Occidental Petroleum Corporation (OXY) Q3 2007 Earnings Report, Transcript and Summary

Good morning ladies and gentlemen. My name is Marchita and I will be your conference operator today. At this time, I would like to welcome everyone to the Occidental Petroleum Third Quarter Earnings Conference Call. All lines, have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. [Operator Instructions]. Thank you. It is now my pleasure to turn the floor over to your host Chris Stavros. Sir, you may begin your conference.

Thank you Marchita and good morning everyone. I would like to welcome you to Occidental's third quarter 2007 earnings conference call. Joining us on the call from Los Angeles are Dr. Ray Irani, Oxy Chairman, President and CEO; Steve Chazen, Senior Executive Vice-President and CFO; Casey Olson, President of Oxy's Oil and Gas Business in the Eastern Hemisphere; and John Morgan, President of Oxy Oil and Gas Western Hemisphere. In a moment, I would turn the call over to Dr. Irani who will update you on the progress we are making on the Dolphin project as well as our pursuit of other potential growth opportunities. Steve Chazen, will then review in detail, our third quarter and nine months 2007 financial results to be followed by a question-and-answer session. Conference call presentation slides, which refer to Steve's remarks can be downloaded off of our website. I will now turn the call over to Dr. Irani, Dr. Irani, please go ahead.

Thank you Chris. Good morning and thank you for joining us. This has been a good quarter for Oxy. Increase in our production volume, including initial production from the Dolphin Project and increases in worldwide crude oil prices contributed to Oxy's record third quarter core income results of $1.21 billion. This reflects the continued successful implementation of our long-term strategy that is focused on current and new long-lived oil and gas assets in our core regions that produce strong financial returns. The Dolphin Project continues to go very well. The first two trains of the gas plant are in operation and performing at levels 5% to 10% above their nameplate capacity. The remaining two trains are expected to come on between now and year-end and we expect to reach full capacity in early 2008. On the past several calls I have expressed confidence that future additional growth at Oxy will be driven primarily by new opportunities in the Middle East/North Africa region and that we expect to announce two new agreements before year-end. I know you are all anxious to hear details. However, while it remains premature to give you any specifics today, I want to emphasize that I continue to be optimistic about our ability to deliver on our promises. As you are aware, we are a finalist in the Abu Dhabi National Oil Company selection of a partner to develop the giant Shah gas field and we look forward to the decision in coming weeks. We are also making progress in developing additional projects in the United Arab Emirates. In Libya, we are in commercial negotiation for large enhanced oil recovery projects, these are from existing oil reserves. Earlier this month we closed on the acquisition of blocks 12 and 13 in Qatar that we acquired from Anadarko and expect to immediately add 5,000 BOE per day to our net production. Of additional interest and importance, we were recently awarded two offshore exploration areas in Bahrain. These areas are technically quite interesting and adjacent to major producing fields in Qatar. We are also submitting a proposal to work with Bahrain to increase oil production from existing onshore areas. We are confident in our prospects for continued strong financial performance and growth in our volume. I will now the call over to Steve Chazen.

Thank you Ray. Net income for the quarter was $1.324 billion, or $1.58 per diluted share, compared to $1.17 billion, or $1.36 per diluted share in the third quarter of 2006. The current quarter diluted earnings per share increase of 16.2% compared to last year was greater than the 13.2% net income increase as a result of the share repurchase program. Core results were $1.21 billion, or $1.45 per diluted share in the third of quarter 2007, compared to $1.103 billion, or $1.28 per diluted share in the third quarter of last year. The 2007 third quarter net income includes $106 million of after-tax gains from the sale of non-core assets, comprised of the following: a $72 million gain from the sale of the West Africa exploration properties, net of oil and gas asset impairments; a $27 million gain from the sale of the remaining 2.4 million Lyondell shares; and a $7 million gain from the sale of domestic oil and gas interests. The third quarter of 2007 includes $8 million of income from discontinued operations, compared to $67 million income in the third quarter of last year. Here's the segment breakdown for the third quarter. Oil and gas third quarter 2007 segment earnings were $2.029 billion. After excluding the gains that I just described, the third quarter results were $1.988 billion, compared to $1.79 billion in the third quarter of last year. The following accounted for the increase in oil and gas earnings between these quarters: Higher worldwide oil and gas price realizations resulted in an increase of $249 million of earnings over the comparable period last year. Occidental's average realized crude oil price in the 2007 third quarter was $5.98 higher than in the comparable period in 2006. Oxy's domestic average realized gas price for the quarter was $5.90, essentially flat with the $5.88 from last year. Worldwide oil and gas production from continuing operations for the quarter averaged 570,000 barrels a day, an increase of 7%, compared with 533,000 barrels of equivalent a day than last year. A significant portion of the production improvement was the result of the Dolphin project start-up which contributed 15,000 BOE a day. Additionally, production volumes increased in California, Colombia and Qatar. Our guidance for the third quarter was in the range of 585,000 to 590,000 BOE a day. We were under this range due to the delayed closing of the Qatar asset acquisition from Anadarko, which took place in the fourth quarter of 2007, representing 4,000 BOE a day and the impact of product prices that reduce volumes from our production sharing contracts by another 4,000 BOE a day. We also had a labor strike in Argentina. Dolphin contributed $13 million to after-tax income during the third quarter start up which was greater than our guidance of $10 million. The sales volumes were 15,000 BOE per day, compared to our guidance of 17,000 BOE per day due to one less lifting during the quarter. Exploration expense of $68 million in the quarter was lower than our previous guidance of $95 million. Oil and gas production costs for the first nine months of 2007 were $12.56 a barrel compared to last year's costs of $11.70 a barrel. The increases were a result of higher field operating and maintenance costs mainly in the United States and Latin America. Chemical segment earnings for the third quarter of 2007 were $212 million, which was higher than our second quarter guidance of $160 million to $175 million. Improvement in earnings from our guidance was due to higher prices across the chloro-vinyls product chain. Despite weakness in domestic demand, chlorine derivative exports were particularly strong in the third quarter. Chemicals earned $248 million in last year's third quarter. The primary factors accounted for the quarter-to-quarter difference with lower PVC margins. The worldwide effective tax rate, excluding the impact of asset sales and other items, was 42% for the third quarter of 2007, 5 points lower than guidance. The lower quarterly rate reflects a positive effect on the income tax rate resulting from substantial increases in crude oil prices in the second half of 2007 and lower foreign exploration expense, due to the delay of certain drilling activities. In addition, the quarter was favorably impacted by a change in the mix of a larger portion of income coming from United States sources rather than from foreign sources. Let me now turn to our performance for the first nine months. Net income was $3.948 billion, or $4.69 per diluted share for the first nine months of this year, compared with $3.261 billion, or $3.78 per diluted share for the same period last year. Core results were $2.941 billion, or $3.50 per share for the first nine months of 2007, compared with $3.332 billion, or $3.86 per diluted share for the same period last year. Worldwide oil and gas production for the nine months averaged 563,000 barrels of oil equivalent per day, an increase of 4%, compared with 539,000 BOE a day for the first nine months of last year. Capital spending was $880 million for the quarter and $2.51 billion for the first nine months. We expect total capital spending for the year to be about $3.5 billion. Cash flow from operations for the nine months was approximately $4.3 billion. Additionally, we received total proceeds of $670 million from our sale of Lyondell, $485 million from the sale of our interest in the Russian joint venture, $230 million from the sale of our Pakistan properties, $120 million from the sale of exploration properties, and $75 million from the sale of domestic oil and gas interests. We used $2.5 billion of the company's cash flow to fund capital expenditures, $1 billion for acquisitions, $1 billion to repurchase debt, and $560 million to pay dividends. We also spent $910 million to repurchase 17.4 million common shares at an average price of $52.27 per share. These net cash outlays reduced our $1.6 billion cash balance at the end of last year by $100 million to $1.5 billion. Debt was $2.0 billion at the end of September, with long-term debt of $1.7 billion. The weighted average basic shares outstanding for the nine months were 837.0 million share and the weighted average diluted shares outstanding were 840.9 million share. At September 30th, there were 829.7 million basic shares outstanding and the dilutive share amount was approximately 833.7 million shares. Our debt to capitalization ratio was 8%, down from 13% at yearend 2006. Over the first nine months of the year, Oxy's annualized return on equity was 26%, with an annualized return on capital employed of 24%. As we look ahead in the current quarter: We expect oil and gas production to be in the range of 600,000 to 615,000 BOE per day during the fourth quarter. The increase includes 21,000 BOE from Dolphin, 5,000 BOE from the acquisition of Qatar assets from Anadarko which closed in early October. Dolphin's third quarter income was $13 million after foreign tax and we expect the fourth quarter after-tax income to be in the $50 million to $60 million range. Dolphin is expected to run at 55% of capacity during the fourth quarter and contributions will continue to improve as it becomes fully operational. We expect the oil and gas production at year end exit rate to be in the range of 615,000 to 635,000 barrels a day. The increase includes 45,000 to 50,000 barrels a day from Dolphin, 5,000 barrels a day from Qatar assets and higher Latin American production. The Dolphin exit rate could be higher, as noted in our previous guidance, depending on how quickly the final train of the gas plant ramps up to full capacity. In any case we expect it to be running at full capacity during January. With regards to prices, $1 per barrel change in oil prices impacts oil and gas quarterly earnings by about $35 million before the impact of income taxes and Dolphin. A swing of $0.50 per million BTUs in domestic gas prices has a $24 million impact on quarterly earnings before income taxes. The NYMEX gas price for the third quarter was $6.69 per thousand cubic feet. Additionally we expect exploration expense to be about $80 million to $100 million for seismic and drilling in our Libya and South American exploration programs. We expect chemical segment earnings to be in the range of $100 million to $140 million, compared to the $212 million in the third quarter. The decline from the third quarter reflects normal seasonal downturn, continued weakening demand due to lower housing starts, and higher energy and ethylene cost. This results in lower volumes and margins across the chloro-vinyls chain. Prices and volumes for key chemical products for the fourth quarter are expected to behave as follows: We expect fourth quarter chlorine prices to be about 10% lower and caustic soda prices to be about 20% higher than last year, and volumes to be comparable. We expect polyvinyl chloride prices for the fourth quarter to be slightly higher than last year and volumes to be about similar. We expect ethylene costs to be at least 30% higher than last year. As we previously discussed, tax rates are difficult to predict for the interim periods as they are based on projected total year income and taxes. Occidental's rate is sensitive to changes in oil and gas prices and foreign expensed exploration. Changes in oil prices have an inverse effect on income tax rates. Increasing oil prices increase the proportion of U.S. income which has lower income tax rates than our international operations. Occidental generally records no tax benefits on foreign expensed exploration until the project is completely abandoned. We expect fourth quarter foreign exploration expense, which is not currently tax deductible to be approximately $70 million. The worldwide tax rate before this exploration expense is expected to be approximately 45%. We expect our combined worldwide tax rate in the fourth quarter, including exploration expense, to increase to 46%. Our third quarter and nine months U.S. and foreign tax rates are included in the Investor Relations Supplemental Schedule. Copies of the press release and the supplemental schedules are on our website. And now we are ready to take your questions.

Operator, please poll for the questions. Question And Answer

[Operator Instructions]. Our first question comes from Michael LaMotte of J. P. Morgan.

Thank you good morning. Dr Irani I was hoping you could speak a little bit about activities in Libya. We have heard on several conference calls this earnings season that activity is starting out a little slower there, some equipment providers have even said that, there is too much equipment on the ground, but not enough rigs. So, I was wondering if perhaps you could talk about the constraints there whether its rig bottle necks or whether it's a just sort of more operator driven and NOC related.

This is Casey Olson, I think I will address that, if I might. I can only speak for Oxy. We are not really having any significant problems, there our explorations and production activities are going just fine. Other companies may or may not be having those same difficulties but we have rigs, our wells are going down well and the operations are going well.

Maybe they are talking about slowness in commercial negotiation.

Yes, I think maybe that's the angle. Could you maybe elaborate on that?

Nothing, I mean basically Libya is a very attractive place. As I said in my remarks, we are in commercial negotiations for a number of opportunities. However, I mean they have rounds and rounds of exploration. Every company, around the universe interested in oil, wants to come and explore or develop or help repair refinery or build the gas pipeline or whatever. And so with all that activity, there is only limited number of resources available. NOC and certain negotiation by definition tend to be slower than people would like. We continue to proceed in our program and so we are in a commercial negotiation and we had some meetings recently. When those discussions would be completed it is difficult to predict.

That is helpful, I didn't thought about it from an NOC standpoint. On Bahrain quickly, perhaps timing on getting started on the exploration activity and timing on the EOR project.

We hope that you know all those activities. Of course we have won the exploration blocks and we are submitting. If we are submitting like today submitted a proposal to develop the onshore oil field and we hope to be getting started early in 2008.

Great.

If we are awarded a contract. We are competing with others of course. So, we have to wait, but we are optimistic.

But it could turn that quickly along Q '08?

Well, you never c an predict how long it takes for government entities to reach decisions. All you have to go to Washington and we forget that you know other countries have complex regimes and they have other priorities including defense and what's their big neighbors are going to do or not do. And so, but we were optimistic that we will have a good opportunity in Bahrain.

Okay. Thank you very much.

Our next question comes from Robert Kessler of Simmons & Company. Robert Kessler - Simmons & Company International: Good morning gentlemen, I wanted to see, if you could provide an update on Argentina. We got another quarter where production ticked along in about 30,000 to 31,000 barrels a day, I know you started some equipment issues there in the past but can you provide an update as to what a negative rate might be for the year and then looking forward to 2008 maybe average production for the year there?

Yes, We expect to exit over 40,000 a day. We have had some production problems and we think, we are on our way to fixing them. So, we expect to exit over 40,000 a day and into the mid 40s for next year rate. Robert Kessler - Simmons & Company International: So, then one other question for me. On Dolphin, do you have an oil and gas split for 4Q and then expectations for next year there?

Dolphin is in the process of building up. So, we just assume... we provided you with an earnings number for the fourth quarter and once we get some more stable production, we will give you better guidance. Right now, we are getting more condensate out of it, than we had initially anticipated. So, we want to see if that continues into next year. So, we are really reluctant to give a lot more detail, except to say what the earnings level would be in the fourth quarter. Robert Kessler - Simmons & Company International: How is the realization on the condensate you are producing?

Right, in the quarter it generally was right at rent. Robert Kessler - Simmons & Company International: Okay. Good, thank you.

Our next question comes from Bernie Picchi of Wall Street Access.

Steve, could you give us some guidance on your CapEx for next year, kind of on an ongoing project basis and talk maybe about what kind of CapEx you might expect if some of these opportunities do pan out? What would be the sort of the base level of CapEx given the current configuration of operating activities for the company?

The pace would be very similar to what we are running now. So, whether it's 3/4, 3/5 or 3/6 I can't tell you. But it's somewhere in that range but similar to what we are doing now.

Even with the completion of Dolphin?

Yes, Dolphin may take it to 3/4 or 3/3 but within my ability to estimate that's probably all I could do. Whether it's 3/3 or 3/4 or 3/5 or 3/6 I can't tell at this point. If we were to go ahead and say what will the other stuff add, I have to go to risk adjusted basis and with only four or five balls to risk adjust you probably get a weird answer, which might be mathematically correct, but inaccurate.

And could you also...

Don't worry about the capital we...

No, no...

The cash flow is fine, we are not going to have to...

I know you got the dough.

But we would guess that it would be in the low fours.

Right. And just to amplify your answer to the previous question about Argentina, could you or John talk a bit about what exactly is going on or what did go on in the third quarter because that...

Election is going in Argentina and...

What does that have to do with production.

Well there was a strike. I mean we can go on and go into all kind of details, a number of things. There was a strike which was not handled properly by government officials, that's been straightened out but we expect the elections to be over in November and we know who the winner is going to be. So, we believe firmly that production in Argentina in the fourth quarter will be in excess of 40,000 as Steve said and we still believe that we would achieve 70,000 barrels a day in a few years as we mentioned. Earlier -- we have said before we are behind schedule, but we believe we can catch up.

Thank you.

Our next question comes from Paval Molchanov of Raymond James.

Hi, good afternoon. I know you've discussed your kind of opposition to MLP structures previously but with the proliferation of MLP's particularly in, with Permian assets, have you... maybe taken any step toward reassessing your view it.

No.

Any other assets, that you think maybe midstream or otherwise that you would ever consider putting into an MLP?

We own midstream assets to enhance the value of our production. We don't own them to just to own midstream assets. So, we wouldn't necessarily want an arms length relationship between our midstream assets and our production as a practical matter. That they make money for the asset, they don't make money as a regulated body. You can achieve the MLP result in theory, if you want to sell some properties, you can sell the properties to an extent MLP and you get 90% of the MLP value. Our core components would not be running a small E&P company which is what an MLP is.

Got it. Thanks very much.

[Operator Instructions]. Our next question comes from Doug Leggate of Citi.

Thank you. Good morning gentlemen apologies, I was a little late, getting on the call so hopefully...

That was kind of [ph]...

Not too fine, thanks. But hopefully these questions have been asked already. Steve I am afraid the order build out of your share buybacks and cash position. Can you just us bring us up-to-date, as to what you are thinking there because it looks like you are very closely growing that cash in this oil price environment?

Our cash would be down sharply by the end of the year. So, we... between share buybacks and we bought the Anadarko properties as the quarter began so we will continue to buyback shares as we go. Where exactly we will wind up for the quarter, for year I don't know. But we bought obviously more shares in the third quarter than we did in the second and so we are... we bought... essentially we spent... since we started the program, we have done about 48 million shares at about 50 bucks a share, which is I think pretty good value add for the shareholders.

Okay, thanks. A couple of quick follow ups, the CapEx numbers you mentioned earlier on an ongoing basis, I think historically you said that, if you are successful with the projects here, you are looking out probably another $1 billion as about the appetite, is that number still good?

It's still good unless we are widely successful.

Okay and I guess the last one then is on, I know that Dr. Irani had mentioned briefly Libya. But could you give us an update on where things stand in the UAE. My apologies again if that has already been discussed, I am thinking specifically about, where... I believe that the bids were due by October 17th and our understanding was there were only two parties basically involved including yourself, just give us an update it will be appreciated.

I read your report Doug. Officially there are four finalists. But we believe we have a good proposal and as I said we are expecting decisions within the next few weeks.

Okay, I will leave it there. Thank you.

Your next question comes from Amanda Golo [ph] of Bernstein.

Hi guys. Can you provide some more color on the large step up and DD&A per barrel that you guys had this quarter?

I think that's DD&A per barrel...

Is it Dolphin coming through or?

Dolphin wouldn't increase the DD&A per barrel, because Dolphin DD&A is low. It could be that the part of the impairment would go through DD&A.

Okay, some of the...

When we wrote-off, these were California properties. Part of that goes through DD&A rather than as an impairment line. That's probably what you are looking at.

Okay, thanks.

Our next question is a follow up from Michael LaMotte of J. P. Morgan.

Thank you, I just wanted to, Steve maybe if I can ask you about the returns down the acquisition market particularly in your core Permian and California regions. As I think about the commercial opportunities and the capital commitments, that they might impose in terms of a call on cash, I guess two one... two questions. One, what are the returns and two, sort of what's your appetite size wise for deals in those space?

We expect the returns to meet our, base total rate which is around 15% after tax. As far... and if they don't, they won't be done. Our appetite is I think very strong. So, I... in the two areas. So, California probably a little better because prices are a little less in California than they are in the Permian. Permian, it's hard to say, there hasn't been much on the market recently. So, I don't, it's hard to predict. But there is some activity in the Permian now and some in California. And we will take properties, that makes sense for us, pass by those that don't. But our current... our future cash needs for the right properties, we wouldn't have any issue with borrowing some money

Maybe a better way to ask the returns question is to say, is to ask if there has been changes in prices and values?

It's hard to say right now. There hasn't been enough activity, we have only been in this... off the level here for a month or so. So, it's hard to say whether there is really going to be any change, I am sure the sellers will want more change

Thanks.

Our final question comes from Nicky Decker of Bear Sterns.

Good morning, I also joined the call late so I apologize if this has been talked about. I know that you have spoken in the past about possibility that some additional up stream projects will be announced by year-end. Is it still reasonable to expect that?

I said in my remarks, yes.

Okay. And did you comment on the status of at Abu Dhabi.

Yes, I did say that we are a finalist. And we expect a decision within the next few weeks.

My apologize... I apologize that you said that.

No problem.

Also we have been seeing some headlines on Ecuador, maybe you could comment on the progress on that case and how the timeline looks going forward.

As you know, we exited Ecuador a while back. Now it's in the hands of the lawyers. And as we have said on numerous occasion's with an arbitration we think, we have a very strong case and we expect to win the judgment and I don't know how long from now but sometime, within one to two years and then the question how do you collect. So, this is an IOU which is going to take a few years to come through.

How does it work Dr. Irani do you have... is there a trial date that get set and how has that date been set?

Yes, I mean it's a normal process of arbitration like in a court. You know judges and lawyers take their time. So, what I am telling you, this is nothing that I count on to happen tomorrow, day after, or very soon. So, it's going to take us few years to collect actual money in my opinion for the appropriation that took place in Ecuador. That we are going to collect money, definitely. When? It's not in the next couple of years.

Okay. Thank you.

At this time there appear to be no further questions. I will turn the floor back to Chris Stravos for closing remarks.

Thank you everyone very much for joining us today. And if you have any further questions please don't hesitate to call us in New York. Thanks again.

Thank you.

Thank you. This does conclude today's teleconference. You may now disconnect.