Occidental Petroleum Corporation (OXY) Q1 2010 Earnings Report, Transcript and Summary

Good morning. My name is Christie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Occidental Petroleum First Quarter 2010 Earnings Release Conference Call. [Operator Instructions] Mr. Stavros, you may begin your conference.

Thank you, Christie, and good morning, everyone. I'd like to welcome you to Occidental Petroleum's First Quarter 2010 Earnings Conference Call. With us this morning from Los Angeles are Dr. Ray Irani, Oxy's Chairman and CEO; Steve Chazen, our President and CFO; Bill Albrecht, President of Oxy's U.S. Oil and Gas operations; and Sandy Lowe, President of our International Oil and Gas business. In just a moment, I'll turn the call over to Dr. Irani who will give you an early glimpse of some of the topics we're planning to address at our upcoming Analyst Meeting on May 19 in New York. Steve Chazen will then review our first quarter 2010 financial and operating results. Our first quarter earnings press release, Investor Relations supplemental schedules and the conference call presentation slides, which referred to Steve's remarks, can be downloaded off of our website at www.oxy.com. I'll now turn the call over to Dr. Irani. Dr. Irani, please go ahead.

Thank you, Chris, and good morning, ladies and gentlemen. As Steve Chazen will provide details on our financial results for the first quarter in a moment. But I want to give you a brief preview of our meeting with all of you in the financial community in New York on May 19. Both Steve and I will present at the meeting, but so with four of our senior executives who are responsible for international oil and gas operations, U.S. oil and gas operations, the California oil and gas operations and also for the fourth addition, will be the worldwide exploration preview. We will give you details on development and numerous key areas of our operations, which we know are of keen interest to you. Among the areas we will cover at the May 19 meeting are: one, we will provide you a multi-year production outlook and build up from our asset base, which will provide considerable detail about the continued growth of the company. We will also outline significant and exciting new opportunities in California, including both conventional and unconventional prospects in the states. We would present details on our continuing growth and success in Oxy's existing Middle East production and also insights into new project potential, and we will provide you our anticipated capital spending program over the next five years. My colleagues and I look forward to meeting with you in three weeks to give you a thorough presentation on these and the numerous other outstanding growth areas of Oxy. I will now turn the call over to Steve Chazen for the details on our first quarter performance.

Thank you, Ray. Net income was $1.1 billion or $1.31 for diluted share in the first quarter of 2010 compared to $368 million or $0.45 per diluted share the first quarter of last year. The first quarter of 2010 income from continuing operations and core income were $1.32 per diluted share. 2009 first quarter core income was $0.50 per diluted share. For comparability purposes, all of our prior period volumes, as well as volume-based statistics, such as operating costs per barrel are being stated on a pretax basis as we previously discussed with you. Please see the Investor Relations supplemental schedule for the previous five year and the 2009 quarterly sales volumes presented on a pretax basis. Here's a segment breakdown for the first quarter: Oil and Gas first quarter 2010 core earnings were $1.8 billion compared to $553 million for the first quarter of 2009. The improvement in 2010 was driven by significantly higher commodity prices and higher volumes. Realized crude oil prices increased 83% in 2010 and domestic natural gas prices improved 59% from the first quarter of last year. Partially offsetting these gains were higher operating expenses, largely resulting from fully expensing CO2 cost in 2010, as well as higher DD&A rates and the effects of foreign exchange. The year-over-year production was negatively impact by a 38,000 BOE per day in the Middle East/North Africa, Long Beach and Colombia which were the result of the higher oil prices affecting our production sharing and similar contracts. Oil and Gas first quarter 2010 core earnings of $1.8 billion was essentially the same as the fourth quarter of 2009. Compared to the fourth quarter of 2009, the 2010 first quarter earnings reflected higher crude oil and natural gas prices, partially offset by increased DD&A rates, the effect of fully expensing CO2 cost in 2010, lower total volumes resulting from two fewer days in the first quarter of 2010 and the timing of liftings I will discuss shortly. Oxy's average realized crude price in 2010 first quarter of $71.88 per barrel, as increase of about 3 1/2% to from $69.39 per barrel in the fourth quarter of 2009. Oxy's domestic average realized gas prices for the quarter was $5.62 per MCF compared with $4.37 per MCF for the fourth quarter of last year. Worldwide Oil and Gas production for the first quarter of 2010 was 743,000 barrels equivalent per day, an increase of over 3 1/2% compared with 717,000 BOE in the fourth quarter of last year. Daily volumes increased in Bahrain by 2,000 barrels of oil and 126 million cubic feet of gas. Our domestic operations added 5,000 BOE, largely in the Kern County discovery area. Partially offsetting these increases were 4,000 BOE of lower volumes resulted in the Dolphin gas plant maintenance which were shut in for 50% of production for approximately two weeks. Sales volumes in the first quarter of 2010 were 726,000 BOE a day compared to 722,000 BOE a day in the fourth quarter of last year. Sales volume were lower than the production volumes I just mentioned due to timing of liftings of 13,000 barrels of oil equivalent day in the Middle East/North Africa and Latin America, of which 11,000 BOE a day were in Libya. Please see the Investor Relations supplemental schedules for net sales volumes per day and the net production per day by asset. Exploration expense was $56 million in the quarter. Oil and Gas cash production cost, excluding production and property taxes, were $10.05 a barrel for the first quarter of 2010, compared to last year's 12-month cost of $9.37 a barrel. The increase reflects $0.32 a barrel, higher CO2 cost due to our decision to expense a 100% of CO2 injected in beginning of this year and higher field support operations and maintenance cost. Taxes, other than on income, were $1.82 a barrel for the first quarter of 2010, compared to $1.60 for all of 2009. These costs which are sensitive to product prices, reflect the effect of higher crude and natural gas prices. As a result of the factors discussed above, the first quarter of 2010 compared to the fourth quarter of 2009 benefited by $174 million from higher prices, $43 million lower exploration expense, $62 million of lower cash operating cost and G&A expense. These gains were offset by the lower liftings of $102 million, effect of two fewer sales days of $77 million, higher DD&A rates of $69 million and a higher CO2 cost decision to expense of $25 million. Chemical segment earnings for the first quarter of 2010 were $30 million compared to $33 million fourth quarter of 2009. The first quarter of 2010 results reflect the continued weakness of domestic market, particularly in the housing and construction area sectors, and the significant margin erosion that was experienced through 2009 that carried into first quarter this year. Midstream segment earnings for the first quarter of 2010 were $94 million compared to $81 million in the fourth quarter of 2009. The increase in earnings was due to improved margins in the Marketing and Trading business, partially offset by lower pipeline income from Dolphin resulted from the two-week partial shutdown of the gas plant for maintenance. Phibro's earnings for the first quarter of 2010 were not significant. The worldwide effective tax rate was 41% for the first quarter of 2010. Capital spending for the first quarter of 2010 was about $850 million, capital expenditures by segment were 80% in Oil and Gas, 15% in the Midstream, with the rest in Chemicals. The spending run rate will increase throughout the year as we ramp up in California, Bahrain and Iraq. Our total year forecast has been increased by $200 million to $4.5 billion. Cash flow from operations in the first quarter of 2010 was $2.2 billion. We used $850 million of the company's cash flow to fund capital expenditures, $250 million on largely Permian acquisitions -- in Midcontinent acquistions and $50 million on foreign contract commitments. These items amounted to $1.2 billion of cash use. We expect property acquisition activity to continue during this quarter as there are sizeable build up of opportunity. We also used $270 million to pay dividends and $225 million to retire debt. These and other net cash flows increased our $1.2 billion cash balance at the end of last year by $700 million to $1.9 billion at the end of the quarter. The first quarter free cash flow after capital spending and dividends but before acquisition activity and debt retirements was about $1.1 billion. The weighted average basic shares outstanding for three months of 2010 were 812.1 million. The weighted average diluted shares outstanding were 813.5 million. As you look ahead in the current quarter, we expect Oil and Gas sales volumes to be in the range of 750,000 to 760,000 BOEs a day at about current prices, with production slightly above these levels. Production volume increased the second quarter expect to come from the following sources: domestically, the Kern County discovery area expected to show modest improvement during the second quarter. The production continues to be constrained by the lack of additional processing capacity. More significant increase are expected to occur late in the second quarter, when we add the skid amount of gas processing facilities. We're continuing with drilling and completed a number of cells. We have sufficient completed wells to fill the entire capacity of the skid mounted processing facilities. Our oil production is also constrained by the lack of gas processing capacity, since these wells also produce natural gas. The Midcontinent Gas region where we're currently drilling shallow oil wells is also expected to show production growth. In the Middle East, increases are expected in Oman, Mukhaizna field and in Dolphin. The first quarter plant maintenance downtime is not expected to repeat. In Latin America, assuming no labor-related stoppages, increases are expected in Argentina, with the current run rate is about 2,000 BOE a day higher than the first quarter, which was negatively affected by a short strike. The Argentine provincial legislature passed enabling legislation in the first quarter that will allow 10-year extension for hydrocarbon extensions (sic) [concessions]. We are now negotiating specific contract terms of a 10-year extension of our concession. Regard to prices. The current market prices, $1 per barrel change in oil prices impacts Oil and Gas quarterly earnings before income taxes by about $36 million. The average first quarter WTI oil price was $78.71 per barrel. A swing of $0.50 per million BTUs in domestic gas prices has a $31 million impact on quarterly earnings before income taxes. The current NYMEX gas price is around $4 per MCF. Additionally, we expect exploration expense to be about $80 million for seismic and drilling for our exploration programs. The Chemical segment demand for caustic soda and vinyls is expected to continue to improve both in the United States and international markets. Improving caustic soda pricing and low natural gas price will contribute to margin improvement. The Chemical segment is expected to provide about $80 million of earnings in the second quarter. We expect our combined worldwide tax rate in the second quarter to be about 42% depending on the split between domestic and foreign sourced income. Our first quarter U.S. and foreign tax rates are included in the Investor Relations supplemental schedule. Copies of the press release announcing our results and the schedules are available at our website, www.oxy.com or through the SEC's EDGAR System. We will provide additional details on May 19 meeting with the financial community in New York City. We request that you limit your questions today, specifically, the quarter results as opposed to strategic matters such as Iraq, Bahrain and California operations, which will be discussed in detail at the meeting. We're now ready to take your questions.

[Operator Instructions] And your first question comes from the line of David Heikkinen of Tudor, Pickering, Holt.

As I think about one of your future sources for CO2 that has made a strategic shift towards more oil activity. Can you talk about any of the specific terms of your contract regarding deliverability? Any penalties around the deliverability that would be helpful for us?

We're going to cover this really in a lot more detail in the May meeting, but there's a sizable penalty for failure to deliver if, for some reason, they don't deliver. But we currently anticipate that they'll make their early numbers based on what they told us. But there is a sizable penalty which would will allow us to buy new CO2 elsewhere at an attractive net price [ph] (25.23). There's been a lot of detail in May.

Just specifically on second quarter guidance and liftings, you mentioned growth in specific areas and no expected downtime. How much of the delayed liftings in first quarter come in to that second quarter number? And then how much volume would you expect to come in the third quarter?

Actually what we said in the remarks was we expect that production will exceed sales again in the second quarter. The numbers I gave you are sales numbers, and we expect currently that production would be higher than that. So the answer to your question is, effectively none of the liftings will show up. Traditionally, what happens is that they lag just a little bit and it catches up by the fourth quarter. So it's just off a little bit, it seems like a lot, but it's just off a little bit.

Our next question comes from the line of Ryan Todd of Morgan Stanley.

Just a quick question on cash flow. You obviously generated a lot of free cash flow this quarter, and I realized that the CapEx spend was going to be a bit more back-end loaded throughout the year. But as we look at commodity prices and we look at relative levels of free cash flow, I realized you bumped up your CapEx a little bit, but how can we expect you to think about your uses of cash in terms of more aggressive deployment of organic capital versus cash return to shareholders? And also the increase in CapEx, can you tell us were that in any particular area or it's just inflation across the board?

We're not going to talk about the use of cash. I view it as strategic question as opposed to quarterly question, so we'll talk about the use of cash in much more detailed in May. But the first quarter tends to be very strong quarter for cash because there's no tax payments. So more tax payments in the second quarter, so it will be a little different. The $200 million of capital is largely going to California.

Is that a result of increase activity from what you originally anticipated, or is that just higher cost?

No, that's increased activity.

[Operator Instructions] And your next question comes from the line of Paul Sankey of Deutsche Bank.

Just on the tax rate, was there anything wacky or unusual other than your standard line, which obviously is a question of the mix between international and domestic, was there anything other that you would highlight as being particularly unusual about -- lower than guidance tax rate for the quarter?

It's probably the most difficult number to estimate. We do the best that we can, but the tax department likes to always be a little more aggressive on what they think they're going to -- tax rate's going to be. What I think what happened was lesser liftings out of Qatar and Libya, made the tax rate appear a little lower, because those were high-tax rate areas.

On kind of new flow in the quarter if you like, Conoco notably backed out of project that you had expressed interest in. Is there any change now to the way you're looking at that project? Obviously, I'm referring to an Abu Dhabi. And generally, Steve, any comments you could make about the M&A environment that we're seeing?

Ray Irani here, we have consistently said over the next two years that the term of the contract that was negotiated between ConocoPhilips and Abu Dhabi, the terms, economically, are not attractive to us. However, if the government wishes to approach us with different terms, we'll look at them. Nobody has called us yet and that's our position. With regards to M&A activity, Steve has mentioned that yes, there's more stuff asset wise are becoming available and Steve will give you more detail. Steve?

Yes, I think activity clearly has picked up and we're seeing a good flow of mostly Permian opportunities. And we expect to have a pretty good year for acquisitions in Permian.

Okay, and just going back to the Abu Dhabi thing, would you expect the government to potentially pursue that project alone, or is that your understanding that they would...

No, definitely. I was in Abu Dhabi recently. The government plans to proceed with that project either alone or inviting partners, but the project will go ahead.

Just back to the M&A question, much less internationally is that a function of just the nature of opportunities that will pursue internationally, or is that more to do with your own interest?

It's just a flow from quarter-to-quarter, I don't think I'd read much in any of this. A lot of the individual sellers in the Permian as they fear is the rising tax rates, so we've seen a quite a flood of lot of small oil deals that people want to cash out before the tax rates go up.

Line of Doug Leggate of Bank of America.

Steve, in Argentina, if I could just ask you for a little bit of clarification as to what's going on down there. Have you now actually got the extension on your contract then?

Its a three-step process. You start with the government, the legislature passing a law, which enables the -- and the parameters of any extension. So there's a law which says these are the parameters of any extension. That's from the provincial legislature. The government of Argentina then negotiates with us about the detailed terms complying with underlying legislation, and that's where we are now. Then they'll have to submit the final contract to the legislature when that's all negotiated. So the answer to your question is we've made progress, although we have not crossed the finish line. That's ten years from when it expires and I think it expires in about three years, so talking about 13 more years of production on average.

So the ramifications if you got the extension, I'm guessing, you would have reasonably substantial reserve bookings and so on along with that, but it's too early to make that kind of assessment, or...

That's right. I think we'll tell you the numbers in a few weeks, But clearly, you're going to have a significant amount of reserve bookings just from not cutting the decline curve of loss in three years, and a fairly sizable decline in the DD&A rate in Argentina.

The jump in DD&A, anything specific there that you can point to?

I think the two areas that are the major increases are, when we took the gas down, the amount of gas in the Piansu [ph], using the $4 gas that results in less gas reserves and a higher DD&A rate in the Rockies. And the second area is Argentina. We continue to expand in anticipation the contract being extended, but it hasn't been extended yet, and therefore, you boost your DD&A rate. The second one, once the contract extended, we'll clearly go down. And the first one, we hope goes down of the natural gas prices were to cooperate, which I guess they're not doing today.

Can you quantify the loss opportunity cost from the under lift in the quarter?

No, I really don't. I can't quantify it. It's a sizable number, though. On an after tax basis, you could probably take that number somewhere around $20 a barrel.

You've given us end of quarter run rate or production rates out of Kern County discovery. Would you care to share what they were at then end of the first quarter?

No, because we'll have some story here for two weeks from now.

Next question comes from Monroe Helm of Barrow, Hanley.

Why you are seeing these opportunities to buy more reserves in the Permian. And I guess, you said, especially because small operators are worried about tax rates going up?

And royalty owners, too. Small working interest royalty owners, it's expected to really have a lot of small deals.

You may not want to say this, but can you tell us what the processing capacity was in California in the first quarter and we expect it to be when you get the additional capacity on?

Monroe, our current infrastructure capacity at Elk Hills is $420 million a day, and the skewed amount of gas plants is name plated for an additional $90 million.

At this time, there are no further questions. Are there any closing remarks?

Thank you very much for dialing in today. And I'm in New York for any further questions, and we certainly look forward to seeing you in New York at our May 19 meeting. Thanks very much.

Thank you.

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