Buoyed by a supportive commodity price environment, Occidental Petroleum Corp. claimed its highest free cash flow since the turn of the century, with production at the high end of guidance even with extended downtime from Hurricane Ida.
CEO Vicki Hollub and her executive team shared the third quarter results during a wide-ranging conference call.
Hurricane Ida, which stormed through the Gulf of Mexico (GOM) in late August, cut production and led to higher-than-expected domestic operating costs. However, the damaging storm failed to disrupt progress in the mainstay Permian Basin, where output climbed while the number of rigs fell.
Oxy, as it is better known, also saw benefits in the midstream and marketing business. It benefited “from the timing of export sales during a rising crude price environment and a healthy market” for produced sulfur, Hollub said.
In addition, “the marketing team was able to capitalize on natural gas price volatility during the quarter by directing gas toward transportation solutions yielding the highest spreads. In summary, our team was once again able to utilize existing contracts and their expertise to maximize margins by delivering products to the markets that needed it the most.”
In the Permian, Oxy drilled its first 15,000-foot lateral wells in the Midland sub-basin of West Texas, with one well delivered in less than 10 days from spud to rig release. In the Delaware sub-basin, Oxy is “drilling 16% faster than we were just a year ago,” the CEO said.
Oxy also set a daily drilling record in the Denver-Julesburg Basin of Colorado with more than 9,700 feet drilled in 24 hours.
Are Any Permian JVs Being Considered?
The Houston independent has holdings far and wide, but the Permian still is the top dog, drawing more capital and more rigs than any other play, Hollub said.
Asked if Oxy has considered pooling its Permian assets into a joint venture (JV) to drive efficiencies and leverage technical expertise, Hollub said it’s been discussed. Would any of Oxy’s exploration and production peers in the Permian, she was asked, be “willing to put aside the ego” and pool resources to advance technologies and efficiencies?
“We always look at opportunities to do that,” she said. “For us, it’s not a matter of how you do it. We just look for ways to create value. And any way that we can create value for our shareholders, we’re open to doing it.”
Oxy in 2019 formed a Permian JV with Colombia’s EcoPetrol SA in the Midland sub-basin. The company is open to JVs also in the Delaware.
Pooling resources “is something that the industry is opening up to because we as an industry, we want to create value,” Hollub said. “We want to do business differently than we’ve done in the past. We have to do that as an industry to attract investors back to the oil and gas industry. It’s going to be important that we change our paradigm about how business should be done.
“And I have had some conversations with other CEOs,” Hollub said. “and there are some open to it, some are not..I think this sort of thing needs to happen and has to happen for us to maximize the value of the assets that we and others have today.”
In part on the impact from Ida in the GOM, and from selling some assets, Oxy’s overall U.S. production fell year/year to average 918,000 boe/d from 960,000 boe/d. Permian output averaged 499,000 boe/d, with Rockies averaging 242,000 boe/d. Global production from continuing operations averaged 1.16 million boe/d, down from year-ago volumes of 1.19 million boe/d.
During 3Q2021, Oxy fetched a realized price for its U.S. natural gas of $3.35/Mcf, compared with $1.18 in 3Q2020. Realized domestic oil prices jumped to $68.76/bbl from $38.22, with U.S. NGL prices more than doubling to $35.20/bbl from $14.62.
Worldwide production from continuing operations, however, fell year/year to 1.18 million boe/d from 1.27 million boe/d.
Overall U.S. production declined to 918,000 boe/d from 960,000 boe/d in 3Q2020. Natural gas production also declined to 1.295 Bcf/d from 1.439 Bcf/d in 3Q2020. Domestic oil output fell to 483,000 b/d from 508,000, but U.S. NGL production increased to 219,000 b/d from 212,000.
Output from the Permian dipped to 499,000 boe/d from 554,000, while Rockies/other U.S. production declined to 292,000 boe/d from 297,000. GOM production was higher than a year ago at 127,000 boe/d versus 109,000.
“We remain confident in our production trajectory leveling out as we enter 2022, where we anticipate a production pattern similar to 2021,” CFO Rob Peterson said. “We have raised our full-year production guidance to 1.55 million boe/d for 2021.
Two rigs have been added to the Permian leasehold in New Mexico and are to be “fully funded” from cost savings and optimization, Peterson said. “Adding activity in one of our highest return assets will place us in a strong position as we transition into 2022.”
One aim since taking over Anadarko Petroleum Corp. in 2019 has been to reduce the debt, and last month two fields offshore Ghana were sold for about $750 million.
“For us, production growth is not a priority for us right now,” Hollub said. “We want to continue working to reduce our debt.” Oxy also wants to start expanding its dividend again.
“And the only point at which we would really need to start growing our production would be down the road, where we want to continue growing the dividend. We don’t need additional growth from production right now to be able to increase the dividend over the next couple of years because again, with what we expect the macro to be and the level of of increase in our dividend, we believe that we can do that without any production growth over…at least a couple of years.”
DAC On Track
Oxy is positioning itself for the future as a “carbon management company,” said Hollub. “We think that’s going to be needed for the energy transition, and we’re actually filling a gap with what we’re doing. As you know with respect to what others are doing, there is a lot that really needs to happen in this energy transition for us to be successful to cap global warming at 1.5 degrees.”
Some oil and gas companies “are moving more toward renewables and that’s very much needed…There are others that are working very hard to mitigate all of their emissions from current operations. We’re working on both of those. But we do not see renewables; we’re working on reducing our current emissions from ongoing operations.”
That said, Oxy is advancing a massive direct air capture (DAC) project for the Permian. A decision on sanctioning is expected in early 2022, and if it were to move forward, the DAC project could be up and running in 2024. As envisioned it would pull up to 1 million metric tons/year of carbon dioxide (CO2) emissions from the air, or around 5% of what Oxy sequesters every year through its enhanced oil recovery (EOR) business.
Oxy is partnering with developer 1PointFive Inc. through Oxy Low Carbon Ventures LLC. Initial funding is from Rusheen Capital Management LLC. The unique technology was created by Carbon Engineering Ltd., in which Oxy is an equity owner.
Having other business units such as Oxy Low Carbon Ventures and OxyChem involved in advancing the decarbonization strategy “gives us a strength that others don’t have in this regard,” Hollub said.
Pulling carbon from the air is a global priority that needs government support, too, she told investors.
“The world absolutely has to have an acceleration of direct air capture…” A “carbon capture retrofitting industry…has to happen.”
Last Friday the Biden administration set a goal to reduce the cost of removing the CO2 from the atmosphere as part of DOE’s Carbon Negative Earthshot. The administration wants to reduce the cost of removing CO2 to $100/metric ton by 2030, either through DAC or by improving natural systems such as forestland to capture and store the emissions.
The best way for U.S. industry to get onboard with DAC is continuing the tax credit for carbon capture and sequestration, Hollub said. The credit in Internal Revenue Code Section 45Q is computed per metric ton of qualified carbon oxide that is captured and sequestered.
The 45Q is “incredibly important to us, otherwise the U.S. will not achieve the targets that we’ve set” in the United Nations climate accord of 2015 or this month in Glasgow, Scotland.
“So 45Q has to happen… We are going to struggle to be successful, but with respect to what we’re doing, there is going to be a price for carbon because there is a lot of commitment from corporations now to get to net neutral. Everybody, I think, realizes at some point that if we don’t achieve our goals through the incentives like 45Q that there’s going to have to be some price mechanism on carbon to make it happen.”
Many corporate executives “see that there is a social license to operate…They have to proactively start seeking CO2 credit offsets…to become net neutral.” Hollub pointed out that United Airlines already has “proactively committed to $1 billion” to build the DAC facility and purchase the oil.
“We’re getting a lot of incoming interest in the direct air capture because of that,” she said. “So I do believe that there is going to be sufficient growth and commitment to make what we’re doing here in the…initial phases work.”
Oxy’s net income was $628 million (65 cents/share), reversing the year-ago loss of nearly $3.8 billion (minus $4.16). The latest results included a pre-tax charge of $102 million net on mark-to-market losses as commodity prices eclipsed expectations. Operating cash flow jumped year/year to $2.9 billion from $815 million. FCF rose to $2.3 billion from $1.4 billion.
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