Occidental Petroleum Corp

NYSE:OXY

Earnings Call Transcript 2022-Q2

[Operator]

Good afternoon, and welcome to Occidental’s Second Quarter 2022 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, Jason. Good afternoon, everyone and thank you for participating in Occidental’s Second Quarter 2022 Conference Call. On the call with us today are Vicki Hollub, President and Chief Executive Officer; Rob Peterson, Senior Vice President and Chief Financial Officer; and Richard Jackson, President, Operations, U.S. Onshore Resources and Carbon Management. 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 will now turn the call over to Vicki. Vicki, please go ahead.

[Vicki Hollub, President and Chief Executive Officer]

Thank you, Jeff and good morning or good afternoon, everyone. We achieved a significant milestone in the second quarter as we completed our near-term debt reduction goal and activated our share repurchase program.

At the beginning of this year, we established a near-term goal of repaying an additional $5 billion of debt, before further increasing the amount of cash allocated to shareholder returns. The debt we completed in May brought the total debt repaid this year to over $8 billion, surpassing our target at a quicker pace than we had originally anticipated.

With our near-term debt reduction goal accomplished, we initiated our $3 billion share repurchase program in the second quarter and have already repurchased more than $1.1 billion of shares.

The additional allocation of cash to shareholders marks a meaningful progression of our cash flow priorities as we have primarily allocated free cash flow to debt reduction over the last few years. Our efforts to improve the balance sheet remain ongoing, but our deleveraging process has reached a stage where our focus is expanding to go to additional cash flow priorities.

This afternoon, I will cover the next phase of our shareholder return framework and second quarter operational performance. Rob will cover our financial results as well as our updated guidance, which includes an increase in our full-year guidance for OxyChem.

Starting with our shareholder return framework. Our ability to consistently deliver outstanding operational results, combined with our focus to improve our balance sheet, have positioned us to increase the amount of capital returned to shareholders.

Considering current commodity price expectations, we expect to repurchase a total of $3 billion of shares and reduce gross debt to the high teens by the end of this year. Once we have completed the $3 billion share repurchase program and reduced our debt to the high teens, we intend to continue returning capital to shareholders in 2023 through a common dividend that is sustainable at $40 WTI as well as through an active share repurchase program.

The progress we are making in lowering interest payments through debt reduction, combined with managing the number of shares outstanding, will enhance the sustainability of our dividend and position us to increase our common dividend at the appropriate time. While we expect future dividend increases to be gradual and meaningful, we do not anticipate the dividend returning to its prior peak.

Given our focus on returning capital to shareholders, it is possible that we may reach a point next year - turn to over $4 per share to common shareholders over a trailing 12-month period. Reaching and maintaining returns to common shareholders above this threshold will require us to begin redeeming their preferred equity concurrently with returning additional cash to common shareholders.

I want to be clear about two things. First, reaching the $4 per share threshold is the potential outcome of our shareholder return framework, not a specific target. Second, if we begin redeeming the preferred equity, this does not mean there is a cap on returns to common shareholders as cash would continue to be returned to common shareholders above $4 per share.

In the second quarter, we generated $4.2 billion of free cash flow before working capital, our highest quarterly free cash flow to-date. Our business has all performed well, and we delivered production from continuing operations of approximately 1.1 million BOE per day, in-line with the midpoint of our guidance and with total company-wide spending of capital of $972 million.

OxyChem reported record earnings for the fourth consecutive quarter with EBIT of $800 million, as the business continued to benefit from robust pricing and demand in the caustic, chlorine and PVC markets.

Last quarter, we highlighted the Responsible Care and Facility Safety Awards that OxyChem received from the American Chemistry Council. OxyChem’s accomplishments continue to be acknowledged.

In May, the U.S. Department of Energy honored OxyChem as a Better Practice Award winner, which recognizes companies for innovative and industry-leading accomplishments in energy management.

OxyChem received the recognition for incorporating an engineering, training and development program that led to process changes, resulting in energy savings that reduced CO2 emissions by 7,000 metric tons annually. It is achievements like this that make me so proud to announce the modernization and expansion of one of 09 key plants, which we will detail in just a minute.

Turning to oil and gas. I would like to congratulate the Gulf of Mexico team in celebrating first oil from the new discovery field, Horn Mountain West. The new field was successfully tied back to the Horn Mountain using a 3.5-mile jewel flow line. The project came in on budget and more than 3 months ahead of schedule.

The Horn Mountain West tieback is expected to eventually add approximately 30,000 barrels of oil production per day and is an excellent example of our ability to leverage our assets and technical expertise to bring new production online in a capital-efficient manner.

I would also like to congratulate our Al Hosn and Oman teams. Al Hosn achieved a recent production record following the first full plant shutdown as a part of a planned turnaround in the first quarter.

Oxy’s Oman team celebrated the record high daily production at Oman North Block 9, which has been operated by Oxy since 1984. Even after almost 40-years, Block 9 is still breaking records with strong base production and new development ledge performance, supported by a successful exploration program.

We have also been active in capturing opportunities to leverage our deep inventory of U.S. onshore assets. When we announced our Midland Basin JV with Ecopetrol in 2019, I mentioned how excited we were to be working with one of our strongest and longest-standing strategic partners.

The JV has worked exceptionally well for both partners, with Oxy benefiting from incremental production and cash flow from the Midland Basin with minimal investment. We are fortunate to collaborate with a partner who has extensive expertise and with whom we share a long-term vision.

This is why I’m equally excited this morning to announce that Oxy and Ecopetrol have agreed to enhance our JV in the Midland Basin and expand our partnership to cover approximately 20,000 net acres in the Delaware Basin.

This includes 17,000 acres in the Texas Delaware that we will utilize with infrastructure. And in the Midland Basin, Oxy will benefit from the opportunity to continue development with an extension to the capital carry through the end of this agreement in the first quarter of 2025.

In the Delaware Basin, we have the opportunity to bring forward the development of high-quality acreage that was further out in our development plans, while benefiting from an additional capital carry of up to 75%. In exchange for the carried capital, Ecopetrol will earn a percentage of the working interest in the JV asset.

Last month, we reached an agreement with Sonatrach in Algeria to enter into a new 25-year production-sharing agreement that will roll Oxy’s existing licenses into a single agreement. The new production-sharing agreement renews and deepens our partnership with Sonatrach, while providing Oxy with the opportunity to add reserves and continue developing a low-decline cash generating asset with long-standing partners.

Even with 2022 expected to be a record year for OxyChem, we see a unique opportunity to expand OxyChem’s future earnings and cash flow generating capabilities by investing in a high-return project.

On our fourth quarter call, we mentioned the FEED study to explore the modernization of certain Gulf Coast chlor-alkali assets and diaphram-to-membrane technology. I’m pleased to announce our Battleground plant, which is adjacent to Huston Ship channel and Dear Park, Texas as one of the sites that we will modernize.

Battleground is Oxy’s largest chlorine and caustic soda production facilities with ready access to both domestic and international markets. The project is being undertaken in part to respond to customer demand for chlorine, chlorine derivatives and certain grades of caustic soda that we can produce with newer technology. It will also result in increased capacities for both products.

The project is expected to increase cash flow through improved margins and higher product volumes, while lowering the energy intensity of the products produced. The modernization and expansion project will commence in 2023, with a capital investment of up to $1.1 billion, spread over three-years.

During construction, existing operations are expected to continue as normal, with the improvements expected to be realized in 2026. The expansion is not a prospective build as we have structurally advanced contracts and internal derivative production to consume the incremental chlorine volume, while caustic volumes will be contracted by the time the new capacity comes online.

The Battleground project represents the first sizable investment we have made in OxyChem since the construction and completion of the 4CPe plant and ethylene cracker that were completed in 2017.

This high-return project is just one of several opportunities we have to grow OxyChem’s cash flow over the next few years. We are conducting similar FEED studies for additional chlor-alkali assets and plan to communicate the results when complete.

I will now turn the call over to Rob, who will walk you through our second quarter results and guidance.

[Robert Peterson]

Thank you, Vicki, and good afternoon. In the second quarter, our profitability remained strong, and we generated a record level of free cash flow. We announced an adjusted profit of $3.16 per diluted share and a reported profit of $3.47 per diluted share, with the difference between the two numbers primarily driven by gains in early debt extinguishment and positive mark-to-market adjustments.

We were pleased to be able to allocate category purchases in the second quarter. To-date, we have purchased over 18 million shares as of Monday, August 1st, for approximately $1.1 billion or weighted average price below $50 per share.

Also, during the quarter, approximately 3.1 million publicly traded warrants were exercised, bringing the total number exercised to almost 4.4 million with 111.5 million remaining outstanding. As we said, when the warrants were issued in 2020, the cash proceeds received will be applied towards share repurchases to mitigate potential dilution to common shareholders.

As Vicki mentioned, we are excited to enhance and expand our relationship with Ecopetrol in the Permian Basin. The AB amendment closed in the second quarter with an effective date of January 1, 2022.

With maximizes opportunity, we intended to add an additional rig late in the year to support the JV development activity in the Delaware Basin. The additional activity is not expected to add any production until 2023, as the first Delaware JV wells will not come online until next year.

Similarly, the JV even is not expect to have any meaningful impact on our capital budget this year. We expect the Delaware JV and the enhanced Midland JV and to allow us to maintain or even lower industry-leading capital intensity in the Permian in 2023 onwards. We will provide further details when we provide 2022 production guidance.

Given that January 1, 2022 effective date and related working interest transferred to our JV partner in the Midland Basin, we have adjusted our full-year Permian production guidance down slightly.

Separately, we are reallocating a portion of the capital we earmarked for the OBO spending this year to our operated Permian assets. Reallocating capital operating activity will provide more certainty in our West delivery for the second half of 2022 and the start of 2023, while also delivering superior returns given our inventory quality and cost control.

While the timing of this change has a slight impact on our 2022 production, due to activity relocation in the second half of the year, the benefit of developing resources that we operate is expected to result in even stronger financial performance going forward. The update activity slide in the earnings presentation in Appendix reflects this change.

The shift in OBO capital, combined with the JV working interest transfer as well as various short-term operability matters, all contributed to a slightly lowering our full-year Permian production guidance.

The operability impacts are primarily related to third-party issues, such as downstream gas processing interruptions or EOR assets and other unplanned disruptions at third parties. For 2022, company-wide full-year production guidance remains unchanged, as the Permian adjustment is fully offset by high production in the Rockies and the Gulf of Mexico.

Finally, we note that our Permian production delivery remains very strong, with a growth of approximately 100,000 BOE per day when comparing the fourth quarter of 2021 through our implied production guidance for the fourth quarter of 2022.

We expect production in the second half of 2022 to average approximately 1.2 million BOE per day, which is notably higher than the first half of the year. Higher production in the second half of the year has always been an expected outcome of our 2022 plan, in part due to ramp-up activities and scheduled turnarounds in the first quarter.

Company-wide third quarter production guidance includes continued growth in the Permian, but considers the potential for tropical weather impacts in the Gulf of Mexico, combined with third-party downtime and production decline in Rockies given our lower activity set as a result of relocating a rig to the Permian.

Our full-year capital budget remains unchanged. But as I mentioned in our previous call, we expect capital spending to come in near the high end of our range of $3.9 billion to $4.3 billion. Certain areas that we operate in, especially the Permian, continue to experience higher inflationary pressures than others.

To support activity in 2023 and address the regional impact of inflation, we are reallocating $200 million of capital to the Permian. We believe our company-wide capital budget is sized appropriately to execute our 2022 plan, as the additional capital for the Permian will be reallocated from other assets that have been able to generate higher than expected capital savings.

We are raising our full-year domestic operating expense guidance to $8.50 per BOE, which accounts for higher than expected labor and energy costs, primarily in the Permian, as well as continued upward pricing pressure on our WTI index CO2 purchase contracts in the EOR business.

OxyChem continues to perform well, and we have raised our full-year guidance to reflect the exceptional second quarter performance as well as a slightly better than previously expected second half of the year.

We still see the potential for market conditions to dampen from where we are today due to inflationary pressures, though the long-term fundamentals continue to remain supportive and we expect third and fourth quarters to be strong by historical standards.

Turning back to financial items. In September, we intend to settle $275 million of notional interest rate swaps. The net liability or cash outflow required to settle these swaps will be around $100 million of the current interest rate curve.

Last quarter, I mentioned that as WTI averages $90 per barrel in 2022, we would expect to pay approximately $600 million in U.S. Federal cash taxes. Oil prices continue to remain strong, increasing the possibility that WTI may average unit higher price for the year. If WTI averaged $100 in 2022, we would expect to pay approximately $1.2 billion in U.S. Federal cash taxes.

As Vicki mentioned, year-to-date, we repaid approximately $8.1 billion of debt, including $4.8 billion in the second quarter, exceeding our near-term goals for paying $5 billion in principal this year.

We have also made meaningful progress towards our medium-term goal of reducing gross debt to the high teens. We began repurchasing shares in the second quarter, further advancing our shareholder return framework as part of our commitment to return more cash to shareholders.

We intend to continue allocating free cash flow towards the share repurchase until we complete our current $3 billion program. During this period, we will continue to view debt retirement opportunistically and will likely retire debt concurrently with share repurchases.

Once our initial share repurchase program is complete, we intend to allocate free cash flow towards reducing the face value of debt to the high teens, which we believe will accelerate our return to investment grade.

When we reach this stage, we intend to reduce the emphasis of our allocation of free cash flow from primarily reducing debt by including initial items in our cash flow priorities. We continue to make incremental progress towards achieving our goal of returning to investment grade.

Since our last earnings call, we just signed a positive - to our credit ratings. All three of the major credit rating agencies rate our debt as one notch below investment grade, with Moody’s and Fitch having assigned positive outlooks.

Overtime, we intend to maintain mid-cycle levered at approximately one time debt-to-EBITDA or below $15 billion. We believe this level of leverage will be appropriate for our capital structure as we will enhance our equity returns, while strengthening our ability to return capital to shareholders throughout the commodity cycle.

I will now turn the call back over to Vicki.

[Vicki Hollub, President and Chief Executive Officer]

We are now prepared to take your calls.

[Operator]

[Operator Instructions] The first question comes from John Royall from JPMorgan. Please go ahead.

[John Royall, JPMorgan]

Hey good afternoon guys. Thanks for taking my question. So can you talk about the various moving pieces in the CapEx guidance. I know that you raised the Permian number, but kept the total the same. So what are the areas that were the source of funds for that raise? And then any early look into some of the moving pieces for next year with this new FID for Chems and then the change in structure with Ecopetrol? Anything you can give us on kind of the puts and takes going into next year would be helpful.

[Vicki Hollub, President and Chief Executive Officer]

I will let Richard cover the changes in the CapEx and then I will follow-up with the additional part of that question.

[Richard Jackson]

Hey John, this is Richard. Yes, so a few moving pieces as we look across the U.S. onshore. And as we look at it, a couple of things occurred during the year. I think, first, from an OBO perspective, we had a wedge assumed in our production plan. And early in the year, that became a bit slower in terms of delivery.

And so we went ahead and made the move to reallocate some of that capital into our operated, which did a few things. One, it secured that production wedge for us, but it also added resources for the back half of the year to give us some continuity on the back half of the year.

We like that we did that. As Rob mentioned in his comments, these are high-return projects that are very good. So that was a good move. And then securing some of those resources early in the year in terms of rigs and frac core has played out well in terms of our timing to manage inflation and improve performance as we hit this ramp-up for the back half of the year.

The other piece of that, so step two is really a reallocation from Oxy. And so part of that is coming from LCV. We can talk in more detail on that if we need to. But that is really - as we hit the back half of the year, we look to be coming in closer to midpoint for low carbon ventures.

That is really just more certainty around the direct air capture development in some of the CCUS hub work that we have got in place. And so that plus, I think, some other savings around the rest of Oxy really contributed to that balance.

So if you think about that extra 200, I would say 50% of that is really around activity adds. So we were a bit front-end loaded in our plan for the year. That allows us to take that capital and keep continuity, especially across drilling rigs, which will give us optionality as we go into 2023.

And then the other piece is really around inflation. We have seen that pressure on that. We have been able to mitigate a large piece of that. But we have outlooked an additional 7% to 10% sort of outlook compared to plan on the year.

We have been able to again make up an incremental 4% of that in operation savings, so pleased with the progress against that. But we did start to see some inflationary pressures come up. And so that capital helps address that uncertainty, I would call it, for the rest of the year.

[Vicki Hollub, President and Chief Executive Officer]

I would say on capital for 2023, it is still way too early for us to determine what that would be. But the Ecopetrol JV would fit into the resources allocation, and we will compete with the capital within that program.

[John Royall, JPMorgan]

Okay. Great. And then switching over to chemicals. If you guys could just talk a little bit about the fundamentals in that business, coming off a very strong 2Q, but a big step down in guidance for the second half. So if you could just give some color on the source of the strength in 2Q and what you see changing in the second half?

[Robert Peterson]

Sure, John. I would say conditions in both the vinyls and caustic soda business that are largely the ones that determine how we perform overall. In Chemicals, they were obviously very favorable in the second quarter. And when we see both conditions - both businesses and favorable points, you have the significant earnings impact leading to the record performance we had in the second quarter.

If you go into the third quarter, I would say, the extreme tightness that we have been experiencing for quite some time in the Vinyls business has become more manageable. And that’s really from improved supply and some softening in the domestic market, while conditions in the caustic soda business remain very strong and continue to improve.

I would say the macroeconomic conditions are still indicative that when you look at interest rates, housing to GDP, they are kind of trading unfavorably, which is why we talked about a softer second half relative to the first half.

But we are also entering a very unpredictable time of the year being the latter part of the third quarter here in terms of weather, which can certainly upset supply or demand either way. And so this is - it is very difficult to look out very far as we enter the very beginning of the hurricane season or the peak of hurricane season.

And the other thing I would say that has impacted the business a bit that we are trying to incorporate into the outlook is the Chinese shutdowns related to COVID, sort of the no-COVID tolerance policies is backing up their demand in terms of needs for chemicals and pushing other Asian chemicals into other parts of the world, including impacting exports from the U.S.

And so there is a bit of a softening there effect. But again, these are all things that can be modified relatively in a short basis if something were to change in either of those. But because of that, macro trends and our normal seasonal declines you would see in the fourth quarter in the business, we are projecting a softer second half of the year onto the first half of the year.

But again, what we are projecting is quite strong by historical standards. Even the guidance for the third quarter as it is now would have been historically a decent year in many years for the Chemicals business, let alone a quarter.

Overall, when we look at business on PVC, we are still seeing growth year-over-year. Domestic demand is up almost 6% through June. And PVC demand, including exports from the U.S., total demand is up about 4.5%.

The chlorine side of the business, we are still seeing growth of 3% to 4% this year. All the market sectors remain strong. There is still a lot of pent-up demand, as you can imagine, coming off of the last two years. But those are all areas in durable goods, et cetera, where we can see impact from interest rates, inflation, disposable income, et cetera.

So again, part of it is just trying to forecast what that might look like, doing the same else is doing right now, trying to gauge the depth of a potential recession and the impact on demand. But overall, still a very favorable conditions in the business, but just not as favorable as they were in the second quarter.

[Operator]

The next question is from Raphael DuBois from Societe Generale. Please go ahead.

[Raphael DuBois, Societe Generale]

Thank you for taking my questions. The first one is related to Algeria. Now that you have signed this 25-year contract extension, I was wondering if you could maybe give us some better color on what is the production potential for Algeria and whether there is a change in the mix between liquids and gas that we should be expecting?

[Vicki Hollub, President and Chief Executive Officer]

Currently, under the agreement that we signed, we will be producing basically oil production with associated gas. And primarily from the fields, we have already been developing just expanding those out.

So I would say that from the standpoint of our production outlook currently, it is going to look a little bit lower next year than it looks this year because of the structure of the contract. But our cash flow is going to be approximately the same. So it is just based on the terms.

And we have a lot of potential, we believe, in the existing fields to continue to develop those out. So the remaining reserves that we will be able to add as a result of just the contract extension will be about 100 million barrels.

Other than that, there is a lot of potential for further evaluation. So we have included the 3D seismic survey as a part of the evaluation, so that we can start to better increase our recoveries from those conventional sales, because they are all relatively low decline and supported with gas injection and potentially ultimately some CO2 injection.

Gas is not a part of what we are developing over there yet, but could be in the future, should there be an opportunity for us to find it commercially competitive with the other projects that we have internally.

[Raphael DuBois, Societe Generale]

Great, thank you. And my follow-on question would be about chemicals. This Battleground CapEx project that you have announced, you said earlier that you would have more plans that you will consider for modernization. When could we hear about the next one to be modernized and could you maybe remind us of the capacity of Battleground so that we can have a feel for the CapEx intensity of such project and what we could be expecting going forward for other projects.

[Robert Peterson]

Sure, Raphael. So we have talked about potential conversions beyond the Battleground project. So at this point, we have made the decision to move forward with the Battleground conversion as indicated in the remarks.

We will continue to operate the facility throughout the construction process or maybe some short periods or I think very short outages for important connections between existing and infrastructure and facility.

We are confident throughout that process, we can build inventory and continue to lower product with no impact own customers. And so as you think about the Battleground process, you should not assume any loss of sales or margin during the actual project itself.

So when you look at the other facilities, once we convert the Battleground facility, we already have membrane technology and polyramics, which is a non-asbestos type diaphram technology, at our Wichita and Geismar facilities. And we are in the process right now of making a conversion change at our TAS facility to polyramics.

So the announced project, that will not only convert Battleground but increase its capacity by 8%. We will only leave our Convent Ingleside facilities utilizing asbestos diaphram. And we will begin the conversion studies on those as we get further underway with the actual Battleground conversion. We will do them sort of in series together.

We won’t wait for one to be completed to make a decision on the other, but we will sort of stagger them together. But obviously, what we are going to do with those facilities isn’t as pertinent as to moving forward the Battleground project right now.

And so from a capital intensity standpoint, we don’t provide individual capacities of our facilities. But what I would say though is that the amount - cost of $1.1 billion that we have included in the slide deck, I would not use that as a proxy necessarily that for the other two facilities.

The facilities are all individually unique. They are not only from different sizes and capacities in the facilities, but they all have different equipment associated inside and outside battery limits. They have different conversions will go on with them.

In addition that at this stage, as we mentioned, the Battleground facility expansion is determined also with existing contractual obligations we have secured for the chlorine side of the business, the derivative side of the business moving into the project.

We are not expanding the project, hoping to get additional demand for those molecules are already sold in the future. At this time, we don’t have needs to expand either our Convent facility or Ingleside facility.

So at this stage, if we were to proceed with an FID decision on one of those, it would simply be a conversion of process change. And so it would be difficult to take that and certainly wouldn’t multiply that number times three and come up with a number for those other two projects to be included in that.

And so as we get further along with the Battleground project, we will start sharing ideas on subsequent changes in the future. But this time, the only decision we made is to actually move forward with Battleground one.

[Jeff Alvarez, Vice President of Investor Relations]

Raphael, this is Jeff. I would add one thing to what Rob said. The EBITDA number we have provided would be the way I look at that as more of a mid-cycle EBITDA, not at current pricing or current marketing conditions. So you can use that for your estimates.

[Operator]

The next question comes from Devin McDermott from Morgan Stanley. Please go ahead.

[Devin McDermott, Morgan Stanley]

Good afternoon. Thanks for taking my questions. So I wanted to ask on low carbon ventures. One of the moving pieces in the cap guidance this year was LCV spend coming in toward the midpoint. I was wondering if you could just talk a little bit more broadly about the progress you have been making towards some of the milestones that you set forth earlier this year. And as part of that, the Inflation Reduction Act that is recently been introduced has some supportive language in there for carbon capture and also direct air capture. Can you talk about if that were to move forward, how that might impact the cadence of investment over the next few years?

[Vicki Hollub, President and Chief Executive Officer]

Devin, I will start, and then pass it over to Richard. And while we are on the Inflation Reduction Act, I just want to cover a little bit more about what is in there. There is a lot of things in there, ranges from alternative fuels to renewable energy, EVs, hydrogen, methane emission, reduction and carbon capture use and sequestration.

But some of the things that impact us are on federal land, oil and gas royalty rates increasing, increased minimum bid rates for leases, increases in annual rental rates, but not excessively and increasing bond requirements, also offshore royalty rate increases.

And one of the good things is that it does require oil and gas lease sales ahead of granting right of ways to wind and solar. It requires royalties in oil gas produced, whatever it is used for, unless it is played for safety reasons or used for the benefit of the lease.

But one of the interesting things about the act is that it reinstates the lease sale [2.57] (Ph) from the Gulf of Mexico in which we had gotten some key leases. And so that is really important for us as a company. The other thing is that it requires the resumption of the scheduled lease sales for the - from 2017 to 2022.

And with respect to carbon capture, which is probably the most impactful to us, is there are a lot of things around the enhancement to 45-Q. And when you look at the Gulf of Mexico benefit to us and you look at the requirements for the methane emissions and emission reductions and that sort of thing, which are things we already were doing, this is turning into for us a net very positive bill should it get passed.

So I will turn it over to Richard, so he can give you a little more color on what the CCUS enhancements are.

[Richard Jackson]

Yes. Hi Devin, let me start with just a few kind of progress points on both our direct air capture and CCUS and then get a couple of specifics on, like Vicki said, how this can potentially help our development plans.

I think from direct air capture, the critical pieces are continuing to move well. I think from a technology and engineering standpoint, we were able to finish FEED. We are on track and plan to begin construction by the end of this year.

And we are really taking that FEED and working hard on putting together specific bid packages and being very thoughtful about the supply chain behind that as we go into the end of the year. So we are spending time with that.

From a market support, continue to have very strong support from the carbon dioxide removal in terms of the sequestered CO2 offtakes. And so continue to see good movement on that. Obviously, the policy support couples with that to help really backstop our development plan.

And then in terms of capitalization, as we continue to derisk, we are thoughtful on how to think about capitalization not only for Plant One, but beyond and continue to see and know that those partnerships will be meaningful.

And so really, on that piece, for the end of the year, again, looking to start construction, finish detailed engineering and then work our innovation work streams. We have got our innovation center with carbon engineering going, seeing really good progress there, lots of pieces in learning.

Again, four Plant 1. But I think one of the things we picked up in that facility is really thinking about how do you continue to reduce the cost to capture for the life of a plant. And so it provides a lot of opportunity for that.

Just briefly on the CCUS hubs, we continue on our three really focused areas on the Gulf Coast. We have been able to secure now over our 100,000-acre target for poor space development. Very pleased with that, lots of great engagement with emitters.

And then we had the announcements, I think we picked up on the last quarter with our midstream partnerships to be able to retrofit or think about moving that CO2 efficiently within those hubs. So that goes well. Expect more updates on both of those as we go into the year. Lots of dynamics, I would say, over the last quarter. And so we will put that into plans for 2023 and beyond that we will communicate.

So just lastly, in terms of some of the policy that plays our way. I think for us, we think about that, we communicated it in our LCV update. It is really an acceleration capability for us. It gives certainty in some of the revenue to allow us to build this development, which is good.

Because the important part of making this business work is really on us. We have got to improve the technology. We have got to lower the cost and we have got to develop our manufacturing and project development success.

And so having certainty to be able to accelerate that development plan, we believe, allows us to reduce those costs quicker and it creates a sustainable business sooner. And so when you look at both a business and emissions reduction over the next several years, we think this could be complete very meaningful.

Longer runway to be able to develop that scale is contemplated in the language, obviously, increased value support that aligns with a lot of CCUS work done collectively around the world to kind of pick what needs to happen to create this catalyst and so very thoughtful alignment there.

And then the final thing is, I think, importantly, recognition for all sources. So point source from industrial or power sector emissions, but carbon removals and direct air capture specifically recognized. And then for the collective CCUS community, recognition of small and large sources I think is important.

And so they were very inclusive to capture both the small and large. And that is good for us and what we are doing, but that is good for other developers. And so I think it really does create the economies of scale that we hope and plan for to make this commercially successful.

[Vicki Hollub, President and Chief Executive Officer]

Just to conclude on that, I would say that the federal leasing onshore/offshore the methane emission reductions in carbon capture. While we talked about what it does for Oxy, this is very good for our industry. Lots of companies will benefit from this. It will provide jobs and it will help the country meet the goals that the President has set out for our emission reduction.

[Devin McDermott, Morgan Stanley]

Thanks for all the detail and a lot of positives to look forward to there. My second question is just on inflation. You mentioned in the prepared remarks that you have been able to take some steps to offset inflationary pressure. I was wondering if you could talk a little bit more on the underlying inflationary trends and also the offset initiatives that you have in place?

[Vicki Hollub, President and Chief Executive Officer]

Yes. We had originally assumed $250 million for our 2020 - based on our 2020 actual, that incremental of $250 million this year. Our current assessment is $350 million to $450 million. And unfortunately, for Richard, it is all falling in this area. But they are dealing with it very well. I will pass to him to give you the details.

[Richard Jackson]

Yes. Perfect. Thanks, Vicki. Yes, just to walk through that, I mean, a couple of things. Certainly, we have seen that 7% to 10% incrementally for us this year. But in our base plan, we had assumed a 2% offset and we are now up to 6%.

And so part of our strategy, and I will talk there a couple of pieces on this whole thing was securing quality resources. If we get into the production cadence for the second half of the year, that delivery schedule and performance is very important. And so working with the right vendors to secure that has been important for us.

But let me just rattle off a few. Like most people, OCTG has seen some of the highest sort of inflationary pressures. We work with one key supplier and one distributor for that. And so when we think about sort of inflation, you think about what is the supply security and then what is the pricing.

The supply security, we feel good out a year and really have worked that hard over this year, developing in core areas like we do gives us a lot of ability to do that. In the pricing, we secure out about six-months. And so we feel good going into the end of the year and then into 2023, that we are timing that fairly well in terms of how that looks.

Rigs and frac core, as I mentioned earlier, securing some of those operated resources. Shifting the OBO dollars allowed us to get in front of that and get, again, the right rigs and frac cores for that.

We are contracted with a little over 50% of our rigs through the first part of next year. And our frac cores similar as we look out. And so feel good about that, but we have really narrowed again to the core frac and rig providers that we feel like can secure performance.

And then finally sand, again, we have worked a lot on that. I think, one, we have gone to more integrated frac providers, and they continue to help us on logistics and sand supply. But then our sand supplier, our logistics facility in Aventine has allowed us to get ahead on that. And so we feel like supply is secured in most of our prices secured through the second half of the year.

So those have been the big areas that have moved up for us. It has definitely been drilling and completion focused facilities has seen a lot less - 5% OpEx, a lot less as well. So hopefully, that provides some detail in terms of what we have been doing.

[Operator]

The next question comes from Doug Leggate from Bank of America. Please go ahead.

[Douglas Leggate]

Thanks. Good afternoon everybody. Vicki or Rob, I wonder if I could go back to the discussion around potentially being a bit more aggressive than a $4 cash return in 2023 and I guess my question is, where do you see the - I guess, the flexibility regarding trying to pay down the preference burden, I guess, the $10 billion, versus continuing to pay down debt? What is the trade-off between those two, if you could try and frame it for us. I guess I’m trying to understand how much more than $4 per share you would be prepared to go.

[Vicki Hollub, President and Chief Executive Officer]

Doug, it really depends on the macro. Right now, we are really trying to - we can’t even forecast from one hour to the next or even minutes, one minute to the next what prices are going to be. So a lot of our strategy around the preferred would depend on the macro because of - as you know, the terms of the deal are challenging if not planned out in a way that enables you to take advantage of the trigger point.

So currently, we are really trying to assess what the macro will look like, and we are going to be prepared to make the best value decision, whether that is continued debt reduction along with preferred and along with common.

But right now, the reality is that from our capital framework, we have always had a priority to reduce debt. We will continue to do that. And we will do that at a faster pace than the maturities. We just don’t know how fast we will do it.

And with respect to the preferred, it really depends on what we see getting through the end of this year and looking into next year what the macro will be, whether the recession, if there is one, will be short or long or deep and what the other opportunities may look like from a debt perspective, and that could depend on what inflation does.

[Douglas Leggate]

I appreciate the answer, Vicki. And I’m going to stay with you, if I may, as a quick follow-up. So before things got crazy over the last couple of years, you had talked about low single-digit growth in production. And of course, the priorities all changed with the balance sheet. So as you kind of get line of sight to the balance sheet and back to perhaps where you want it to be, what are you thinking now in terms of what happens to the growth element of prioritizing in terms of where you relatively prioritize capital? And I will leave it there. Thanks.

[Vicki Hollub, President and Chief Executive Officer]

Well, the good thing is what we see that we have today is a great opportunity and that is that we don’t have to grow our cash flow right now. And we have an opportunity because of the evaluation of our stock right now to continue to make that a key part of our value proposition going forward.

We will do a little bit of dividend increase. We will certainly mature our debt faster than what the current schedule is in terms of maturities because we want to accelerate that. But we will also buy back a significant volume of shares, or at least we hope, to over the next few years. And we don’t feel the need to grow production until we get beyond that point, because we feel like one of the best values right now is investment in our own stock.

[Operator]

The next question comes from Neal Dingmann from Truist. Please go ahead.

[Neal Dingmann, Truist Securities]

Vicki, maybe just to follow on that last one. on M&A, are you saying that sort of given the current upstream midstream in OxyChem, you will likely stand pat with either you don’t really obviously need to divest anything and still the best spend on the money in livestock, would it be fair to say the biggest M&A might be coming from the low carbon area?

[Vicki Hollub, President and Chief Executive Officer]

Yes, I think that the only M&A that we see that would make sense for us is what we have been doing, and that’s just to get bigger in the areas that we are. So increasing our working interest and/or trading acres for bolt-ons to where we are right now in the resources business and in the EOR business. So we have opportunities to do that. We picked up a little bit offshore. So that’s - those are the kind of M&A.

So we are not talking big M&A here. That is not something that we feel like we need to do. But with respect to low carbon ventures, that is a bit of a different story because we are growing a business there. And what we are doing there is looking for technologies that fit within our strategy and that support our strategy.

We are not going to take the shotgun approach, where we are putting dollars into 100 different little small tech companies. We are looking for technologies that make our strategy better. And where we find those, we are going to make equity investments when we feel it’s a part of what we want to build ultimately.

I think the team has spent with just about $200 million, they have gotten us into two technologies, I really think are revolutionary. One is NetPower, which generates electricity at a fairly low cost, lower than a traditional gas plant with carbon capture. So that power technology generates electricity, but also captures the emissions. So there are no emissions and no volatile organics or anything like that.

So NetPower is really important for us. And then direct air capture. Back to NetPower, it is going to be revolutionary, I believe, for the electric power generation industry around the world. So that is the technology that is critically important direct air capture is to. And we are looking at some other technologies.

There are a few things that we are putting money into that we believe has a real chance to improve our business. And those are - that is the way we kind of look at investments and to carbon opportunities.

[Neal Dingmann, Truist Securities]

Okay. And then one last one for either Robert or Jeff. Maybe just on the preferred, is there any conversation about maybe just direct repurchase of those given obviously the same firm mind. Obviously, a lot of equity in the company. I’m just wondering is there - or is that just going to be countered by this, find back as you would your debt and all.

[Vicki Hollub, President and Chief Executive Officer]

It is really going to be a part of a more comprehensive evaluation as we go forward. So we will look at that as time passes, and we will certainly keep you guys updated. But what we intend to do is make the best value decision and proceed with the capital framework that we have laid out.

[Operator]

Next question comes from Jeanine Wai from Barclays. Please go ahead.

[Jeanine Wai, Barclays Bank PLC]

Hi good afternoon everyone. Thanks for taking our questions. Our first question, I guess, maybe heading back on cash returns and a follow-up and a couple of the other questions. The plan for 2023-plus now is to retire debt maturities as they come due. We are looking at your debt schedule, and there is really nothing more than like $2 billion coming due in any one-year. So super manageable until 2030. You have got cash building on our model to, call it, like $12 billion on strip by the end of the year. So lots of options. You had some helpful comments on the macro governors on how you are going to allocate capital over the next year or two. Do you have an updated view on your reserve cash level? We realize there is a lot of reasons to hold cash above that, but that is always a helpful number for us.

[Vicki Hollub, President and Chief Executive Officer]

Yes. Before I pass that to Rob for the answer to that question, I just want to say that you are right about our debt maturities. So we expect this year to be able to lower our debt based on what we see from the macro by another $2 billion to $2.5 billion, which would get us close to $18 billion.

Then to get us down to the $15 billion that Rob mentioned in his script is that we would have - those maturities would come due, all of them, before August, end of August of 2025. We don’t want to wait three-years to get our debt down to $15 billion.

So we would expect to, assuming the macro allows to cut that considerably. We do want to get to the $15 billion sooner rather than later. So we will fit that in. And that is still a priority for us. I will pass it to Rob now for the other question.

[Robert Peterson]

Yes, Jeanine. And so certainly based on what Vicki just said and the fact for target, we should be able to do well beyond $1.9 billion left we have for the balance of the year on the share repurchase program, assuming the macro is consistent or relative to the strip prices right now.

And part of targeting that will be some of the maturities you listed off. But we have been able to opportunistically balance between short- and long-term debt maturities. As we move on year-to-date, it is about 45%. In the current decade, about 55% later in the -.

And so we continue to be opportunistic between knocking out near-term maturities, including ones that are higher interest rate coupon ones now because of the way they have come down interest rates, but also achieving discount on longer-dated bonds. So you can expect that mix to stay together.

As far as cash reserves, certainly with a very manageable debt maturity profile, we have been holding higher cash levels. Historically, we ended last year about $2.5 billion. I think we would be comfortable with something closer to 1.5 by the end of this year, providing another certainly $1 billion of cash to work with this year just from the reduction on reserves.

[Jeanine Wai, Barclays Bank PLC]

Okay. Great. thank you that is very helpful. Maybe if we could turn to operations and the Permian. You probably provided some really helpful color on the Q3 Permian guide in your prepared remarks. And the implied 4Q Permian guidance calls for, I think we calculated 12% increase quarter-on-quarter to hit the midpoint. And it sounds like from your comments, there are some third-party stuff that is going on that may come back online in Q4, which will help. But any comments that you have around kind of how you try to stack the deck in your favor on execution in Q4 in the Permian that would be really helpful just because I think a lot of people are looking at the Permian at the end of the year and trying to figure out implications for next year. Thank you.

[Richard Jackson]

Yes. I appreciate it. Well, there are a few pieces. You are exactly right was we thought about sort of this building security in our production delivery for the year. There are several pieces that were important to us.

If I go back even to where we started and entered the year from a rig count perspective, we have added - if you go back second half of 2021, we went from about 11.5 rigs to the first half of this year, over 2015 to second half of the year at 2019. And so being able to secure those operated rigs early to get the performance was really important to us.

So same thing in the back half of this year. If I look at first half versus second half, we look to add about 78 more wells online compared to the first half. So a tremendous step-up in activity. We are able to utilize our frac cores more efficiently with the development plans that we have put together. We are adding on additional in the second half of this year, but we are really creating much more smooth operations with what we have done and transition with that OBO capital.

And I guess the pieces I would point to, what has been important to us operationally is getting back to performance. Most of the capital for the second half of the year and the production deliveries in the Delaware, we have about 80% of those wells that are coming online are Third Bone Springs to Wolfcamp A. So it derisks a lot in terms of that production delivery. We have added lateral length. We are 1,000-foot longer compared to last year to when they look at the second half of this year.

Our 24-hour IP is about 14% better than the first half of last year. And so all of that has added in terms of derisking the second half of the year. Drilling completion efficiencies improved. Our feet per day is up quarter-to-quarter about 10%. Our nonproductive time is reduced about 7% in the Delaware.

And so what we have seen is we have added these rigs, we have been able to work as an operational team. The performance continues to improve. And we are looking at the second half of the year, expecting about a 10% time-to-market improvement with those operations.

So put a lot of pieces in place in the first half of this year, now we just need to go execute. But really, the plan has been built to achieve that production growth you noted, and we are well on our way.

[Operator]

The final question comes from Neil Mehta from Goldman Sachs. Please go ahead.

[Neil Mehta, Goldman Sachs Group]

Yes good afternoon team. The first question is just the path to investment grade. Can you provide any color in terms of the milestones that you are going to in order to achieve that? How should the investment community think about timing recognizing out of your control? And what would get into investment grade mean to your business?

[Robert Peterson]

Yes, Neil, sure. So year-to-date, as we mentioned, we paid $8.1 billion of debt, certainly far beyond the $5 billion initial target we established for the year. And included in that, in the second quarter, we knocked out 50% of what I would call the annual risk associated with our zero coupon bonds that was occurring every October. If you look back to July of last year - or June of last year, we retired almost $15 billion of debt. So very meaningful progress on the debt reduction side of it.

But in addition to the debt reduction, all three agencies have their own other metrics, I will call them, the return IG. And so they are all sitting, as we discussed, one notch below. Our forecast that we have internally have us exceeding the majority of these criteria before the end of the year or, in many cases, we are actually ahead of now on the last 12-month basis.

But the conversation we have been having with the agencies would suggest, I just want you to get more comfortable, that in a different oil price environment and all of the agencies have long-term oil prices well below corn oil prices that they would be comfortable that we would not slip back into being a high-yield type credit.

But again, like I said, like Moody’s, for example, they want to look at retained cash flow to adjusted debt to be greater than 40% and essentially the retained cash flow exclusive preferred dividends. But the adjusted debt does include half of the Berkshire. So the Berkshire does factor into that. And so we are well ahead of that forecast. And even we are adjusting for Moody’s price forecast relative to ours.

And in the case of Fitch, I will give you an example. They also look at our sort of mid-cycle funds from operation it just covered - 5.5 times. The preferred is excluded from the funds flow, but it is included in interest expense. We are going to be well over 5.5 times certainly this year by year-end.

And so I think on a lot of these statistics, we are passing through these very rapidly probably much more in rapidly than we suspected or the agencies suspected. We are having very constructive conversations with them and making sure that the decisions we are making are contributing towards that.

As you said, we don’t have ultimate control over when that occurs, but comfortably looking at all of the various metrics that they have shown in us relative to our financial policy and metrics. I feel confident that we would be in good stead with all those toward the end of the year.

We have a gap with S&P’s expectations on reported debt, but that is really the only one that we are going to have a significant gap in right now. But certainly with Fitch and Moody’s, I’m confidence on those two agencies that what they laid out for us explicitly in terms of metrics that we can meet thus far at the end of the year.

[Operator]

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 Chief Executive Officer]

Just want to thank you all for your participation in our call today, and have a good day. Thanks.

[Operator]

This conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.