Earnings Call: Q4 2013

Jan 30, 2014

Morning and welcome to the Occidental Petroleum Corporation 4th Quarter 2013 Earnings Conference Call. All participants will be in a listen only mode. After today's presentation, there will be an opportunity to ask questions. I would now like to turn the conference over to Mr. Chris Stavros. Please go ahead. Thank you, Emily, and good morning, everyone. Thanks for participating in Occidental Petroleum's 4th quarter 2013 earnings conference call. On the call with us this morning from Houston are Steve Chasen, Oxy's President and Chief Executive Officer Vicki Hollub, Executive Vice President of Oxy's U. S. Oil and Gas Operations Cynthia Walker, our Chief Financial Officer Willie Chang, Oxy's Vice President of Operations and Head of our Midstream Business Bill Albright, President of Oxy's Oil and Gas in the Americas and Sandy Lowe, President of our International Oil and Gas Operations. We're going to change things up a bit this quarter and begin the call with comments from our CEO, Steve Chasen, who will review some of the achievements we realized last year with respect to the fundamentals of our business and our strategy and plan for 2014. Vicki Hollub will then provide a thorough discussion on the strategy and outlook for our operations in both the Permian Basin and California. In order to provide a little more time for discussion around our domestic oil and gas operations, we will not directly address our 4th quarter results on the call. However, Cynthia Walker's detailed commentary on the 4th quarter as well as forward looking guidance items can be found in the conference call slides sent to you following Vicki's remarks and beginning with Slide 46. As a reminder, today's conference call contains certain projections and other forward looking statements within the meaning of the federal securities laws. These statements are subject to the risks and uncertainties that may cause actual results differ from those expressed or implied in these statements in our filings. Our Q4 2013 earnings press release, Investor Relations supplemental schedules, conference call presentation slides as well as Cynthia's detailed commentary on the 4th quarter results have been posted and can be downloaded off of our website at www.oxi.com. I'll now turn the call over to Steve Chasen. Steve, please go ahead. Thank you, Chris. We just finished a successful year meeting or succeeding many of the goals we set out for ourselves and are looking to continue our performance in the 2014. Let me give you a brief overview of the key 13 highlights. We grew our domestic oil production by 11,000 barrels per day over 2012 to 266,000 a day. We exceeded our capital efficiency goals reducing our drilling costs by 24% from the 2012 levels, reduced domestic operating costs by 17%. We added about 4 70,000,000 barrels of reserve equivalents achieving overall replacement ratio of 169%. Our total costs incurred associated with those reserve adds were about $7,700,000,000 resulting in an apparent finding and development cost of under 17 We increased our return on capital employed from 10.3% in 2012 to 12.2% in 20 13. Turning now to some of the specifics of the key accomplishments of last year. As a result of our development program, we improved our capital efficiency by 24% domestically over 2012, which translates to about a 900 $1,000,000 reduction in capital for the wells drilled in 2013. Of this improvement, 50% came from the Permian Basin, 25% from California and 25% from the rest of the domestic assets. We accomplished these improvements while successfully completing our program by drilling approximately what we had planned. We also reduced our domestic operating cost by 17% or about $470,000,000 compared to 2012. About 48% of this improvement was in the Permian Basin, 46% was in California and the remainder was in their other domestic assets. While we focused on these efficiencies, we also grew our domestic oil production by 11,000 barrels a day. With respect to reserves, we had a very successful year in growing the company's reserve base by adding substantially more reserves than we produced, over 90% of which was added through our organic development program. We ended the year based on a preliminary estimate with about 3,500,000,000 barrels of reserves, which represented an all time high for company. Our total company reserve replacement ratio from all categories before dispositions was about 169% or about 4 70,000,000 barrels of new reserves compared to 278,000,000 barrels we produced during the year. In the United States, our reserve replacement ratio was 190%. Replacement ratios at the California properties and the Permian non CO2 properties were similar to the overall ratio. Our reserve replacement ratio for liquids from all categories was 195 percent for the total company and 2 28% domestically. This reflects our emphasis on oil drilling instead of gas. Our total costs incurred related to total reserve additions for the year on a preliminary basis were about $7,700,000,000 Over the last several years, we have built a large portfolio of growth oriented assets in the United States. In 2013, we spent larger than normal portion of our investment dollars in development of these assets. Our Garnock reserve replacement for the year reflects the positive results of these development efforts. In our 2013 program excluding acquisitions replaced 168 percent of our domestic production with about 291,000,000 barrels of reserve adds. In addition, we transferred 115,000,000 barrels of proved undeveloped reserves to the proved developed category domestically as a result of the program. Our acquisitions were at a multi year low of dollars providing reserve adds of 32,000,000 barrels. At the end of the year, we estimate that 73% of our total proved reserves were liquids increasing from 72% in 2012. Of the total reserves, about 70% were proved developed compared to 73% last year, 2012 that is. The increase in the share of the proved undeveloped reserves compared to last year was all the reserves added for El Hosen gas project. We expect to move these reserves to proved developed category at the end of this year once the initial production starts in the Q4. With the success of our drilling program and capital efficiency initiative, we lowered our finding development costs over just recent years. As a result, we expect our DD and A expense to be around $17.40 a barrel, only a small increase from the $17.10 in 20 13. This is consistent with our expectation that DD and A rate of growth should flatten out as recent investments come online and finding and development costs come down. Success of our organic reserve additions and the efficiencies we've achieved in our operations demonstrates the significant progress we've made in turning the company into competitive domestic producer. One of our long term goals domestically has been achieve a 50% pre tax margin after finding and development cash and cash operating costs so as to generate solid returns. We believe we are achieving that now and expect to continue to do so in the future. Consistent with what we have said, our focus in 2013 was to enhance shareholder value through our results. For this goal, our program was heavily focused on growing our domestic oil production, improving our capital efficiency that is our improving our finding and development costs and lowering our operating costs. We met or exceeded these goals and as a result of increased our return on capital to 12 0.2%, a significant improvement from 10.3% of last year and a testament to the hard work and dedication of all of our employees. We expect to see further improvements in our returns in coming years as a result of recent investments. Turning to this year, our 2014 program is designed to improve upon last year's strong performance. Let me highlight the key elements of the 2014 program, which I will discuss without reflecting any of the effects of our strategic review initiatives. We expect our 2014 program to be about $10,200,000,000 compared to the $8,800,000,000 we spent in 2013. The increase includes about $400,000,000 of additional capital allocated to each of our California and Permian operations, largely for additional drilling to accelerate their development plans and production growth. An additional $100,000,000 will be spent in these and other domestic assets for facilities projects that were deferred from 2013. The domestic oil and gas capital program will continue to focus on growing oil production and the entire increase in capital will go to oil projects in California and the Permian Basin. We also expect to continue to fund growth opportunities in our key international assets mainly in Oman and Qatar and complete the El Hozin gas project. Our capital for 2014 for Oman and Qatar will increase by about $300,000,000 over last year. Our exploration capital increased by about $100,000,000 in part due to spending what was deferred from last year. Our midstream capital increased by about $100,000,000 a result of spending on the BridgeTex pipeline and 2 new terminals at Ingleside. Our chemical capital increased also by about 100,000,000 dollars to the Mexichem joint venture we announced last year, while we complete the new Johnsonville chlor alkali facility. Our success in improving our capital efficiency and operating cost structure has provided us with the ability to expand our development opportunities that met our financial return targets. Capital program production growth that I outlined that reflects the benefit of our streamlined structure and our commitment to continue to fuel growth by exploiting our large portfolio primarily in California and in the Permian Basin. As we expect to our 20 14 production, we expect our company wide production volumes to grow to between 780,070,090,000 barrel equivalents a day compared to 763,000 in 2013 with a 4th quarter exit rate of over 800,000 barrels a day excluding the planned oil hoisin production. This increase will come almost entirely from domestic oil production, while we expect to see a continued modest drop in our domestic gas volumes. Our domestic oil production is expected to grow from 200 and 66,000 barrels a day in 2013 to between 280,000,295,000 barrels a day in 2014 or about a 9% increase. This growth will come fairly evenly from our California and Permian operations. Internationally, excluding Elhosin, we expect production to grow slightly. While the elements of the 2014 program that I discussed assumes no changes to company structure or its mix of assets, we do expect the company to look significantly different by the end of the year. Strategic view we are undertaking will result in large changes to the company's asset mix. Our capital program production expectation to other elements of the 2014 program will be adjusted as the related transactions are concluded. Finally, some of our longer lead investments we have been making over the last couple of years will start contributing to our results this year. Specifically, the Elhosin gas project we expect to start its initial production in the 4th quarter and start contributing to our cash flow. We expect the BridgeTex pipeline to come online around the 3rd quarter and to start contributing to our midstream earnings and cash flow. The new Johnsonville chlor alkali plant and expect to come online early this year and will make a positive contribution to the operations of our Chemical business. With respect to the initiatives outlined in the first phase of the company's strategic review announced last year, we completed a sale of the portion of the company's investment in the general partner Plains All American Pipeline in October, resulting in pre tax proceeds of about $1,400,000,000 After this sale, we continue to own about a 25% interest discussions with key partners in the countries where we operate in the MENA region for the sale of our minority interest in our operations there. Due to the scale and complexities of potential transaction, we expect these discussions to continue through the first half of this year. We have made good progress in the pursuit of strategic alternatives to the select Mid Con assets. We expect to provide further information on any transactions as they conclude some around the end of Q2 and we'll announce material developments as they occur. In the Q4, we used the Plains proceeds to retire 6 $25,000,000 of debt reducing our debt load by about 9% and to purchase almost 10,000,000 shares of the company's stock with cash outlay of $880,000,000 We ended the year with a debt to capitalization ratio of 14%. At the February's Board meeting, we will review the company's dividend policy, status of strategic alternatives and share repurchase authority. Many of the steps we've taken in 2013 including our success improving our efficiency and the actions that our Board has authorized lay a groundwork for stronger results for this year and beyond. The operational improvements we expect to achieve in 2014, coupled with the strategic action its dividends to maximize shareholder value. Vicki Hollub will now provide a more detailed discussion of our California and Permian operations. Thank you, Steve. This morning, I'll review 2 of our largest domestic operations, our Permian and California businesses, describing our 2014 plans as well as longer term growth opportunities. In 2013, we implemented an important transition plan in both of these businesses and the success we achieved built a solid foundation for long term growth. In 2014, the specific goals of our operations are continue the development of our large anchor projects in each of our operating areas, which will enable us to allocate a significant portion of our capital to projects with solid returns, low execution risk and long term growth further reduce our drilling and completion costs to improve our finding and development costs and our project economics continue to optimize operating costs without affecting production to improve our current earnings and free cash flow build on our successful exploration efforts in each of our core areas, evaluate data and test various new concepts in our pilot areas, which will set up the anchor projects for the future. We manage our Permian Basin operations through 2 business units, the Permian EOR business, which combines CO2 and water floods and the Permian Resources business, which is where our growth oriented and unconventional opportunities are managed. I will refer to the CO2 and water flood business as Permian EOR and the other business as Permian Resources. The Permian Basin designation will be for the combined operations. In the Permian Basin, we spent over $1,700,000,000 of capital in 2013 with 64% focused on our Permian Resources assets. In 2014, we plan to spend just under $2,200,000,000 overall in the basin. The entire $450,000,000 increase will be spent on our Permian Resources assets, representing about 70% of our total capital spend in the basin. We expect the Permian EOR business to offset its decline in 2014 and to actually grow 1.4%. The Permian Resources oil production is expected to grow faster in a range of 20% to 25% and its total production by 13% to 16%. On a combined basis for the Permian Basin, this should translate to oil production growth of over 6% in 20 14 and total overall production growth of over 5%, while generating $1,800,000,000 of cash flow after percent and reduced our operating expenses by $3.22 a barrel or 17%. We also began transitioning to a horizontal drilling program. We drilled 49 horizontal wells with 47 completed and producing. The combination of improvements in well cost, our own results and those of neighboring operators has given us the opportunity to dramatically shift our program to more horizontal drilling in 2014. Our Permian Resources team will average running about 21 rigs of which 17 will be drilling horizontal wells. We plan to drill approximately 345 total wells or about 50 percent of which will be horizontal. This compares to 330 total wells drilled in 2013, where only 15% were horizontal. We have 2 main goals for our Permian Resources business in 2014. First, we intend to continue the evaluation of the potential across our full acreage position. And second, we plan to pilot various development strategies, including optimal lateral length, frac design and well spacing, both laterally and vertically. We believe this will position us for accelerated development as we exit 2014 and into 2015. We believe we have one of the most promising and underexploited unconventional portfolios in the basin. In 2013, we added 200,000 net prospective acres to our unconventional portfolios and now have about 1,900,000 prospective acres. This is a prime position in the Permian Basin. Our acreage in the Midland Basin, Texas Delaware Basin and New Mexico gives us exposure to all unconventional plays, which is unique. This will give us flexibility to develop our most attractive opportunities first and to mitigate risk. Based on the work we've done to date, we've identified approximately 4,000 500 drilling locations across our portfolio, representing 1,200,000,000 net barrels of resource potential. We believe we've made conservative assumptions regarding prospective acres, well spacing and expected ultimate recoveries and expect these numbers will grow as we learn more. We see the largest near term growth in the Midland Basin, which represents about 2 thirds of our currently assessed resource potential. However, our Delaware Basin perspective acreage is is significantly larger and potentially there should be room to grow. We continue we believe our measured approach to our unconventional portfolio has worked to our advantage. Our Permian Resources production comes from about 9,500 gross wells of which 54% are operated by other producers. On a net basis, we have approximately 4,400 wells of which 15% are non operated. This has given us the opportunity to observe the results achieved by other operators in the basin, learn from those results and optimize our approach to maximize the opportunities on our acreage. The success of our capital and operating cost efficiency efforts in 2013 has enabled us to significantly improve our cost structure, which has increased our opportunity set. For example, a typical well in the Cauley area that had an IRR of 24% before our capital and operating cost reductions now yields IRR of 48% using the same product prices. We achieved similar success in all of our most active areas across the business unit. Finally, we have established a multistep methodical process for our unconventional acreage in the Permian Resources business that includes step 1, exploration to establish the presence of a commercial resource step 2, testing and data gathering to optimize well and completion design step 3, pilot programs to assess variability of well performance to design fullfill development plans and step 4, transition to manufacturing mode for fullfill development. This process is helping us prudently develop our acreage, maximizing cash flow and returns. As a result, we are now prepared to accelerate our activities in the Permian Resources business where we believe the opportunity in front of us is one of the biggest in the basin. Now I'll review our program in more detail beginning with the Midland Basin. We have we've been most active with our horizontal activity to date in the Midland Basin where we've drilled 16 wells. In 2014, we plan to spend $790,000,000 to drill 147 wells including 74 horizontals. We expect to average 8 rigs in the year in the area during this year. And our largest opportunity here is in the Wolfcamp Shell where we've tested Wolfcamp A and B benches and plan to target our activity to test the remaining bitches. One of our most successful pilot projects in this basin is South Curtis Ranch, which has now gone into fulfill development mode. This is a property that we acquired in 2010. We've drilled 63 vertical and 6 horizontal wells to date and signed to drill over 200 additional wells on this acreage. Results thus far have been as expected with initial 30 day production rates for the horizontal wells averaging approximately 800 BOE per day. In the Midland Basin, we also believe there is substantial potential in Cline, which is currently under evaluation. We've drilled 6 horizontal Klein wells so far and plan to drill another 5 to 10 in 2014. Preliminary results indicate we may have opportunity to drill up to 450 Klein wells in the basin. Another pilot project is horizontal drilling in the Spraberry, where we plan to drill our first horizontal well in Q1 and we'll evaluate next steps for the results. In addition to the horizontal activity, we also plan to continue our legacy vertical Wolfberry development. In the Texas Delaware Basin, we plan to spend approximately $370,000,000 in 2014 to drill 91 wells, including 48 horizontals. We expect to average 5 rigs during the year and our horizontal activity will be focused in the Wolfcamp where we believe the A, B and C benches will prove to be the most prospective. We drilled or participated in 3 horizontal Wolfcamp wells in 2013 and we'll increase that to 45 in 2014. Our activity is centered in Reeves County where we historically have drilled vertical Wolfbone wells. Early horizontal results are proving to have better economics, but there are some place where vertical development is still more efficient. In our Cauley area, we plan to drill 43 vertical wells targeting the Belle and Cherry Canyon formations. This represents a continuation of the 1 rig program we executed in 2013. In New Mexico, we plan to spend approximately $370,000,000 to drill 97 wells including 50 horizontals. We expect to average 4 rigs during the year. The Bone Spring formation in New Mexico is the 2nd largest opportunity in our portfolio behind the Wolfcamp Shale. In 2013, we drilled 16 horizontal wells testing the 1st, 2nd and third Bone Spring sand intervals. Our results were very encouraging and we expect to increase the program to drill 30 horizontal Bone Spring Sand Wells in 2014. Of the $2,200,000,000 to be spent in the Permian Basin in 2014, dollars 660,000,000 will be allocated to our Permian EOR business. As I previously mentioned, this business unit is a combination of CO2 and water floods. It is symbiotic to manage these assets together as they have similar development characteristics and ongoing monitoring and maintenance requirements. The last couple of years, we've actually spent more capital on waterfloods as we mature the next CO2 developments. In 2014, 25% of the $60,000,000 will be spent on current waterflood development and the remainder on CO2 water CO2 floods. Further, we have 1,400,000,000 net barrels of oil equivalent in reserves and potential resources remaining to be developed in the Permian EOR business. We believe we are the efficiency leader in the basin in applying CO2 flood technology to develop this potential. We have the ability to accelerate growth in our EOR projects as more CO2 becomes available. As a result of our efficiency advantage, many projects that don't work for us for others work for us. Over the last several years, the focus of our Permian exploration program has been to identify unconventional opportunities, which are then transitioned to fulfill development through the process I explained earlier. Our approach has been very successful giving us a large opportunity set that we are now working to fully develop. We continue to see the addition of new plays in the basin and see years of exploration drilling opportunities ahead in our 2,000,000 prospective acre position. Now that I've gone through some of the specifics of the program for the Permian Basin, I will explain our overall business strategy. We are approaching our development program with a multi pronged strategy that first maximizes the field resource potential second controls cost to optimize returns, third gives us a strategic advantage to improve our realizations. We're using targeted horizontal and vertical drilling as appropriate, optimizing development and completion plans from lateral length to frac efficiency as well as lift strategies to maximize recovery. We're making heavier infrastructure investments like power, water handling and gas processing to preplan for life of field success. These strategies coupled with our successful exploration program accomplish the first of our objectives. We will continue to costs and take advantage of our progress along the learning curve with leading technologies and execution efficiencies to accomplish our second objective. And we are also investing in additional takeaway capacity, including the completion of the BridgeTex pipeline and build out of our gathering systems, which will give us which will give our crude a strategic advantage to reach either the Houston Ship Channel or Corpus Christi markets. Finally, I would like to comment on our plans for the Permian Basin over the next several years. With the combined businesses, we have more than 2,500,000,000 barrels of oil equivalent in reserves and potential resources. Within each business, we have the flexibility to shift capital among projects within that business as well as the flexibility to shift capital between the two businesses as needed. Our large and diverse portfolio creates opportunities for a variety of growth options. In the Permian Resources EOR business is generating significant cash flow and we expect our opportunity set to continue to grow, we plan to double our rigs over the next 3 years to accelerate the development of the Permian Resources Units growth opportunities. We expect this to result in the doubling of our Resources Units production from approximately 64,000 BOE per day in 2013 to more than 120,000 in 2016. In Permian EOR, while it is large with a somewhat slower growth curve, we have significant opportunities going forward with continued positive cash flow to fuel the growth of the resources unit. Combined with EOR growth opportunities, we expect our overall Permian Basin production to grow by roughly 10% compounded annual growth rate through 2016. Now I will shift to California. In 2013, we spent $1,500,000,000 of capital. Our main goals were to deliver a predictable outcome, advance low risk projects contribute to long term growth, reduce the cost structure, lower our base decline, create a more balanced portfolio and test exploration and development concepts, We achieved every one of these objectives. We produced 154,000 barrels of oil equivalent per day, generated $1,300,000,000 of free cash flow after capital. We progressed the development of our steam plugs in Kern Front and Lost Hills and started the redevelopment of our Huntington Beach build. We improved our capital efficiency by 20% versus 2012 and also reduced operating costs by $4.70 per BOE or 20%. Overall in 2014, we intend to continue the capital strategy shift initiated last year, which was to focus the majority of our capital on low decline projects. Our goals for this year are to accelerate the rate of production growth and maintain our lower cost structure. We will also continue to advance several low risk, high return, long term growth projects and capitalize on our exploration successes. In 2014, we plan to spend $1,900,000,000 of capital, of which 40% will be spent on water floods, 20% on steam floods and 40% on unconventional and other developing plays. We expect to average about 27 rigs in California in 2014 compared to an average of 20 rigs in 20 13. We plan to drill around 1050 wells in 2014 compared to 7 in 2013. We expect this program to deliver around 11% oil production growth or over 4% total production growth while generating $1,000,000,000 of free cash flow after capital at current prices. We believe the rate of growth will further accelerate in 2015 and beyond as a number of the steam and waterflood projects reach full production and the base decline is lower due to relatively less natural gas development, higher investment in lower decline oil projects and a larger share of higher growth lower decline projects in the asset mix. Let me now share some of the highlights of the program for this year beginning with the waterfloods. In the LA Basin, we plan to spend $500,000,000 in the Wilmington and Huntington Beach fields. Our Wilmington field development in 2013 exceeded expectations. We drilled 135 wells and we'll increase that by 7% to 145 wells in 2014. Our horizontal program was particularly strong and horizontal wells will represent an even greater percentage of wells in 2014. In our Huntington Beach redevelopment, we successfully brought online our 2 new fit for purpose drilling rigs and drilled and completed our first two wells in the project. In 2014, we plan to drill 30 wells and we'll ultimately drill at least 128 wells. Our heavy oil business unit was a key focus area in 2013 and will be again in 2014. We plan to spend $350,000,000 to drill about 4 20 wells compared to 3 24 wells in 2013. We'll also continue the multi year development of Kern Front and Lost Hills steam floods and we'll pilot some new projects. I would also like to highlight that the business achieved record production in the Q4 producing 19,000 BOE per day, which is an increase of 4,000 barrels per day from the Q1 of 2013. At Elk Hills, our key objective is to lower the high decline rate and we have made significant progress towards this goal. In 2014, we plan to spend $600,000,000 in capital to drill 3 25 wells, which is an increase of $170,000,000 over 20 13. About 55 percent of Elk Hill's capital will be targeting our shale reservoirs where our capital efficiency efforts in 20 13 had a significant impact. We experienced an average of 23% decline in well costs for these programs and 21% decline in operating costs, which dramatically improved the economics and increased the opportunity set. For example, a typical well that generated 30% IRR prior to our efficiency initiatives now delivers 50% IRR using the same product prices. In 2014, we will drill around 130 shale wells at Elk Hills, an increase from 80 in 2013. The remaining Elk Hills capital will target continued development in the shallow oil zone in Stevens Sand. Our California exploration program has delivered solid results for over 5 years. The 2014 California program will continue to explore both unconventional and conventional targets. The unconventional program targets several prospects similar to the 2013 discovery. The conventional program will target prospects in and around our existing production in both the San Joaquin Valley and Victoria County. Our extensive proprietary 3 seismic surveys are yielding an exciting inventory of leads and prospects, which will provide years of drilling opportunities. Lastly, I would like to give you some perspectives on our development plans over the next several years in California. We expect to continue the capital strategy we initiated in 2013 to shift the lower decline and lower risk steam and waterflood projects. We believe we can grow our California production from 154,000 barrels of oil equivalent per day currently to 190,000 in 20 16 or roughly a 7.5% compounded annual growth rate. Our steam and waterflood projects will contribute 80% of that growth. In fact, 90% will come from projects that are already online. We think this positions California as one of the lowest risk growth profiles in the industry. Further, we are targeting primarily oil drilling, which will make our portfolio more oily contributing to solid margin expansion going forward. We expect to grow our oil volumes by roughly a 15% compounded annual growth rate through 2016. Over the long term, we expect our California growth prospects to benefit from changes in our asset mix. Elk Hills and Thums, while having the potential for years of continued production, have lower growth prospects due to the mature state of both of these fields. On the other hand, our water and steam floods as well as our unconventional opportunities should continue to give us double digit growth for years to come. The share of our production from Elk Hills and Thoms has shrunk from 64% in 2,009 to 44% in 2013. This shift will continue going forward and share of higher growth projects will further accelerate the growth rate in coming years. As in the Permian Basin, we are continuing to test new ideas and to further improve our drilling completion and development efficiency in all of our projects. We're also working diligently to comply with the new regulatory requirements created as a result of the passage of Senate Bill 4 in California. We have a dedicated team addressing the associated issues and currently we don't expect significant delays in our development plans. As you can see, while the Permian Basin and California stories are different, they're both very exciting. The hard work and dedication of our people have put both of these assets in a position for continued success and 2014 is the year that both of these businesses will begin to accelerate their growth as we have completed the transition to a focused growth oriented development program and we're set for long term growth. I will now turn the call back to Chris Tavares. Thanks, Vicki. Emily, can you please open the line Our first question is from Doug Terreson of ISI. Please go ahead. Good morning, everybody. Steve, OXY's returns on capital rose last year by almost 20%, I think was the objective or the hope anyway. But your capital spending looks like it's going to rise by another 16% or so this year. And so my question is how does management prevent capital misallocation and then retrenchment from occurring again as it did a couple of years ago? Meaning, have there been changes to the capital allocation process or in other areas of corporate planning that might enhance the result in the current scenario? Yes, sure. I think you first remember that this number is for an unchanged business and that's really not going to happen. So the actual spending will be some other number a lower number because some of the businesses won't be here by year end. We're being we've changed the process. I think Vicki has pointed out the change in the domestic business and how we're focusing on returns a lot better. And we're not I think it's basically a lower risk portfolio and we'll generate more certain returns. We expect the returns we're not actually excited about the 12% return on capital employed. I think we need to be closer to in excess of 15%. And so our goal is to make sure that's right. We're this puts foot group. Very great caution on my part that I've allowed additional spending in Permian and California. They've had to convince me that they're going to stay on the straight and narrow here. So I'm pretty sure we're under control. But if it turns out because we can watch this monthly, because that's what we do now, we watch it monthly. It turns out that they get off the wagon, they'll the beer will be turned off. Okay. And Steve, one more question. You guys also were Or the fine wine, whatever they're drinking. One of the 2. So you guys were obviously very successful with your cost program that helped the result last year. And so are we mostly complete? Is there more work to do there on the cost drive program? For sure. Well, I'm I think we exceeded our goals. We'll set new goals. I think my main focus just so we're real clear, the long term business depends on low F and D. Operating costs are fine because they affect the current year. But we have to develop a long term low F and D rate and go back to what we said for ever. If we add the F and D and the operating costs and the local taxes, We need to be below 50% of the selling price of the product. And if you can do that, you'll have pre tax margins of 50% and you'll generate good returns. And that's really the objective. And so we need to continue to drive as the reservoirs become more challenging, need to cost our costs need to be watched very carefully. I think we've used this year 2013 to really hone our ability to control costs. And I think we're there. We've gone through a multiyear transition of the company from a very good international producer and an okay domestic one to a much stronger domestic business. And this has been not an easy or quick transition. But I think at this point, we have the people in place to accomplish those goals going forward. We're giving them more money this year, but I hold myself and them responsible. Unlike football teams, the coach gets fired not the assistant coaches in this. Well, if you guys can make 15% returns on capital that would be fantastic. Thanks a lot. I think we'll be there. Great. Thanks. Our next question is from Doug Leggate of Bank of America Merrill Lynch. Please go ahead. Thanks. Good morning, Steve and welcome to Houston, I guess. I have a couple also, if I may. California has, I guess, been judged to some extent has not been able to because of a lack of visibility. So you've laid out some targets this morning obviously that suggest a step up in activity. But what comfort can you give that you have got the permitting, you have got the rig count? And I'm just curious as to where your latest where your head is in terms of how whether or not separating California is still a viable option and one that you think would benefit the balance of the portfolio? And I've got a follow-up please. Yes. I'll answer the last question first and then we'll let Vicki, the assistant coach here, get ready to answer your how certain she is. The California and the Permian and the rest of the company are quite in some ways different businesses. California can benefit a lot, I think, by higher capital spending and it will generate more growth. We established a base with the we might call it boring if you want, steam flood and those kind of projects, so they'll have enough cash flow to go ahead. I think it could be managed differently than we would. And I think it has good prospects. I think the issue that we're we need to have a team together that is more aggressive growers, maybe less concerned about dividends and more look more like an E and P, a small E and P. No one will ever since there's 3 producers are 85% of production in California. It isn't going to change. And so there's never going to be a comp. And for people to believe and for the management of that business to deliver, it's probable they should be separate. Thanks. On the NASH? Yes. Is that clear enough? Yes. Vicki will answer the rest. With respect to our efficiencies, I feel like in California certainly we have a lot of potential as we outlined in detail in the earnings call a couple of times ago. So we have the resources available. We have now put together a team out there that's structured in a way that gives them the best opportunity for success. We have great people. We have very experienced people who are who know a lot about operating in California, who know a lot about the types of projects that we're developing. That's our core business. We know water floods. We know steam floods. And that's the bulk of what we're doing. So our team understands quite clearly how to do that and they're among the best in the industry. And so we're accomplishing what we've said we would do. And what we're doing going forward with this increase in capital is we're being very disciplined about how we evaluate and design our projects and implement our projects. So quite certain that we're not going to lose our efficiency around execution. And with the resources that we have, I feel confident that we're going to continue to see the same results that we achieved in 2013 going forward. Thanks, Steve. I guess my follow-up given that you've been fairly clear about how this could play out. Cal Fund has not been spending its cash flow until now. So as a standalone company, would there be an intangible drilling cost uplift to the operating cash flow in your estimates? And I guess if I could layer on a third very quickly, latest thoughts on the scale of a potential Dutch tender buyback if that's still in your thinking? And I'll leave it there. Thanks. Obviously, California would spend more money and drill more wells. And I'm sure they'll generate a lot of tax shelter if that's the question. Yes, basically. Yes. A separate business who competes with a separate oil company that competes with other medium size or whatever you want to call them producers, obviously, is a business that would generate basically burn use its cash flow. California has the flexibility however which I'll that it could cut back its capital and use money to repurchase shares or something like that if the right sort of environment came out. I mean it's unlike some other things, it's a pretty complete business. It has gas a fair amount of gas opportunity when that's available. It has relatively safe long term oil and has some exciting oil things to do too. So I think it could it's a fairly complete business. It's a business where if things get bad for regulatory reasons or price or whatever, it can cut its capital back, still do well, doesn't get caught on a treadmill of higher decline, it could even buy back shares. I don't think it's other than be a big dividend producer, but I think on share repurchase, it could do that if conditions warrant, but if conditions don't warrant it, I'm sure spend all their money. The process of repurchasing the shares from whatever we do just depends on the situation at the time. When we have the money, we'll figure out when we have the money in hand, we'll figure out exactly what the process will be. But I point out that we repurchased around 10,000,000 shares in the Q4. We wouldn't have done that with the shareholders' money, if we thought that all this wasn't going to happen. So I think the process of doing it remains to be seen because you might have at one oil one stock price you might do one thing and another you might do something else. But there's no other place to put it. I mean it's either some kind of share repurchase or there isn't really any debt that we can do much with. So I think we've taken down the debt. I think the next maturity is in 2016 and I'm not up for some kind of windfall for bondholders. All right. I'll let someone else jump on. Thanks, Steve. Thank you. Our next question is from Ed Westlake of Credit Suisse. Please go ahead. Yes. I mean, I guess I got a bigger picture question just on Permian and then some follow ups on California. So those good questions from Doug. Just on your Permian, I mean, how do you think you're going to get a fair price for the light oil that you're producing Permian? What is Oxy going to do about it over and above what you've already announced with the BridgeTex pipeline expansion? Thanks. We're going to let Willy answer that since she's an expert in oil. Yes, Ed. Obviously, we've seen a lot of disruptions in pricing between the regions and we're seeing a lot of infrastructure getting built in. And when we look at our production of roughly 50,000,000 barrels a year or 150,000 barrels a day out of the Permian, between the BridgeTex pipeline, which 1,000 barrels a day out of the Permian between the BridgeTex pipeline which goes from essentially Midland or Permian directly to the Gulf Coast as well as taking capacity on other pipelines down to Corpus. We essentially go from a 2 market business Midland and Cushing to ultimately getting to Houston Ship Channel as well as Corpus. And then we also get the ability to go to U. S. East Coast and lots of different places. So I think the infrastructure is going to help us tremendously in that area. As a follow on, I guess people are concerned that when the crew gets down to the Gulf, it's still going to be impaired. Any thoughts around that? The work you've done on that? Well, the thing everyone looks at is the Brent TI. And as I think about it, Brent's really tied to world prices. And I think what you're going to see is all the grades as well as TI kind of come to transportation parity. Okay. So no major discount in your thoughts for the crudes once it gets down to the Gulf other than quality and logistics? No. I think prices fix the price issues. Okay. So just in fact I'll also point out that I thought you might Yes. That $97 oil is probably okay for us. I mean this isn't some bargain basement price. So we feel pretty comfortable that we could be reasonably profitable at 90 $7 and much lower. So sometimes you lose sight of the absolute price and all this talk about differentials. Yes. It's a good point. Just on California then. I mean you gave us sort of some resource initial resource estimates for the Permian. Would you be willing to give us a resource estimate to California? People obviously try and have confidence and resource number from yourselves would obviously help that confidence. I think what I prefer to do is leave that for another day and another kind of announcement. Okay. Well, thanks very much. Our next question is from Arjun Murti of Goldman Sachs. Please go ahead. Thank you. Just another follow-up on California where you have a nice growth trajectory here. It sounds like the greater confidence in And maybe and maybe less reliance on the unconventionals at least in the scope of the years presented here. Is that accurate? And I guess if so, where are you on the unconventional from a confidence standpoint? Thank you. I'll let Vicki answer about the unconventional. But just so you understand, I think you got it, but we have a high decline and really no decline high decline at Elk Hills and really no decline at Thoms. So you have the which was the bulk of the production of the company and originally was nearly 100%. And so what's happened is that the little wedge has grown and we've made a lot of progress in improving the decline rate in Elk Hills. So we're not fighting as big a decline curve. And so what we're doing is we're filling it in with things that are real certain, so that the business has sufficient cash without being on a treadmill to go forward. And I'll let Vicki talk about the unconventional here since she's more knowledgeable than I am for sure. This year we're drilling 170 unconventional shale wells versus 111 that we drilled last year. So we increased the number that we're drilling this year. And actually, we'd hope to drill even more than we currently have on the schedule. But we felt like that from a regulatory standpoint, it was best to take a more conservative approach this year in view of SB 4. We do have some exciting unconventional projects there in the permitting process and we expect to bring those online in 2015. So basically part of it's permitting, just trying to get the permits in line and ready to go. The other part of it is that we are continuing with the strategy that we developed and that is to as we've said lower our decline and build up a larger solid base of those types of projects and that really helps prop us up for the unconventional developments. Is it a question Vicky of the scope of what you have there? You want to ensure you have enough running room between confidence in the resource and the ability to get permits? Or are there still questions all those points? Yes. There are questions on all of them. We do have, as I said, unconventional plays that feel very comfortable with the development of, because there are things that we understand that we've already started the process of development. So there is a portfolio that we feel like we can move forward at a fairly fast pace if we had the permitting in place. There's still some shales that we haven't really tested and evaluated yet. And we're taking the same approach in California as we are in the Permian, where we're doing a more measured approach to go out, drill a few wells, do some evaluation, then start some pilot projects and then from there progress to fulfill development. So we're trying to be very prudent in the way that we approach our comments. I comments. I certainly appreciate the scale and complexity here and that's going to take some time. Can you comment that you have identified maybe a partner group, which is a key group you're negotiating with and these things can still take time? Or is it earlier stage than that where there's still multiple parties that are involved here? No. So there's a partner group. That's great. And then just a final one on the stock buyback. Should we think about this primarily as asset sale proceeds are used for stock buyback or your balance sheet is strong that it can be an ongoing program even without proceeds? Yes. The business fundamentally the overall business or whatever portion whatever remains in the company is able to generate free cash. And so we should see as part I think I said at your conference part of the program would be we'll continue to grow the dividends at a healthy pace. We'll have a little more share repurchase than we've done historically. You will see share reductions from whatever happens in the asset sales or whatever dividends we might take from anything that was separated from the company. So I think you'll see the share count come down. And therefore the dividend requirement, the dollar amount of dividend requirement come down. So I think you'll see a mix. But we're I'm very focused on the value of the stock we're buying. It isn't just about buying shares for fun. Certainly easier than drilling wells. But I think that and so you see us come and go as the stock price changes. And of course there are periods when we can't buy where we have material information. So there may be periods when we can't buy. But generally, you should expect to see a regular program at some level, but also some fairly sizable reductions over the next year I would expect. Great. Thank you so much. Thanks. Our next question is from Faisel Khan of Citigroup. Please go ahead. Thank you. Good morning. Steve, I was wondering if you could clarify some of the comments you had around return on capital employed. So are you saying that and you guys have made a tremendous effort in getting return on capital employed up over the last 12 months to 24 months. But I want to make sure I understand. So are you saying that with CapEx going up next year and with sort of the doubling of the rig count in the Permian over the next few years and adding 7 rigs on California, overall you're saying ROCE should trend up over the next 1 to 2 years, all else being equal? Yes. Product prices aside, yes. Okay. Okay. Fair enough. And then in terms of your comments on California, Given that most of your growth in California is sort of longer live production and some of your growth in the Permian has sort of a higher decline rate. I mean, doesn't it make more sense to kind of keep those assets together as a portfolio? Or what's the I'm just trying to understand like how you balance the cash flow and decline rate between the two portfolios over time? Remember that the Permian is effectively 2 businesses. There's the EOR business, which generates large amounts of free cash flow. So the question really is, how do you and it has a potential to add this high growth stuff, but still generate large amounts of free cash flow as a business. We can manage that reasonably well. California, the potential is it currently is managed to generate free cash flow. And it will generate a base ultimately of these long live projects, which basically by the way answers to some extent your question about the returns because you could turn on a long live project your DE and A rate will be relatively low and so your earnings will be better because you got a lot of reserves over a long period. But and so every business a standalone business has to have a base of money to pay for itself. Now I understand there's a whole bunch of companies out there that don't, but that's not the way to build a long term oil business. So California can spend more fairly, I think easily and continue to grow. And in the Permian, there's a lot of rigs and people and so I think it's a little more challenging in the Permian. I think California, I have a map in my office from 16/79, which shows California as an island and there's some truth to that. Fair enough. And then do you guys have an estimate for the return on capital employed for California at the end of the year? I don't think so. I think we'll leave those kinds of questions for some other announcement. Fair enough. Thanks. Okay. And our final question will come from Roger Read of Wells Fargo. Please go ahead. Yes. Thanks. Good morning. I guess maybe taking a little stronger or deeper view of the Permian. You mentioned in the preview part the costs and the learning curve issues. Have you done anything in particular to hire people out there? Or has it been learning by watching, learning by sharing info and data with some of your partners out there? I think we Vicky, so it's not the frustrator, went through a long we've got a lot of gross wells, but the bulk of our production and outcome comes from our own net wells. So we see enormous exposure to what other people are doing. We don't actually have to experiment or hire other people. We could actually see what they're doing. We hire people all the time. But we're not hiring people from radically different cultures. We need people who are trained in a return driven free cash flow kind of culture. And to hire somebody from some small company, they really have a different kind of culture. They're more an IRR getting their money back quick and drilling more wells culture. So we don't want to destroy the notion that this is a business about generating money and generating returns. And we're not going to spoil at least while I'm here, we're not going to spoil Stu with a bunch of promoters. Okay. And then I guess as a follow-up even to those comments, if I remember correctly, we are in a new CEO search mode here. Is there any update you can provide on that front? I think the Board will have something to say about that next month. But I expect that we'll be doing significantly more earnings calls than I had planned. Okay. That's helpful. Thank you. In the interest of time, this concludes our question and answer session. I'd like to turn the conference back over to Mr. Savros for any closing remarks. Thanks everyone for joining us today and please call us with any follow-up questions in New York. Thanks again. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.