Occidental Petroleum Corp

NYSE:OXY

Earnings Call Transcript 2021-Q2

[Operator]

Good afternoon, and welcome to Occidental's Second Quarter 2021 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions.

[Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Jeff Alvarez, Vice President of Investor Relations. Please go ahead.

[Jeff Alvarez, Vice President of Investor Relations]

Thank you, Chad. Good afternoon everyone. And thank you for participating in Occidental's Second Quarter 2021 Conference Call. On the call with us today, are Vicki Hollub, President and Chief Executive Officer, and Rob Peterson, Senior Vice-President and Chief Financial Officer.

This afternoon, we will refer to slides available on the Investors section of our website. The presentation includes a cautionary statement on Slide 2 regarding forward-looking statements that will be made on the call this afternoon. I'll now turn the call over to Vicki. Vicki, please go ahead.

[Vicki Hollub, President and CEO]

Thank you, Jeff, and good afternoon everyone. Our strong operational performance in the second quarter continued to drive robust financial performance as we marked our second consecutive quarter of generating the highest level of free cash flow in over a decade.

As was the case last quarter, our cost structure and capital intensity leadership were catalysts for our strong results and continue to provide a solid foundation for free cash flow generation in the future. We were especially pleased to have been in a position at the end of the second quarter to launch a tender process to retire over $3 billion of debt using excess cash generated from operations, as well as proceeds from divestitures.

While we made incremental progress in reducing debt throughout 2020 and the first half of 2021, the completion of this tender represents a sizeable step forward in our deleveraging efforts.

This morning, I will cover our Second Quarter operational performance and divestiture progress. And Rob will cover our financial results and balance sheet improvement, as well as our updated guidance, which includes an improvement to our DD&A rate and an increase in guidance for our full-year production and for midstream and OxyChem 2021 earnings.

In the Second Quarter, our business -- all of our businesses outperformed. Our capital discipline and efficiency, combined with a supportive and improving commodity-price environment, positioned us to generate the highest level of free cash flow before and after working capital. That's the Third Quarter of 2008, when WTI hit a $145 a barrel.

We are proud of our teams for this accomplishment, and we appreciate that they are continuing to improve our capital execution and operating efficiencies to further expand our margins. We exited the quarter with approximately $4.6 billion of unrestricted cash, which does not include cash received in July from the recently closed divestiture or the cash used for the debt tender, which closed in July.

Rob will touch on the tender in a little more detail, but I'd like to reiterate how pleased we are to be, once again, making notable progress in reducing debt and strengthening our balance sheet. Turning to our operational results, our oil and gas business delivered second-quarter production from continuing operations of over 1.2 million BOE per day.

The total Company-wide capital spending of almost 698 million. Our domestic oil and gas operating costs of $6 per BOE came in substantially below our full-year guidance as our teams continue to demonstrate their innovative operations expertise, while finding new ways to safely reduce costs in our field operations.

In the second quarter, OxyChem continued to benefit from robust PVC demand and pricing, as well as gradual strengthening in the caustic soda markets. We believe the fundamentals for these markets will remain supportive through the second half of 2021.

And we are confident in increasing our full-year guidance to a midpoint of $1.25 billion, representing an almost 60% increase over our original guidance for the year. The ability of our oil and gas business to overcome challenges while increasing efficiencies has been transformational.

Looking back over the first 6 months of this year, we overcame the impacts of a major weather event and divested in a producing asset. We were able to make up the lost and divested production and have increased our full-year production guidance for continuing operations to 1.15 million BOE per day. We continue to be highly encouraged by well performance across our Portfolio. For example, in the Texas, Delaware, we recently bought online a new [Indiscernible] development that is producing approximately 20% more oil compared to a prior development in this area.

Additionally, in an area of roughly 10 miles Southeast of [Indiscernible], we brought online a 5-well development with average 30-day peak rates of almost 5,000 BOE per day. As I mentioned, operationally, our teams continue to set new efficiency records while constantly pursuing opportunities to improve.

We set new quarterly records across our Portfolio on feet drilled and hours pumped in a single day. In the Midland Basin, we set a new drilling record with over 9,500 feet drilled in 24 hours, contributing to a new OxyPermian spud to rig release record, drilling a 10,000 foot horizontal well in only eight days.

In the DJ Basins, we set a new Company-wide frac record of pumping over 23 hours in a single day. Utilizing Oxy Drilling Dynamics in the Gulf of Mexico, we have significantly lower drilling costs and duration, as the wells drilled in 2021 have cost 15% less than the average for 2019.

As I mentioned on last quarter's call, we've had excellent results leveraging remote operations. Our innovative mindset and ability to leverage technological breakthroughs have allowed us to continue pushing the performance envelope giving me confidence that our best-in-class capital efficiency will continue.

Our divestiture plan advanced in the second quarter with the recent closing of a non-core Permian acreage sale for approximately $510 million. Given our industry-leading Inventory depth, we welcome the opportunity to monetize these assets at an attractive price as it is unlikely that we would have developed this acreage in the near future.

We expect to close at least $2 billion of divestitures Post Colombia. And as we've said previously, we'll always prioritize obtaining value for our shareholders over meeting a deadline. I want to take a few minutes to talk about our Chemical business and how we plan to leverage its leadership and expertise into our Low Carbon Ventures business.

OxyChem success is demonstrated by its financial performance and track record of consistent free cash flow generation. OxyChem has been a consistent generator of free cash flow during past downturns. And with the macro environment improving, OxyChem is on track to deliver record earnings this year, even surpassing 2018 results.

The business may also continue to strengthen in future years as caustic soda, one of the key profit drivers for the business, has experienced only a moderate price recovery to date. Last quarter, I spoke about how OxyChem's integration across multiple chlorine derivatives provides us with the ability to optimize our caustic soda production while opportunistically adjusting our production mix to maximize margins.

There are many opportunities for us to apply the same approach to integration as we develop opportunities between OxyChem and our low carbon ventures business. As a major producer of PVC and caustic potash, OxyChem has the engineering, R&D, and process technology expertise, as well as the production capability necessary to build our low carbon business.

OxyChem is a world leader in the customization, handling and usage of PVC, which will be a major component in the construction and ongoing operation of the Direct Air Capture facility. We're also one of the world's largest leading producers of caustic potash, the key chemical utilized in the Direct Air Capture process to separate carbon dioxide for sequestration or carbon-neutral enhanced oil recovery.

Our best knowledge of equipment design and our experience with operating and handling of caustic potash will be key to helping us quickly optimize our Direct Air Capture facilities. In addition to being a market leader and consistent free cash flow generator, OxyChem is integral to our business up today and of tomorrow.

It's also worth noting that OxyChem is a market leader in health, safety, and environmental performance. OxyChem recently earned a remarkable 31 Responsible Care Awards. These are from the American Chemistry Council, and are the U.S. chemical manufacturing industry's leading performance awards.

The awards recognized OxyChem 's achievements in safety, waste reduction, and improving energy efficiency. Several of the award-winning initiatives focused on waste minimization, reuse, recycling, and energy efficiency, which will all contribute to our 2025 sustainability goal.

I'll now hand the call over to Rob, who will walk you through our financial results for the second quarter, and guidance for the remainder of the year.

[Rob Peterson, Senior Vice-President and CFO]

Thank you, Vicki. Our businesses continue to perform well in the second quarter, as our free cash flow generation affirmed our confidence in Oxy's ability to generate cash and healthy price environment. Strong performance contributed to a quarter-end unrestricted cash balance of $4.6 billion.

On our last call, I mentioned the potential for a partial reversal of the working capital change incurred in the first quarter. As expected, we benefited from a positive working capital change this quarter of approximately $600 million, further contributing to our cash build during the quarter.

As Vicki mentioned, we launched a tender late in the quarter enabling us to repay over $3 billion of debt in July. Subsequent successful execution of a debt tender in July, we received proceeds for the non-strategic Permian acreage, partially refreshing our post-tender cash position early in the quarter.

In the Second Quarter, we announced an adjusted profit of $0.32 and our reported loss of $0.10 per diluted share. While we placed a greater importance on cash flow generation, especially as we are focused on deleveraging, we are pleased to be generating income on an adjusted basis, and view this as a positive indication that our financial position continues to improve.

Our reported results were less than our adjusted results, primarily due to mark-to-market impact of derivatives. We delivered outstanding production results year-to-date while having deployed less than half of our full-year capital budget of $2.9 billion.

We expect capital spending should remain within budget, demonstrating our commitment of capital discipline and our capital intensity leadership, even as capital spending is pretty higher on the second half of the -- than the first half of the year. The positive working capital change realized in the quarter was driven by lower cash payments for items that accrued throughout the year and lower crude inventory from fewer barrels in the water, partially offset by higher accounts receivable balance due to the increase in commodity prices.

As the interest payments on our bonds are made semi-annually, our cash interest payments are significant lower in the second and fourth quarters than they are in the first and third quarters. During the downturn last year, we received approximately $1 billion of additional cash flow from our oil hedges.

To obtain a cost of structure, we sold a 2021 call position of 350,000 barrels a day, with an average strike price of $74 and 16% rent. As the commodity prices rose in the second quarter, we made payments of $5.7 million under the sold call position, and $1 million under our gas hedges in July.

Cash settlements paid to date on the hedges have been minimal and are certainly worth the benefit we received last year. We continue to maintain our opportunistic approach towards hedging. In the fourth [Indiscernible] was supportive, but not added any hedges past the end of this year.

We believe creating a manageable debt maturity profile and reducing debt is a more effective, long-term solution to de-risking the balance sheet while providing shareholders with exposure to commodity price gains. raised our full-year production guidance following our strong Second Quarter results, and have increased our earnings guidance for OxyChem and Midstream for the second time this year.

Looking strong first-half performance and improved market conditions. We expect that 2021 will be a record year for OxyChem, even surpassing our earnings in 2018. We benefit from acceptably strong caustic soda prices in the middle part of that year.

Midstream is expected to benefit in the second half of the year from continued higher sulfur prices that are risen, as well as up list in the Third Quarter related to timing of export sales. We also lowered our DD&A guidance for 2021, like in a mid-year reserve update.

This update takes in account more supportive trailing 12-month commodity prices at midyear compared to year-end 2020 as well as our activity plans and recent success in lowering operating costs.

The combination is expected to increase our proved reserves, which we expect to result in a lower DD&A rate going forward. Our production in the second half of 2021 is expected to average 1.14 million BOE per day. Production in the second quarter benefited from time-to-market acceleration in the Rockies and Permian.

Favorable weather conditions and optimization of planned maintenance schedules to better sequence shut-down activities resulted in lower-than-expected downtime in Gulf of Mexico, contributing a higher expected production. Our expected third-quarter production of 1.145 million BOE per day includes an allowance for seasonal weather and maintenance in the Gulf of Mexico, a divestiture of approximately 10,000 BOE per day in the Permian, the timing impact of our Rockies capital program, which was front-loaded in 2021, as well as PSC impact due to price.

Even as production in the second half of the year is pretty lower than the impressive second-quarter production results, we remain confident in our production trajectory leveling out as we enter 2022 where we anticipate a production pattern similar to 2021. We have updated our activities slide to include two additional New Mexico rigs.

New Mexico activity change will be fully funded through the cost savings and optimization of our capital projects gained through efficiency improvements, but we'll not increase our capital budget. Adding activity to one of our highest return to assets will place us in a strong position as we transition into 2022.

With the successful completion of our debt tender, we paid over $3 billion in 2022 through 2026 maturities. And I have a clear runway of the next few years. As we generate cash and organic free cash flow, we continue to evaluate the options available for additional debt reduction, and we'll seek to further our debt maturity profile, so that we left -- we're not exposed to any significant amount of maturity than any single year.

The options available to us for debt reduction include potentially calling the 2022 floating rate notes prior to maturity, executing initial tenders, exercising attractive make-whole provisions, pursuing over market debt repurchases, or we may choose, in some cases, to build a cash position, which may be applied towards retire maturities as they come due.

We also plan to retire $750 million of notional interest rate swaps in the Third Quarter for the fair value amount, which will improve cash flow by almost $50 million per annum at the current curve. We end the second half of 2021 in a strong position in the beginning of the year.

And as we look forward, remain focused on maintaining a strong liquidity position, deleveraging or regain investment-grade metrics and preserving financial policies and cash flow priorities in best capital discipline. I will now turn the call back over to Vicki.

[Vicki Hollub, President and CEO]

Thank you, Rob. We are proud of the substantial progress in delivering our near-term cash flow priorities. We have significantly de-risked our balance sheet with the successful completion of our recent debt tenders, and this marks the next stage of our deleveraging effort as we work to further reduce debt and to lower our breakeven.

While we still have work to do before transitioning to the next stage of our cash flow priorities, including returning additional capital to shareholders, we're confident that the steps we have completed to date and the strong operational performance that we continue to deliver will accelerate our progress. And I'll now open the call to your questions.

[Operator]

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Please limit your questions to one primary question and one follow up. If you have further questions, you may re-enter the question queue.

At this time, we will pause momentarily to assemble our roster. And the first question will be from Neil Mehta with Goldman Sachs. Please go ahead.

[Neil Mehta, Goldman Sachs]

Thanks so much. And really strong results here on chemicals and that's where I want to start. Can you talk to your views on caustic soda and PVC pricing for the remainder of the year and next year, and the sustainability of the margins that we see out there?

[Rob Peterson, Senior Vice-President and CFO]

Yeah, Neil. We continue to see very strong conditions in with our vinyl business and steady improvements in caustic soda business, as Vicki indicated. As you can see on Slide 7, that these two businesses are the major profit drivers for our chemical business.

And it's unusual, but we do have conditions when both businesses are usually in favorable market conditions, the earnings impact, as you're seeing, is significant. So on the PVC business, the business remains extremely strong due to a tight supply-demand balance.

On a year-to-date basis, we're seeing domestic demand as an industry about 60% higher compared to the same period in 2020. But more importantly, it's up 13% for where it was in 2019 in a non - COVID period.

And so strong demand is also attributed to really low levels of Inventory and supply train combined with the construction sector which you're seeing and obviously in a lot of their construction materials.

And we expect demand to remain strong with a very favorable housing start outlook, mortgage rates remaining low, which tends to also drive historically the business and a lot of investment remodeling. And so we're -- those kind of factors are all pointing towards sustained improvement of PVC business?

The only thing I would say is that when the export business is soft, like it is now, where we're seeing year-to-date exports are down 33%, which tends to be the last allocation of PVC production. That's indicative of a straw market, and when there's not enough product to go around, we shouldn't see margins remain favorable for us.

On the [Indiscernible] side, a coring molecule itself is very tight, and so producers are seeking the highest value outlets for coring molecules. And as Vicki mentioned, our very diverse Portfolio of coring derivatives allows us to really maximize the value as coring molecules through our chain of opportunities.

And so towards production itself has been under pressure for the year simply because of a lot of both unplanned and planned outages. And if you look across the rates, they are actually lower in '21 than they were in '20 year-to-date, running about 75% year-to-date versus 80% over the same period last year. We're already in about 6% less caustic production available this year versus last year.

Caustic has been quite tight with this helping to improve prices, and with plant outages scheduled in Third Quarter, we would anticipate that further support for additional price increases in the caustic soda business.

And then, as you see, caustic for us tends to be something that moves with the global economy. And we're certainly as economies open up and eventually travel restrictions goes -- ease globally, we should see additional demand in underlying sectors.

And so as far as the key demand sector in the second half, we see better demand in the aluminum sector, the pulp and paper sector, water treatment, and certainly bleaching sectors, all improving in the third quarter.

So both sides of the ECU are looking strong headed into the second half of the year. And the underlying factors certainly are bullish for both of them as we move into 2022 and beyond.

[Neil Mehta, Goldman Sachs]

And the follow-up is one of the key takeaways from earnings season. Is the emphasis investors continue to place on cash returns. And at this point, Occidental is more focused on deleveraging the business, which makes a lot of sense.

Can you just remind us what your absolute debt target is? And then at what point or what milestones should we be thinking about the Company shifting from a deleveraging approach to one of where you can reintroduce something like a dividend?

[Rob Peterson, Senior Vice-President and CFO]

Yes. So it's certainly a topic du jour -- we depicted on the 13th slide of the stack, which was newly included, that we're essentially on a journey when it comes to cash flow priorities. And after a lot of risk in 2020, to de-risk the Company in what I call post - COVID world between the stabilization on production, the slashing of our costs, and refinancing [Indiscernible] maturities, now we're making headway as Vicki detailed on the leveraging process.

And we took a significant step forward with the upsize tender in July through both a combination of cash available from strong production performance, the continued capital execution and diligent cost management, and really, the remarkable turnaround in chemicals, all contributed to the success of that.

And so now we retired about $12.7 billion of principles since the middle of '19 through that combination of our granted cash generation in the Investor Program. And I think we'll continue to work towards the $2 billion to $3 billion post - Colombia divestiture target that we've established.

But as we look forward, it's anticipated that the majority of free cash flow from the business will be the source of future cash for debt retirement. And it's critical that, as we take advantage of these elevated prices, to deleverage the balance sheet because we know at anytime the could be changes in the macro-environment that could affect our ultra-commodity prices that would inhibit our ability to do that.

So when I look at the time it takes in our past, it does remain focus right now in the 2 top priorities being -- that we're focused on in our list, and how long we're on that path is certainly dependent upon future commodity prices, because that certainly impacts the rate at which we're able to move down the path.

But I do think that the steps we've taken since March of '20 are all part of a long-term strategy around increasing value to our shareholders. For example, look at last year in the de-risking side, we could have saved a little interest in our refinance process by using more orders and ventures, but we're sitting today with a much less risky maturity profile and a much -- in the same simple capital structure we started with.

And we do believe ultimately deleveraging the Company is going to be to the benefit of equity holders in the form of equity appreciation. And we also understand that that leverage to oil price remains attractive and is the Dermot at that phase of that process. And our EBITDA does fluctuate the weight obviously a lot with commodity prices.

And while some agencies modestly increased their models, our prices are still well below the current strip. That's why we keep saying to get to a more sustainable debt level in the mid-20 range, is likely necessary to achieve those [Indiscernible] like financial metrics. In addition to debt ratio, we understand, obviously, financial policies matter and that's a great decision.

So, use of cash for dividends, growth, et cetera, ultimately viewed in the near-term unfavorably. So that's why we remain focused on deleveraging process. And once we reach that more sustainable debt level, we will start resuming greater amount of cash to shareholders.

[Operator]

Thank you. And the next question will come from Doug Leggate with Bank of America. Please go ahead.

[Doug Leggate, Bank of America]

Thank you. Good morning, everybody. Good afternoon, everybody. I should say. Gosh, it's amazing for me how it [Indiscernible] continue to look for cash returns, Vicki, when you quote the potential of moving 40% of your market cap between debt and equity over the next year.

And I guess it's not really the rub of my question is disposals and how you can accelerate that. But I would like to frame it like this, when you announced the $2 billion to $3 billion target Post-Colombia, rent was $42 from the 2 billion to 3 billion target.

Obviously it's not there today. So can you just give us an update as to, do you expect to do more than the 2.3 on a prior question basis for the oil price or are you moving -- are you targeting 2 the 3? albeit I'm guessing you can do that with fewer assets given the oil prices.

So I just want you to help me [Indiscernible] the 2 to $3 billion. It seems to me, you can probably do a lot more in absolute terms given the oil prices still on the lower side.

[Vicki Hollub, President and CEO]

At this point, we're not really prepared to change the goals that we've set out, although we feel very comfortable we will achieve the lower end of that goal. But Doug, you're exactly right. Given our Portfolio, there could be other opportunities available to us to continue to optimize what we have today and optimization to us is not just ensuring that you have the best-quality assets in your Portfolio and that you're putting your dollars where they generate the most value.

It's also looking at the opportunities to do as we just did, and that is to monetize, where you see that the monetization of that is going to be so far out into the future. It's not meaningful value for our shareholders today. We're constantly looking at an updating, optimizing our plans, and looking at those opportunities.

Where could there be additional situations where we have the same thing that we just did with this Permian acreage, monetize it today, and have the opportunity to create better value today than to keep it in the portfolio when we know we can't get to it. We're still looking at all those things -- not prepared yet to change our guidance.

But I can say that opportunistically we do want to create value sooner rather than later. So we'll continue to keep that in mind as we review the Portfolio and optimize as we go along.

[Doug Leggate, Bank of America]

Vicki, I apologize for asking for clarification on this, but if you have the same number of assets, are you ahead of schedule then, in terms of the obsolete proceeds, again, reflecting the fact the oil price is higher.

[Vicki Hollub, President and CEO]

We are on schedule with what we need to do. But with that said, given where oil prices are today, we're quite comfortable looking at opportunities as they come in. And by that, I mean we're still getting opportunities coming in the door for various parts of our portfolio. And we look at all those very critically.

And I think that there's going to be situations that come up over the next 12 to 18 months that would provide us more opportunity to raise additional funds. But I don't want to commit to that because where we are now, and with respect to our cash flow generation and our deleveraging progress, we're in a position to be, I would say much more careful -- not -- and careful is not the right word, but much more, I guess, opportunistic is the only word I can think of to ensure that we get maximum prices for what we would sell because we started out the divestiture program by cutting off the very tail end of what we felt like fit within our Portfolio -- that could fit within other's Portfolio in a higher level.

But for us, the things we've sold just could not compete and could not add the value that other things in our Portfolio could. So now, as we have divested of those assets, we're now getting to the assets where we expect we expect to get more value from a divestiture than those that were at the lower end, I guess is the best way to say it. So -- but we're open to looking at opportunities as we see them.

[Operator]

Thank you. And the next question will come from Roger Read with Wells Fargo. Please, go ahead.

[Roger Read, Wells Fargo]

Yeah, thank you. And I guess good afternoon, and congratulations on the quarter. It's nice to see everything clicking for the first time in a while.

I guess what I'd like to maybe address, some of the metrics you're using that underpin the decision to move away from any sort of a hedging strategy and maybe getting back to thinking about from a debt-to-EBITDA, debt-to-cap, maybe a long-term debt number you're more comfortable with, just maybe all the pieces that have gone into if it speaks to where you are now versus where everything was 12 months and 24 months ago?

[Rob Peterson, Senior Vice-President and CFO]

Yeah. Fair question, Roger. So certainly historically, the Company has not been one with the hedging philosophy and felt like the combination of our exposure to commodities, exposure to price over the long haul would ultimately deliver the most value to our shareholders, versus attempting to you've had just to try and create value.

And that's certainly changed in 2020 because we were in a position where our leverage was such that it was necessary for us to create some protection in the event we were in a negative price environment, like what ultimately worked out that way, and certainly the billion dollars that we were able to create in value last year from the hedge was something that was critical to our success last year.

And we'll continue to maintain that opportunistic approach. But as we evaluate hedges, we're considering a lot of factors. Number 1 is the cost to execute the hedge. Certainly, as we're -- the cost of hedge that we did last year came with a call provision this year, which hasn't been very expensive, but they can be.

And the implications that the hedge is going to have on the upside to leverage our oil price, such as a collar. And so a pure put hedge is pretty expensive, and then collars are going to be upside, that limitation that we would like to put on our shareholders.

And so if you look at that, we think that's creating that manageable debt profile as a discussing the comments, particularly knocking down the taller towers beyond just the near-term stuff that we focused on. If you look at the recent tender, 80% of the bonds that we addressed were in that 2022 to 2024 timeframe.

And it's a more effective long-term solution [Indiscernible] didn't provide that. And so I do think that you can use a trailing -- if prices were to continue with the current strip of values and use a trailing EBITDA by the end of the year, you could be certain we are able to continue on as we've been doing with debt retirement. It would be to easily be below a 3 times multiple.

But certainly as we discussed, that's nothing necessarily unless with a strip value that's much higher than the inquest of being used by the rating agencies. And so I do think it's important to us to maintain our ratios, but it's also why I mentioned in my comments it's important for us to really go after the maturities while we have the wind at our back in terms of commodity prices, which is exactly what we're doing.

And so taking that out and continuing forward. And then you can look at the way that we structured the tender and the strategy approach on that, we left aside a significant amount of debt that's easily available to us, $2 billion worth that's either going to be mature before the end of the year, as callable for the New Year, or we haven't tried to make whole payments in addition to the floating interest rate notes.

And so that gives us access to very cheaply continue to retire debt moving forward over the balance of the year, which will go further and further towards that. So we've just got work to do. We made a giant step forward with the debt tender in the last quarter.

We still have a lot more work to do, but I do feel like that the work we've done, particularly between the deleveraging and the cleanout runway has made us -- give us a lot more selectivity around hedging strategies moving forward.

Not to say that we would never do them again, but it certainly is getting all our -- certainly our preference is decrease the value for shareholders and give them the exposure to oil price, which is something that OXY has to offer right now, that many others don't.

[Roger Read, Wells Fargo]

I appreciate that. That's a good answer, and it gets to the reduced risk profile overall. Appreciate that. Maybe just changing directions with my other question a little bit here. The comment about being able to add two rigs in New Mexico, no impact on Capex.

I was just curious. Does -- is that a function or a reflection of improved efficiency and productivity, some of the other things mentioned like the uptime on the pumping jobs? Maybe Vicki, just a question overall, you're seeing the evolution and continued productivity and efficiency gains out of the field.

[Vicki Hollub, President and CEO]

Yeah, it was a combination of the efficiencies of the current drilling program and also the utilization of existing facilities to ensure that we could shift our capital to 2 additional rigs without needing any incremental infrastructure expenditures. So it creates -- this has created a really good opportunity, the fact that our teams are continuing to improve what they're doing.

[Jeff Alvarez, Vice President of Investor Relations]

Okay. And Roger, on top of what Vicki just said, I think it's important to note. I mean, if you look at our activity profile, we were ramping down through the year. So it's not that we necessarily are ramping up activity. It's not the case. We're just not ramping down. We still went from 12 rigs down to 10.

Today we're at 11. so we're just kind of flattening out that activity profile while still keeping the capital budget exactly the same. So we're not adding to that as you pointed out, and the impact's really more about next year. If you look at that activity set, those -- one rig started up, another one will startup soon, that -- it will add approximately 20,000 barrels a day to second quarter next year. So that will help our capital profile going into next year.

[Operator]

Thank you. And the next question will be from Phil Gresh with J.P. Morgan. Please go ahead.

[Phil Gresh, J.P. Morgan]

Yeah. Jeff, just to follow up on what you were talking about with the activity levels. As you look at the second half spending, you annualized that second-half spending as around 3.2 billion or so. Any initial thoughts around the 2022 Capex levels? Would you just be looking to keep it where it is? Yeah, and I'll stop there.

[Jeff Alvarez, Vice President of Investor Relations]

It's a good question. And as you know, Phil, it's a little early for us to forecast what 2022 looks like. We usually do that on our Fourth Quarter call. But to your point about cadence because I think that's relevant and you can read some things into that. When you look at our capital profile, it's 29 for the year, as you mentioned, we've spent 13 in the first half.

And there's a couple of things that drive that and you can see it. For example, in our chems business we forecasted about 300 million. They've spent a little over a 100 million, so a lot of those activities are back-end weighted.

On our Permian activity slide, you can see of our 1.2 billion, we've only spent 500 million of that, and the reason for that is a lot of our Midland Basin wells were front-end loaded, so much lower working interest with the carry. Now we're getting to some of our higher working interest wells that go with that.

So it's really more about where we're spending capital and how it is more than a cadence of an activity set drastically changing. So I wouldn't read into a 800 quarter type number being what we need for next year.

As you look to 2022, obviously would give a lot more color on this going forward, but I think the same narrative we've talked about on previous calls; we continue to see great improvement from an operational standpoint. I think when you look at what our teams have done this year, it's exceeded all of our expectations from an efficiency standpoint.

Every time we look to put the slides together, and we ask for new records that have been set, we are blown away by the new things that come up again and again, and again that our teams are doing. And so I don't think that's going to stop.

I mean, even after we put the slides together for this, we got a notice last night where our Rockies team set a record for the month of July for pumping efficiency of like 630 hours pump. You start doing the math on that, and that's 10% better than our previous record, and the vast Western Hemisphere record for the service provider that did that in Halliburton.

And so I think we're going to continue to see those improvements that are going to help with capital efficiency going forward, and we do know there's takes against that, that we'll need to build in that we've talked about, GoM was especially low this year, and we know that probably takes a little more capital to run the type of business we want to run their.

We've got other projects going on that could push that up, but those will be offset by some improvement. More to come on that in the future, but I do think, as we roll that out, we will talk about some of the benefits and then some of the things that may cause us to spend a little more capital in the short term.

But we definitely don't want to underestimate all the great things that teams are doing to get more efficient and get better results from the money that they spend. And I think that's what you saw in the first half of this year, is that rolling through, and hence why we could add activity compared to what we thought without increasing the capital budget.

[Phil Gresh, J.P. Morgan]

That makes sense. My next question I guess would be for Vicki. As you think about the EOR business moving forward, where would you say you are in terms of the opportunity to process anthropogenic CO2? And how should we think about the timing of potential updates from the Company as we look ahead say, the next 6 to 12 months around CCUS?

[Vicki Hollub, President and CEO]

Yeah, as you may remember, we have 2 billion barrels of resources yet to be developed in the enhanced or recovery business in the Permian and the conventional reservoirs. And so we're really excited about the fact that the low carbon business will provide us either very low costs or net 0 cost of CO2, so -- for those projects. But we see that the incremental for enhanced oil recovery will probably come closer to the time of getting the first Direct Air Capture facility online.

We still have access to organic CO2 and we'll have minor increases as we continue to expand phases within the Permian EOR business. But significant improvement and escalation will come as a part of our low carbon strategy.

And that will help to provide the low decline assets and production that we've been used to having in the past, which will help to offset some of the resources decline. It's a key part of our low carbon strategy, and it will be a key contributor and growth engine for us as we go forward beyond the implementation of the first [Indiscernible].

[Operator]

Thank you. And the next question will come from Paul Cheng with Scotiabank. Please go ahead.

[Paul Cheng, Scotiabank]

Hi, good afternoon. Two questions, please. First, Vicki, just curious. You guys are definitely one of the very efficient operator in Permian, and you have done a good job. And in the past that you have formed some joint venture essentially so that by trying to prove the value forward and by having someone to fund you.

But going forward, we feel balance sheets started getting in shape and cash flow getting better. If you look at opportunities there to talk to some of your peers, like Shell that -- to maybe pull the Permian asset together into a giant joint venture.

And you guys are telling they're not going to extract cash up funds, but just drive really great efficiency gain going forward that leverage your technical expertise here.

[Vicki Hollub, President and CEO]

I think that what you've said is a great idea. We always look at opportunities to do that. 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. And so we've -- the JV with Ecopetrol on the minum -- Midland Basin has been very successful for us.

We actually may look at additional JVs in the Delaware Basin to continue to accelerate what we're doing there and partnering with others where we can join forces and find ways to obtain synergies and to utilize our team for the execution part of it and the evaluation part, I think is a really good idea because I am so proud of our teams.

As Jeff said, I can't reiterate enough how they 've blown us away with the work that they've done that is not just at steady day-to-day; it's continuing to improve. As Jeff mentioned, the subsurface work goes beyond what I ever expected to see in the Shell play and they're now really pushing the technology envelope on how to model -- how to first evaluate, do the data analytics, and then model the surface production in the Shell reservoirs, and to know exactly where to land and how to frac and how to complete.

You combine that with the fact that our drilling and completion guys are continuing to set records. And I tell you, 3 years ago we'd not -- we'd not have predicted where we are today. And even last year, we wouldn't have predicted some of the things that are happening this year.

That's why when we talk about capital in the future, it's really hard to say what our sustaining capital would be because we didn't expect it to be 2.9 this year back when we looked at it 18 months ago. The progress made and pushing the envelope, being innovative, and really developing the leading edge part of the industry with respect to this kind of technology has been amazing.

I am so proud of the team. I'll say it again. I don't know of any other group that I've ever seen that could do this kind of work and continue to progressive. Thank you.

[Paul Cheng, Scotiabank]

Just [Indiscernible] Vicki, have you talked to any of your peers, the other CEO? I mean, because everyone seems to have a big ego and think their team is the best, but is that something that the industry is ready to do something like that?

Because it could be great for you and great for everyone actually, for the whole industry. Yeah, someone willing to -- they put aside their ego and do something like that.

[Vicki Hollub, President and CEO]

I think there has been some discussion --

[Paul Cheng, Scotiabank]

Let's assume that whether that is --

[Vicki Hollub, President and CEO]

Yeah. I don't want to mention names, but there has been some discussion around that. And I think that that is something that the industry is opening up too because we as an industry, we want to create value, 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 changed our paradigm about how business should be done. And I have had some conversations with other CEOs about exactly what you've said. And there are some open to it, some are not, but there are some open to that.

And 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.

[Jeff Alvarez, Vice President of Investor Relations]

Hey, Paul. If I could add, I think a lot of people forget our Permian position was built on one of those JVs. Basically, we bought the joint venture between what was Amoco Shell and then BP, and then ARCO, which was exactly that.

So a lot of the people in the Company are very well versed in the benefits that come from that and continually look for those opportunities. But that is the heart of our Permian operation.

[Operator]

Thank you. And the next question comes from Neal Dingmann with Truist. Please, go ahead.

[Neal Dingmann, Truist]

Vicki you want just follow on the ones you said earlier, I want to make sure I'm clear on this. You mentioned I think the proposal said there could be some coordination said between OxyChem and your de-carbonization business. I am just wondering what -- how you're thinking about that or how quickly you could -- something like this could occur?

[Vicki Hollub, President and CEO]

Well, OxyChem is already involved in the design of the Direct Air Capture facility. They will be a key part of the fan engineering and design that's happening today. We are doing the FEED study, so OxyChem participants are a part of that, and they're helping to drive that.

And we really want to leverage their expertise around the use of caustic potash and the need to use PVC products in the Direct Air Capture facility that's going to be a key part of some of the components going into it.

They will not only in this, but in potential, other kinds of processes in the future, but with respect to how to use the product. It's not just in the first Direct Air Capture facility. We believe also they have an R&D mindset, and they have a group that's been very innovative in the past around developing new ways to do things.

And Rob could speak more to that history if we had time. Maybe in the future, we'll have him do that. But right now, they are a key part of the Low Carbon strategy and give us a strength that others don't have in this regard.

[Neal Dingmann, Truist]

Got it. Got it. And then just my follow-up is just more on upstream activity. It appears despite your indication for stable U.S. activity going forward, it looks like you've slowed in the DJ from first to second half.

I am just wondering, is this more of a function of slower permitting or a shift of interest? I am just wondering that as, you see '22 -- would '22 be more like first half with more than 50 TILs, or more like second half this year with less than 25 TILs?

[Jeff Alvarez, Vice President of Investor Relations]

Yes, I think what you're seeing there when you look at Wells online, it's heavily influenced by the amount of docs we brought on early in the year. If you look at the activity set is relatively flat. We're basically running two rigs up there, one in the Powder, one in the DJ and the frac core.

That activity sets pretty consistent, but you're right, Neil, that you pointed out. We think we brought on 70% of the Wells, but that was heavily influenced. We brought on about a 100 docs late last year into the early part of this year. That's what's heavily influencing the Wells online number.

But the activity set is pretty constant, and the teams are continue to build Inventory so we can keep that activity set ongoing.

[Operator]

Thank you. And the next question is from Leo Mariani with KeyBanK. Please, go ahead.

[Leo Mariani, KeyBanK]

I just wanted to just jump in a little bit more on the direct air capture side of things here. Correct me if I'm wrong, but it's my understanding you have a pilot project coming on in the Permian sometime early next year.

I was just hoping to get a bit more information about that in terms of like, what type of capacity, in terms of tons of CO2 or whatever it might be able to pull out of the air, and maybe just a little bit more about what you hoping to achieve with that pilot.

[Vicki Hollub, President and CEO]

We're using the technology that was developed by Carbon Engineering, of which we're an equity owner. And Carbon Engineering has a pilot facility already in operation in Canada. So the pilot is already working, And so we'll be designing the facility that we build on the basis of that pilot.

And that's where OxyChem also comes into play because OxyChem has done this in the past. They've done pilots and then scaled up those pilots and they've done that very successfully, so they have experience doing this. But the one that we're going to build will be the largest Direct Air Capture facility in the world.

Currently, there are a couple of other different technologies that can capture CO2 from the air. Those other technologies -- the largest one that's built today captures about 4,000 tons per year. The facility that we intend to build in the Permian will capture 1 million tons per year.

So it's on the basis of taking that pilot, upscaling it and in the process, what we're also doing is we're working on the feed study, is there's a separate group working together to optimize the facility. So we're not wasting time to get it in operation and then see how it works. We're actually innovating as we build and as we look at the study for the engineering.

As we're doing that, we're innovating too. We expect that when we get into operation, it's going to be, when you think, certainly a better product than it would've been had we not involved both OxyChem in the innovation processes simultaneous to the FEED study.

[Leo Mariani, KeyBanK]

Okay. It's definitely helpful. And just can you remind us a little bit on the rough timeline to get that first project in place? And then additionally, is there a -- I think there was a plan to maybe fund that off-balance sheet. Or maybe looking more creative financing, can you maybe update us on where you are there?

[Vicki Hollub, President and CEO]

About the feed study, should be done and we should have final investment decision the early part of next year. And we hope to begin construction by the end of 2022 or beginning of 2023. It should be then online toward the end of 2023 or into 2024, though it will be up and running certainly by 2024.

The process around what we're doing to ensure that we get the right funding for it is we have been talking with partners and so we have multiple opportunities to bring in others who want to be a part of this. United Airlines has announced that they will be a part of our Direct Air Capture facility.

So they'll be not only contributing to the capital needed to build it, but they'll be taking the fuel from the facility. They are committing to an offtake of the low carbon fuel that will be provided by the CO2 that's captured from the air. There are multiple ways to fund it. There's -- one is to make an investment in the facility itself.

Second is to commit to taking the CO2 credits. Third is to commit to purchasing the oil that's generated from the CO2 that goes into enhanced oil recovery. We have several ways of financing the facility and so if we're -- we haven't finalized how we'll do that. We're working through that now and talking to a lot of interested parties. We should have more information on how we're going to do that by early next year. But it's a -- there's definitely a lot of interest in making this happen.

For the U.S. and for the world, Direct Air Capture needs to happen successfully and happen in a big way. And so that's generating the interest in the parties that want to be contributing to it and then get to participate in the results of it.

[Operator]

Thank you. In the interest of time, this concludes our question-and-answer session. I would like to turn the conference back over to Vicki Hollub for any closing remarks.

[Vicki Hollub, President and CEO]

I just want to thank you all for your questions and then for joining our call today.

[Operator]

And thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.