Houston-based Occidental Petroleum Corp. is throttling back from growth to ensure it can build cash flow to pay down some big debt maturities due in 2021, CEO Vicki Hollub said Tuesday.
The company, better known as Oxy, has set spending priorities on maintenance, debt reduction and eventually a sustainable dividend before expanding, Hollub said during a conference call to discuss second quarter performance.
“We intend to live within cash flow to sustain our production” going into 2021, Hollub said. “I don’t really see us growing next year. I see us optimizing and following our cash flow priorities, which is really the maintenance first.”
The push toward improving cash flow came after posting tremendous losses in 2Q2020. Oxy’s net losses were $8.4 billion, or a loss of $9.12/share, fueled by a $6.6 billion writedown on the value of the oil and gas assets. In 2Q2019, Oxy earned $632 million (84 cents/share).
Revenue plunged by almost 34% from a year ago and nearly 54% sequentially to $2.98 billion, crimped by the demand loss related to the coronavirus. However, operating expenses came in below guidance at $4.69/boe, and Oxy achieved its 2020 annualized run rate for operating cost savings in 2020 at $800 million.
The available cash from operations would be used to retire upcoming debt maturities, sorely needed following the $55 billion takeover last year of Anadarko Petroleum Corp. The ill-timed merger, which preceded the dire slump in demand, was keyed to boosting its hold in the Permian Basin. However, the deal built a $40 billion debt burden, including a $10 billion loan owed to Berkshire Hathaway.
Oxy now faces $5 billion of maturities due in 2021. Progress was made in 2Q2020 as Oxy raised $2 billion of new debt used to refinance some bonds, which eliminated some maturities due in the first half of next year. It ended the quarter with $1.1 billion cash and had $5 billion of available credit.
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“On our first quarter earnings call, we outlined the cost reduction measures implemented across our company to adapt to the immediate crisis of the pandemic and to the ensuing market volatility,” Hollub noted. “Compared to a few months ago, our financial position has noticeably improved as we are currently free cash flow positive and expect to generate significant free cash flow over the remainder of this year…
“We are determined to build upon this progress ever mindful that Covid-19 remains a threat to the global economy, the demand for the products we produce and to the health and safety of our employees and their families.”
The goal is to improve efficiencies to reach a breakeven oil price of under $40/bbl West Texas Intermediate, Hollub said. With board approval, maintenance capital for 2021 tentatively would be set at $2.7-2.9 billion, keeping output basically flat for the year.
“We do have things planned beyond next year that will help to increase cash flow without significant additional capital, part of what we really needed to do to maximize the cash flow that we get out of our operations was first to capture the synergies,” Hollub told analysts.
To improve the bottom line, the top of the list is divesting assets. Thus far, Oxy has sold about $6 billion in properties, but the process took a nearly three-month pause in March, April and May “when everybody was really dealing with the crisis” related to Covid-19, she noted.
Oxy also doesn’t want to sell assets for less than they are worth. The plan is “not to sacrifice value for timing, so we’ve got some room to make the right decisions around our divestitures.” Another avenue down the line is adding more joint ventures (JV) on core acreage, including in the Permian. The JVs would enable Oxy to “bring on another wedge of cash flow that will get us to where we need to be to be able to get back to a stronger balance sheet and get back to growth probably sooner than most people are modeling at this point,” said the CEO.
Oil and gas production in 2Q2020 was 36,000 boe/d, above the midpoint of guidance, fueled by the better-than-expected output from the Permian. However, the gains in production came when prices were weak and wells were curtailed. Realized oil prices averaged $23.17/bbl, down 51% year/year.
“Operability remains high across our oil and gas operations, and we’ve reduced downtime across the legacy of the Anadarko acreage faster than originally planned,” Hollub said. “To maximize the economic benefit from our existing base production, we have increased production by bottlenecking surface infrastructure, mitigating decline and reducing operating costs.
“We are employing remote surveillance processes, utilizing artificial intelligence to further enhance our predictive maintenance schedules, optimizing artificial lift systems, adding an additional well to centralize gas lift and reducing back pressure throughout our gathering systems and facilities.”
Moderate Boost To Output
Second quarter curtailments in the Permian averaged 29,000 boe/d, peaking in May at 47,000 boe/d. Permian output in the quarter exceeded the high end of guidance by 5% at 465,000 boe/d.
“We have now brought back online the majority of the domestic production that was shut-in for economic reasons with no detrimental impact to oil performance across our portfolio,” Hollub said. “This quarter, we achieved our combined overhead synergy and cost reduction goal by decreasing our overhead costs to below $400 million. On an annualized basis, we have fully realized $1.5 billion of total overhead savings versus our original synergies target of $900 million…
“We also reduced our operating costs by $800 million, which is an additional $600 million more than our synergy target of $200 million. We expect more than two-thirds of the additional operating cost savings will be permanent, even as we return to normalized activity levels…”
Oxy is committed to spending within the capital budget of $2.4-2.6 billion this year and plans to “moderately increase drilling and completion activities in the third and fourth quarters.”
Plans are to restart activity with the Permian Midland JV partner Ecopetrol, with two rigs running by the end of September.
“We will also selectively resume activity across other assets,” Hollub said. “And in the Gulf of Mexico, we are restarting our drillship that was idled earlier in the year…
“In any eventual growth scenario, we expect an annual production growth will be less than the 5% per year that we’ve previously stated,” the CEO said. “Our desire is to at least stabilize production next year. Our 2021 capital budget will depend on what market conditions are indicating when we roll up the budget in the fourth quarter.”
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