Occidental Petroleum Corporation

And welcome to Occidental's fourth quarter 2022 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 touch-tone phone. To withdraw your question, please press star then two. Please note, today's event is being recorded. I would now like to turn the conference over to Neal Backhouse, Vice President of Investment Relations. Please go ahead.

Thank you, Rocco. Good afternoon, everyone, and thank you for participating in Occidental's fourth quarter 2022 conference call. On the call with us today are Vicki Holla, President and Chief Executive Officer, Rob Peterson, Senior Vice President and Chief Financial Officer, and Richard Jackson, President, Operations, U.S. Onshore Resources and Carbon Management. This afternoon, 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 afternoon. We'll also reference a few non-GAAP financial measures today. Reconciliation, so the nearest corresponding GAAP measure, can be found in the schedules to our earnings release and on our website. I'll now turn the call over to Vicki. Vicki, please go ahead.

Thank you, Neil, and good afternoon, everyone. On today's call, I'll begin with highlights of our 2022 achievements, including an oil and gas update, followed by our fourth quarter performance. Next, I'll discuss our 2023 cash flow priorities, our enhanced shareholder return framework, and our 2023 capital plan. Rob will then provide an update on the status and mechanics of Oxy's preferred equity redemption before reviewing our fourth quarter financial results and 2023 guidance. In 2022, our record net income of $12.5 billion generated a return on capital employed of 28%, which is the highest return we have achieved since before 2005. We also delivered record free cash flow before working capital of $13.6 billion, which enabled us to retire more than $10.5 billion of debt and to repurchase $3 billion of common shares. Our return on capital employed was enhanced by exceptional performance as our team set multiple operational and productivity records across our U.S. onshore, Gulf of Mexico, and international businesses. OxyChem generated record earnings, and our midstream business approximated guidance. Also in 2022, our high return Permian production grew by 90,000 DOE per day, propelled by outstanding well results. We delivered our best year ever in Delaware new well productivity, making 2022 the seventh year in a row that we were able to increase our average well productivity as shown in our presentation's appendix on slide 29. Our teams accomplished this by applying our proprietary surface modeling and completion designs to our high-quality reservoirs. Well performance, along with our oxy-drilling dynamics and logistics efficiencies, enabled us to achieve reserves-to-replacement ratio driven by our capital programs of over 140% at a cost of $6.50 per BOE, which was less than half of our current DD&A per barrel. With price revisions included, the total reserves replacement ratio is 172%, which increased our year-end 2022 reserves to approximately 3.8 billion BOEs. Except for the years of the price collapse in 2015 and the pandemic in 2020, we have replaced more than 100% of our production for at least the last 20 years. With the depth and quality of our shale-weld inventory and 2 billion barrels of remaining potential in our Permian enhanced oil recovery business, we have the scale to continue our history of reserves replacement. A deep inventory along with our unique portfolio of short cycle, high return, unconventional assets paired with low-decline conventional assets, OxyChem, and our midstream businesses, we have the capability for long-term sustainability and the flexibility to allocate capital to maximize returns for our shareholders. In 2022, we also made significant progress in developing the capabilities and assets needed to secure a low-carbon future, which is the other key to our sustainability. We started site preparation on our first direct air capture plant and executed several exciting agreements to sell carbon dioxide removal credits to prospective purchasers in diverse industry sectors. We also secured over a quarter million acres of land, or approximately 400 square miles, to develop carbon sequestration hubs. The fourth quarter of 2022 was a fitting way to wrap up a year of continued operational and financial success. We generated over $2.6 billion of free cash flow, which supported nearly $1.6 billion of balance sheet improvements. We also repurchased $562 million of common shares in the quarter, completing our 2022 share repurchase program. In our business segments, oil and gas approximated the midpoint of guidance, despite Winter Storm Elliott's impact. Outperformance from the Gulf of Mexico and Al-Hosin partially offset storm impacts experienced in the Permian and Rockies. OxyChem exceeded guidance driven by stronger-than-expected market dynamics, while midstream and marketing earnings were within guidance. In December, Oxy participated in the recapitalization of NetPower. This is a technology that generates emission-free power generation has the potential to accelerate emissions reduction efforts in our existing operations and to supply electricity to our direct air capture plants and sequestration hubs. Ultimately, net power could be an important emission-free power generator anywhere that has access to natural gas. Among the records set in 2022 were lateral links in the Delaware Basin, DJ Basin, Oman, and most notably in the Midland Basin where our well- Lulu 3641DP exceeded 18,000 feet to become our longest lateral on record. Remarkably, this well was drilled in slightly over 12 days. Milestones like this showcase our team's focus on safely and efficiently expanding the boundaries of drilling technology. Our teams also achieved an Oxy Delaware Basin record for wedge productivity averaging a 30-day initial production rate of over 3,000 BOE per day from all wells that came online in 2022. We believe that two of our wells in the First Bone Springs in New Mexico and six of our wells in the Barnett Formation of the Midland Basin achieved initial 30-day production records amongst all operators in their respective formations. In addition, we are continuing to consolidate acreage via trades that enable more capital-efficient longer laterals which help to optimize the required infrastructure. The longer laterals, exceptional well productivity, and optimized infrastructure partially offset inflation impacts in 2022, and we expect similar benefits as we progress through 2023. After highlighting two of our Gulf of Mexico assets, Horn Mountain and Cesar Tonga, on previous earnings calls, I'm pleased to announce another Oxy production record in our offshore operations. Our Lucius platform surpassed 150 million BOE of gross production in less than eight years from first oil, becoming the fastest Oxy developed Gulf of Mexico platform to reach this milestone. Internationally, we, along with our partner, ADNOC, achieved record quarterly production at Alhosen with 85,500 BOE per day net to Oxy. The Alhosen expansion project is progressing well and remains on track for mid-2023 completion. We expect Oxy's Alhosen net production to ultimately reach approximately 94,000 BOE per day. We are pleased with the total value we've created for shareholders in 2022, including the debt reduction of $10.5 billion and the $3 billion of share repurchases, along with a successful capital program of $4.5 billion. With our debt from outstanding bonds down to less than $18 billion and consistent with our shareholder framework, we will shift our focus to share repurchases, dividend growth, and a capital program that further strengthens our sustainability. Over the long term, we intend to repay maturities and opportunistically retire debt to further reduce our cost structure and strengthen our balance sheet. In future years, we will seek to grow our cash flow and earnings to support increases of our dividends, and the continuation of our share repurchase program. While we do intend to grow the absolute value of the company, as part of our value proposition, we also want to increase value per share for our shareholders through dividend growth and the reduction of outstanding shares. Accordingly, our board of directors authorized an over 38% increase in our common dividend and a new $3 billion share repurchase authorization, which will trigger redemption of a portion of the preferred equity. Future cash and earnings growth opportunities could come from our shale and conventional oil and gas assets, as well as our chemicals business, and ultimately our low-carbon ventures business. Turning now to 2023, our business plan is designed to maximize return on capital and return of capital to our shareholders, while also strengthening our future sustainability by prioritizing asset-enhancing investments to support the resilience of Oxy's future cash flows. These investments include $500 million for low-decline, mid-cycle projects, including the previously announced modernization and expansion of OxyChem's battleground chloralkali plant, and a new OxyChem plant enhancement, along with Permian EOR and the Gulf of Mexico. Of the $500 million that I just mentioned, we plan to spend $350 million on OxyChem projects, which, upon completion, we expect will generate a combined annual EBITDA of $300 to $400 million. We expect the Battleground project to be online in early 2026. The other OxyChem plant enhancement will deliver higher production volumes, enhance operational efficiency, and improve logistics costs. We look forward to providing more detail about this project on a future call. The remainder of the $500 million will be spent in EOR in the Gulf of Mexico. EOR remains a core component of Oxy's asset portfolio and will be essential for our future strategy, so we are glad to return to sustaining capital investment levels this year. In the Gulf of Mexico, infrastructure projects, including subsea pumping initiatives to increase the tieback radius and productivity of existing platforms, will drive high capital spending compared to recent years. We're also focused on our high-return short-cycle businesses, Our return to a two-rig program in the DJ Basin late last year requires additional investment, but should begin to moderate production decline by the middle of 2023. In our Permian unconventional business, we intend to run an activity program similar to the second half of last year. Our Permian unconventional assets are best placed to deliver production growth to offset marginal declines elsewhere in our portfolio. Overall, 2023 Permian unconventional capital is expected to decline slightly from 2022 due to the initial capital inflow from the Delaware Basin JV. We anticipate that inflation will continue to be a challenge for our industry this year. In 2023, we expect approximately 15% inflation impact on our domestic oil and gas business compared to 2022. As always, we will continue our efforts to reduce and offset inflation by leveraging our supply chain competencies and focusing on continued capital efficiency. Another important aspect of sustainability is the carbon intensity of our operations and what we're doing to address it. We focus on reducing emissions every day as we progress our pathway to net zero, and we've made significant progress over the past few years. Since 2020, our emissions reductions projects have focused on capturing methane and reducing venting and flaring. These projects resulted in a 33% decrease in our estimated company-wide methane emissions from 2020 to 2021, and a 24% decrease in methane emissions intensity of our marketed gas production. We were the first U.S. oil and gas company to endorse the World Bank's Zero Routine Flaring by 2030 initiative, and I'm pleased to announce that our U.S. oil and gas operations achieved zero routine flaring eight years ahead of that target. That was a major achievement. Our international operations have implemented projects to significantly reduce routine flaring, and we're on track to meet the World Bank's target well ahead of 2030. In 2023, we also intend to invest in several unique and compelling low-carbon business opportunities to advance our net zero pathway. Ongoing construction of our direct air capture facility in the Permian and the development of our large Gulf Coast sequestration hubs including force-based certification, will be among our expected investments. We anticipate that our first direct air capture or DAC plant will complete commissioning and begin to capture carbon in late 2024 and be commercially operational in mid-2025. This timing is a few months later than our original target as we navigate the current supply chain environment and focus on construction sequencing to support faster optimization and the application of new technologies and innovation. Our 2023 capital investment in these low-carbon businesses is expected to total $200 to $600 million, subject to third-party funding optionality for the DAC and the timing of projects. We mentioned on our prior call that our net-zero ambitions will require funding outside of Oxy's historical capital allocation program. However, We are prepared to fund our first stack ourselves if utilizing our capital preserves the most value for our shareholders. Our capital plan includes investments in our carbon sequestration business, both through the development of the Gulf Coast hubs we previously announced and through drilling appraisal wells. Investments in other projects that reduce OxyScope 1 and 2 emissions will also continue. As part of our strategy to develop Gulf Coast sequestration hubs, we're pleased to announce that we will be working with Energy Transfer Low Carbon Development to build a pipeline network from point source emitters in the Lake Charles area through our Magnolia sequestration site in Allen Parish, Louisiana. This pipeline will support our point source carbon capture and sequestration business, which we intend to develop along with our DACs. to help meet medium and long-term greenhouse gas emission reduction goals for Oxy and our customers. Before turning over to Rob, I want to reiterate that our 2023 capital plan focuses on projects that best position Oxy for long-term success. As in past years, we retain a high degree of flexibility, which allows us to adapt to commodity price fluctuations and reduce spending if necessary.