scotiabank. Please go ahead.
spk04: Thank you. Good morning, guys. Ricky in Permian, I think one of your competitors talking about they're going to move more into the females wells. Just curious that in your plan, is that something that you guys were trying to do or that you don't think is suitable for you? And also you talk about on the CO2 flooding in the unconventional side. So when we're looking at your prospect inventory, what percentage of your inventory that you think is applicable in here? So that's the first question. The second question is that at some point that you will bring down your debt, and once you reach that mid-$20 billion range, what's the objective for your Oman, Algeria, and Gulf of Mexico operations? Is that you're trying to just maintain the production relatively steady, or are you trying to grow over there? Thank you.
spk01: Hey, Paul, could you just clarify for me, when you were asking the first question, you mentioned that our competitors are doing something and then you were asking if we were doing the same. Could you clarify what that was again?
spk04: At least one of your competitors is talking about they are drilling the lateral length that the three miles or 15,000 feet well. So just curious that given your position, is that something you guys find that is capital efficient and productive for use to push for the three miles or that you don't think is applicable to you?
spk01: I think that it's always important to not put yourself into a box to think that 5,000 feet's the right answer, 10,000 feet's the right answer. I really think that in all cases you should do an engineering model you should really look at what is the right design for maximizing recovery from the wells, and what does your acreage position allow? And what are the risks of drilling the three miles versus one mile or 10,000 feet? So I think that there are cases where there may be situations and scenarios where a longer lateral than 10,000, in fact, we've drilled 15,000 ourselves. We did at least one or two of those, and we've drilled more than 10,000. In other cases, it didn't go all the way to the 15,000, but I think it really depends on the reservoir and all the things that you have to take into consideration. Again, your acreage position, your fulfilled development plan, how you intend to complete it, what kind of artificial lift you intend to use, So there are a lot of variables involved, but I certainly wouldn't say that we would never consider doing our 15,000-foot wells again. It's always under evaluation, not only in the Permian, but anywhere we drill horizontal wells. So we wouldn't rule it out. And with respect to CO2, we expect to use in both the conventional and the unconventional wells. And in the conventional alone, there's 2 billion barrels of additional resources that could be developed with what we expect to be much lower or no cost CO2 in the future. And then the enhanced oil recovery of the shell as well. So we're excited about that.
spk06: In the interest of time, this concludes our question and answer session. I would like to turn the conference back over to Vicki Holub for any closing remarks. Please go ahead, ma'am.
spk01: I just want to thank you all for your participation and your questions today. Thank you and have a great day.
spk06: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
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