Earnings Call: Q3 2013

Oct 29, 2013

Morning, and welcome to the Q3 2013 Earnings Release Conference Call. All lines have been placed on mute to present any background noise. After the Thank you. Mr. Sarvos, you may now begin. Thank you, Tamika. Good morning, everyone, and thank you for participating in Occidental Petroleum's 3rd quarter 20 13 earnings conference call. On the call with us this morning from Los Angeles are Steve Chasen, OXY's President and Chief Executive Officer Cynthia Walker, our Chief Financial Officer Willie Chang, OXY's Vice President of Operations and Head of our Midstream Business Sandy Lowe, President of our International Oil and Gas Operations Bill Albright, President of Oxy Oil and Gas in the Americas and Vicki Hollub, Executive Vice President of Oxy's U. S. Oil and Gas Operations. In just a moment, I'll turn the call over to our CFO, Cynthia Walker, who will review our financial and operating results for this year's Q3 and provide some guidance for the current quarter. Sandy Lowe will then provide a brief overview of our oil and gas operations in the Middle East focusing on the key countries for Oxy as well as our strategic objectives for the region. Steve Chasen will then follow with a discussion of our strategic initiatives and some of our growth opportunities. 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 risks and uncertainties that may cause actual results to differ from those expressed or implied in these statements our filings. Our Q3 2013 earnings press release, the Investor Relations supplemental schedules and conference call presentation slides, which refer to our prepared remarks can be downloaded off of our website at www.oxy.com. I'll now turn the call over to Cynthia. Cynthia, please go ahead. Thank you, Chris, and good morning, everyone. My comments will reference several slides in the conference call materials that Chris referenced are available on our website. Overall in the Q3, we continued the solid execution seen in the first half. Total company production was 767,000 BOE per day. And importantly, we produced 267,000 barrels of oil domestically. This is on track to achieve our second half growth objectives. In addition, with 3 quarters of successful execution behind us, we are confident that we will exceed the goals we set for the year for operating costs and capital efficiency. We had core earnings of 1.6 $1,000,000,000 or $1.97 per diluted share. And for the 1st 9 months of 2013, we generated $9,400,000,000 of cash flow from continuing operations before changes in working capital and ended the quarter with $3,800,000,000 of cash on our balance sheet. If you turn to slide 3, you'll see a summary of our earnings for the quarter. Core income was approximately $1,600,000,000 or $1.97 per diluted share. As you can see, this is an improvement over both of the prior quarters. Compared to the Q2 of 2013, the current quarter results reflected improved oil and gas segment earnings, driven by higher realized oil prices and domestic volumes, as well as higher core earnings in the Chemicals segment and improved performance in the Midstream segment, driven by higher margins in the Marketing and Trading businesses largely due to commodity price movements. Now I will discuss the segment performance for the oil and gas business and begin with earnings on slide 4. Oil and gas earnings for the Q3 of 2013 were $2,400,000,000 an increase over both the Q2 of 2013 and the Q3 of 2012. On a sequential quarter over quarter basis, improvements came from higher oil prices and domestic volumes. Volume increases resulted largely from higher oil production in California, the Permian and Williston and improved Columbia listings. Moving to slide 5, You'll see a summary of production changes during the quarter. As I mentioned, total production for the quarter was 767,000 barrels per day, a decrease of 5,000 barrels per day over the 2nd quarter and an increase of 1,000 barrels per day over the year ago quarter. On a sequential quarterly basis, these results reflect domestic oil production growth as a result of our drilling program as well as a resumption of Permian production following plant turnarounds and weather interruptions in the second quarter. As you can see, we also experienced an improved environment in Colombia, although disruptions continued to impact production in the quarter we've seen the same early in Q4. MENA production was lower, primarily due to the impact of full cost recovery on our contract in Yemen, lower spending in Iraq, some maintenance in Qatar and labor issues in Libya. Excluding certain of these impacts and the disruptions in Colombia, our overall international production was in line with our guidance on the last call. On a year over year basis, full cost recovery and other adjustments under our production sharing and similar contracts also reduced MENA production by about 7,000 barrels per day. If you turn to slide 6, I'll now discuss our domestic production in a bit more detail. Our domestic production was 476,000 barrels per day, an increase of 6,000 barrels per day from the Q2 of 2013 and an increase of 7,000 barrels per day from the Q3 of 2012. Focusing on our commodity composition, oil production increased 6,000 barrels from the 2nd quarter, driven by California, the Permian and the Williston Basin. For the 1st 9 months of 2013, our domestic oil production has increased by 13,000 barrels per day. This is a 5% increase versus the same period in 2012. NGL production increased 2,000 barrels per day versus the 2nd quarter. Natural gas volumes were lower by about 11,000,000 cubic feet a day compared with the 2nd quarter almost entirely in the Permian as a result of third party processing bottlenecks. Moving to our realized prices for the quarter and the comparison to benchmark prices. You can see the summary on slide 7. Compared to the Q2, our worldwide crude oil realized price increased about 6%, primarily reflecting changes in benchmark prices. We experienced improvement in NGL prices domestically, which contributed to a 5% increase in worldwide NGL realized prices. While domestic natural gas realized prices experienced a 14% decrease driven by the decline in the benchmark. You'll note we also included updated price sensitivities. Next, I will cover production costs on slide 8. Oil and gas production costs were $13.60 per barrel in the 3rd quarter and $13.64 per barrel for the 1st 9 months of 2013, compared to $14.99 per barrel for the full year of 2012. As you can see, domestic operating expenses increased slightly from the Q2 of 2013. This was due to the timing of certain planned workover activities. International production costs have remained fairly consistent with 2012 levels, excluding the impact of the facilities turnarounds in Qatar and Dawson that affected the Q1 of this year. We are very pleased with our performance on operating costs this year and will beat our full year target. Taxes other than non income, which are generally related to product prices were $2.61 per barrel for the 1st 9 months of 2013, compared with $2.39 per barrel for the full year of 2012. 3rd quarter exploration expense was 68,000,000 and we expect 4th quarter exploration expense to be about $100,000,000 Turning to Chemicals segment core earnings on slide 9. 3rd quarter earnings of $181,000,000 were $37,000,000 higher than the 2nd quarter, primarily driven by strong caustic soda export volumes and lower energy and ethylene costs. Looking ahead to the 4th quarter, demand for chlor alkali products is typically lower due to seasonal factors. We expect Q4 2013 earnings to decline to approximately $100,000,000 driven by these seasonal factors coupled with lower foreign east demand and lower caustic soda spot and export prices. On slide 10 is a summary of midstream segment earnings. They were $212,000,000 for the Q3 of 2013 compared to $48,000,000 in the Q2 of 2013 and $156,000,000 in the Q3 of 2012. The 2013 sequential quarterly improvement in earnings resulted mainly from higher marketing and trading performance, driven by commodity price movements during the quarter. The year over year improvement was driven by improved margins in our pipeline and gas processing businesses. The worldwide effective tax rate on core income was 40% for the Q3. The lower tax rate and guidance resulted from lower volumes in Libya, where tax rates are significantly higher than our overall effective tax rate. We expect our combined worldwide tax rate in the Q4 of 2013 to remain in 2013 to remain in the 40% to 41% range. Slide 11 summarizes our year to date 2013 cash flow. In the 1st 9 months of 2013, we generated $9,400,000,000 of cash flow from continuing operations before changes in working capital. Working capital changes increased our cash flow from operations by $400,000,000 to $9,800,000,000 Capital expenditures for the 1st 9 months of 2013 were $6,400,000,000 of which $2,200,000,000 was spent in the 3rd quarter. We generated approximately $270,000,000 of cash from the sale of a chemical investment and used $340,000,000 for acquisitions of domestic oil and gas assets. After paying dividends of $1,000,000,000 in other net flows, our cash balance was $3,800,000,000 at September 30. Our debt to capitalization ratio remained at 15% at the end of the quarter. Our annualized return on equity for the 1st 9 months was 2,000 for the 1st 9 months of 2013 was 14% and return on capital employed was 12%. Last, I'll turn to the 4th quarter outlook. With respect to production, domestically as I mentioned, we are on track to achieve our second half oil growth average of 6000 to 8000 barrels per day increase over the first half average. Our natural gas and NGL volumes are expected to decline modestly in the 4th due to lower drilling on gas properties and natural decline coupled with the effect of a major turnaround in the Permian. Internationally, we expect total production to be about flat with the 4th in the 4th quarter compared to the Q3, excluding the impact of insurgent activity in Colombia. We expect international sales volumes to increase in the Q4, recouping the deferred listings we experienced earlier in the year. Our annual capital is expected to be about $9,000,000,000 This is about $600,000,000 lower than the $9,600,000,000 program we've previously discussed. Of this reduction approximately $200,000,000 resulted from achieving better than planned efficiencies in our oil and gas program particularly in our drilling costs. An additional $200,000,000 resulted primarily from the deferral of certain oil and gas facilities and midstream projects into 2014 and a further $100,000,000 from lower than planned spending in Iraq. We are particularly pleased that we are on track to meet or exceed our planned drilling activity levels for the year, while spending less capital than planned as a result of efficiency initiatives. I'll now turn the call over to Sandy Lowe, who'll provide an overview of our Middle East North Africa operations. Thank you, Cynthia. As you are aware, we have had a successful involvement in the Middle East North Africa region for over 40 years. We are active in key major oil producing countries in the region and have formed excellent relationships at all levels. The countries in which we operate include Oman, Qatar, United Arab Emirates, Iraq, Bahrain, Libya and Yemen. We have a diverse set of projects in the region and manage all of our projects with high safety standards creating local jobs and development opportunities for people in local communities. Our current producing operations have generated over $20,000,000,000 of net free cash flow in the past 15 years and are currently generating annual free cash flow of around $1,600,000,000 excluding the Al Hosn Gas Project capital, which is currently running at about $1,000,000,000 annually. We reasonably expect that our Middle East business will generate over $2,000,000,000 of free cash flow annually once the Al Hosn Gas project becomes operational. We have invested $9,000,000,000 of capital in the Middle East region since 2010, 75% of which has been spent in Oman, Abu Dhabi and Qatar. We have drilled over 2,500 wells in the region during this time and currently have 37 drilling rigs running. We have also spent $300,000,000 on exploration since 2010. Our projects make a significant contribution to the economies of these countries employing around 15,000 full time employees and contractors not counting the workforce at the Alafas and Gas Project which currently over 34,000. We have drilled several types of wells throughout the region. These include onshore oil wells in Oman, offshore wells in Qatar and sour gas wells onshore Abu Dhabi. The production from our wells ranges from 200 to 4,500 barrels of oil per day and our gas rates are as high as 120,000,000 standard cubic feet per day. Our Middle East operations are designed to leverage our technical expertise based in central support groups such as project management, engineering, exploration and drilling. We apply this knowledge locally to successfully execute our projects. We have used this central support approach effectively in the areas of reservoir characterization, flood implementation, drilling and completion techniques and management of major projects. This enables us to apply best practices across the region while minimizing the deployment of Western Expatriates and maximizing opportunities for nationals in each country. We expect that our net Middle East production for 2013 will exceed 260,000 barrels of oil equivalent per day, representing about 35% of Oxy's total production worldwide. When the Al Hossein gas project reaches full operational status in 2015, it should add net production of over 60,000 barrels of oil equivalent per day. Our 2013 Middle East development capital is expected to be about $3,000,000,000 with about 44% spent on waterflood projects, 34% on the Al Hosn Gas project, 12% on steam floods and 10% on primary production. We will drill over 750 development wells this year and plan on around 6 65 wells next year. Our strategic goals for our Middle East business can be summarized as follows: continue to be a growing profitable and vibrant business in the Middle East region continue to be a preferred strategic partner with the host countries where we operate expand our Middle East area of business by partnering with local investors to secure strategically important growth projects continuing to successfully execute projects achieve returns in excess of 20% on our invested capital continue our investment philosophy where our presence makes meaningful contributions to the host economies and makes a positive difference to the lives of the people in local communities, including increased education and employment opportunities for nationals. We have a strong track record in each of the goals summarized above and believe we will be able to deliver close relationships with key partners in the countries we operate. We have always been respectful of the interests, expertise and values of the host countries. This philosophy has over time led to mutual respect and helped us grow our operations profitably. I will now provide a brief summary of our operations in 3 of the key countries in the Middle East region, which collectively make up 70% of our current production, 85% of our income from operations and nearly all of our free cash flow. We spend about 75% of our Middle East capital in these three countries as well. Oman. We've been present in Oman for 34 years and operate in Blocks 9, 2762 in the north of Oman and Block 53, which is the McKaysner field. We are the largest independent oil producer in Oman and have a highly skilled and loyal national staff. Our Almaty staff has grown from 246 in 2,005 to 1858 today. Most of our national employees have developed their skills and experience within Oxy including opportunities to train and work on Oxy projects in the United States and other countries. As a result, over 81% of our employees are Omani nationals and Omani citizens now hold most of the high level executive positions including the President of our Oman business unit. Oxy's gross production is expected to be about 230,000 barrels of oil equivalent per day in 2013 with a net of 76,000 in Oman. Our Omani operations are a significant free cash flow generator. We expect to continue to achieve returns well in excess 20% from our Oman projects. Northern Oman. In Northern Oman, a combination of development wells, exploration success and the application of water flooding techniques has led to an increase in gross production from 92,000 to 106,000 barrels of oil equivalent per day since 2010. We have a large pipeline hub and gas plant at Safa associated with the producing wells in Northern Oman. This infrastructure enables us to rapidly and efficiently bring new wells into production. Most wells initially free flow and later have either gas lift or electric submersible pumps installed. We have maintained our gross average operating cost at around $5.50 per barrel with the key drivers being downhole maintenance, surface operations and support costs. We have drilled 170 out of our 153 planned wells for this year. These are typically horizontal wells with lateral length of between 1803,500 feet. Recent production rates have been as high as 3,800 barrels of oil equivalent per day with an average for 2013 of around 550. During 2014, we plan to drill another 125 development wells. Over the next 5 years, our plans include drilling 400 development and water injection wells. We expect our annual drilling capital between $250,000,000 to $300,000,000 per year. We believe our development program will increase gross production to about 100 and 25,000 barrels of oil equivalent per day during this period. Our exploration program in Northern Oman has one of our most successful ever as a company with a discovery rate of greater than 60%. We attribute this success to our use of technologies such as horizontal drilling, state of the art 3 d seismic as well as the development of new play concepts. Our discoveries this year mostly coming from horizontal wells have an average production of 3,000 barrels of oil equivalent per day and produce over 70% oil. We continue to expand our technical understanding and have a robust inventory of future drilling prospects. In addition, we are nearing completion of a 2,000 square mile 3 d seismic program, which should further enhance our growth portfolio. This new seismic data over Blocks 9 and 27 should yield many attractive prospects and enable us to continue exploring in these areas for many years. Over the next 5 years, we expect to drill more than 50 exploration wells, 13 of which are planned for 2014 and to generate more than 250 new development drilling locations. Our Block 62 development is in the early stages of engineering with a number of gas producers already drilled. We are planning to further delineate 1 of the larger structures by the end of this year, allowing an updated development plan to be presented to the government during 2014. McKaysnay. Mukaysnay is one of the world's largest steamflood projects. At the end of 2012, it ranked 3rd in the world in terms of steam flood production ahead of the large best known U. S. Steam floods. Oxy's involvement in the McKesson field began in 2,005. Since that time, we have increased gross production from 8,000 to 125,000 barrels of oil per day and produced 160,000,000 barrels of oil from the field. We have drilled over 2,000 wells of which 825 are producers. The steam wells enable injection of over 500,000 barrels per day. Waste feed recovery systems on power generators account for 20% of our steam. We continue to optimize the development plan of this field with the government and our partners and we expect to continue executing our infill drilling program. The anticipated peak production is estimated to be between 135,000,140,000 barrels of oil per day. We expect to drill 3 40 wells this year. Recent rates have been as high as 8.30 barrels of oil per day, within average for 2013 of around 330. We plan to drill another 300 wells in 2014. We currently have 6 rigs running in McKesson. In addition to the main McKesson reservoirs, we are delineating the extensive Kaima fractured carbonate heavy oil reservoir, which lies above the main pay in McKesson. We presently have 1 rig dedicated to this activity. Another milestone will be reached in McKaysman next year with the drilling of our first deep exploration well in the field. Qatar. We presently operate 3 shallow water offshore oilfields in Qatar, Ird El Sharghi North Dome, Ird El Sharghi South Dome and El Reyyan. We also have an interest in the Dolphin project, which has been a great success since its start. Through our plans for various projects in Qatar, we expect to achieve returns well in excess of 20%. In nearly 20 years in Qatar, we have invested $4,300,000,000 and produced 680,000,000 barrels of oil. Our operations in Qatar provide significant free cash flow. Current production is around 100 1,000 barrels of oil per day for 2013 from the 3 fields, netting 67,000 barrels of oil per day to Oxy. Dolphin's current production net to Oxy is about 38,000 barrels of oil equivalent per day. In Qatar, as in Oman, we are focused on the development of national staff and have successful national employees in all levels in the company. Oxy has established itself as an active and committed member of the community. During our presence in Qatar, we have forged strong and effective relationships with a number of organizations in the focus areas of health, education, arts and culture and sports. Examples include partnering with the Supreme Education Council and the Weill Cornell Medical College in the promotion of a healthy lifestyle, which is aligned with Qatar's 2,030 national vision. Other initiatives relate to specific causes such as diabetes, cancer, working with the Al Noor Institute For the Blind and partnering with the Qatar Museums Authority and supporting a number of supporting events. In the Adel Sharghi North Dome, we will drill 17 wells in 2013 from jackup rigs in a water depth of around 130 feet. Over the course of our involvement in Qatar since 1994, we have drilled 268 horizontal producing wells and over 100 horizontal water injectors. Recent well production rates in Idyllshargi North Dome have been as high as 4,500 barrels of oil per day with an average of 2013 around 1460. As part of the As part of our recently approved Phase 5 development plan, we will drill another 2 0 5 wells at a cost of $1,200,000,000 We plan to drill 36 of these wells in 2014. The development plan includes the installation of new wellhead platforms, the compression and power platform and various pipelines and related facilities. We believe that as a result of this development, we will be able to continue the plateaued gross production of 100,000 barrels of oil per day for many years to come. We also have new development opportunities being planned for the Idil Sharghi South Dome and El Ryan fields. Dolphin. The Dolphin project remains one of the flagship projects in the region and it has been a great success since coming on stream in 2,007. The project involves production from wells located on 2 offshore platforms in the Northfield of Qatar. Wet gas flows to the onshore gas plant at Raskopan where we process it into condensate natural gas liquids and sulfur. The dry gas is exported under a long term contract to the UAE via a 48 inches 230 mile subsea pipeline. In addition to the 2,000,000,000 cubic feet a day of contracted gas from Qatar, we transport additional gas on an interruptible basis to customers in the UAE. While meeting a significant portion of the UAE's gas needs, Dalton also provides gas to Oman. We are currently expanding gas compression facilities in Ras Lafont to achieve the maximum pipeline capacity of 3,500,000,000 cubic feet per day to handle additional volumes. We believe substantial opportunities remain in the region to sign up additional customers to provide gas transportation up to the full capacity of the Dolphin Pipeline, generating additional midstream revenues and cash flows. We expect our 2013 net production from Dolphin to be around 38,000 barrels of oil equivalent per day with significant free cash flow, which we believe will grow over time as we take on new customers. United Arab Emirates. Oxy's initial experience in the UAE was as a partner in offshore exploration during the 60s. Most recently, Oxy has had a presence in the UAE since 2000. Since then, our Abu Dhabi office has developed into a regional hub supporting our Middle East assets with engineering, geoscience, business development, operations, supply chain and finance resources. During this time, the Dolphin Midstream infrastructure has continued to expand and the pipeline system now extends for 4 75 miles throughout the UAE and into Oman. The Alhosin Gas Project where we are partnering with the Abu Dhabi National Oil Company ADNOC involves the development of the Shaw Sour Gas Field in the western region of Abu Dhabi. Production from the field contains natural gas and condensate along with high concentrations of hydrogen sulfide and carbon dioxide. A large processing plant is currently under construction with an average 34,000 workers at the site. This is a world scale mega project with the involvement of major engineering, construction and manufacturing companies from around the world. It remains on schedule and on budget. When completed, the plant will be able to process about 1,000,000,000 cubic feet a day of gas from the field and separated into sales gas condensate natural gas liquids and sulfur. Oxy's net share of production is expected to be over 200,000,000 standard cubic feet a day of sales gas and more than 20,000 barrels of NGLs and condensate. By the end of 2013, the project will be about 92% complete and will start up next year. The 2013 Oxy share of Al Hosn Capital is expected to be about $1,000,000,000 Total project cost is expected beyond budget and about $10,000,000 with Oxy's share of $4,000,000,000 We expect production from the project to start in the Q4 of 2014. Once the field achieves steady state, annual average free cash flow to Oxy should be approximately $600,000,000 at current liquids prices. Currently, we are spending about $1,000,000,000 per year, so steady state operations should provide a net cash flow swing of $1,600,000,000 annually. As we have recently announced, we are currently looking to sell a minority interest in our Middle East North Africa operations. We believe this will give us an exciting opportunity to possibly partner with key regional players. This sale will reduce the Middle East North Africa share in our overall portfolio. We believe a partnership with regional investors will align us with local interest in our existing operations and on new opportunities throughout the Middle East to achieve future growth from a lower base. In summary, we believe we are well positioned to meet each of our strategic goals in the region. Specifically, we have a highly profitable, vibrant and growing business. We have developed strong and lasting relationships with host countries where we are welcome and invited to stay. We will continue to be a preferred strategic partner to them in the years to come. Our plans to sell a minority in our Middle East North Africa operations will assure that we will continue to grow our Middle East North African business profitably over time by securing strategically important future projects. Our development and operating plans will ensure continued success in executing our projects. We will continue to achieve returns in excess of 20% of our invested capital. We are continuing to apply our investment philosophy where our presence makes meaningful contributions to the host economies and makes a positive difference in the lives of the people in the local communities, including increased education and employment opportunities for nationals. In closing, I would like to emphasize, we are very excited about our presence and experience and our track record of timely project execution will allow us to continue to enhance our rich growth potential of the region. I will now turn the call over to Steve Chazen, who will discuss our strategic initiatives. Thank you, Sandy. Earlier this month, we announced the initial phase of the company's strategic review as a part of an effort to streamline and focus our enhance value for our shareholders. As a result of the initial actions, Oxy's Board of Directors has authorized the following: to pursue a sale of minority interest in the Middle East, North Africa operations in a financially efficient manner as Sandy just discussed pursue strategic alternatives for selective Mid Continent assets including our oil and gas interests in the Williston, Yucatan, Peons Basin and other Rocky Mountain assets and the completed sale of a portion of our 35% interest in general partner of Plains All American Pipeline. This resulted in pre tax proceeds of $1,400,000,000 This initial sale process is concluded and we have received the proceeds. Our cash balance of $3,800,000,000 at the end of the quarter does not include these proceeds. Oxy's remaining interest in the Plains All American pipeline based on the IPO price is valued at approximately $3,300,000,000 As we indicated, these are our first formal steps in our effort to streamline the business, concentrate in areas where we have depth and scale and improve overall profitability. Our goal is to become a somewhat smaller company with more manageable exposure to political risk. We will continue to seek additional strategic alternatives for the company to maximize total returns to our shareholders. These actions are expected to generate a significant amount of proceeds. Together with the excess cash in the company's balance sheet, these funds will largely be used to reduce Oxy's capitalization. While we expect to use a substantial and a vast majority of these proceeds to repurchase our shares, we also anticipate paying down some of our debt on a proportional basis. We expect to retire $600,000,000 of bonds due in December. Continue to make We continue to make steady progress and expect to complete the strategic view in the coming months and we'll disclose material developments as they occur. Approximately a year ago, our oil and gas business embarked on an aggressive plan to improve our operational efficiency across all cost categories including capital with a view to achieving an appreciable reduction in our operating expenses and drilling costs. Our teams are to be commended for doing a superb job on this front, exceeding our initial goals. We continue to run ahead of our full year objectives to improve domestic operational and capital efficiencies. For example, we have reduced our domestic well costs by 22% and operating costs by about 18% relative to last year. This is ahead of our previously stated targets of 15% well cost improvement and total oil and gas operating costs below $14 a barrel. Total annualized savings from these operating costs and capital efficiency initiatives amount to 1 point compared to last year. We expect these savings to result in additional development opportunities as previously marginal projects are now economic. The purpose of these initiatives is to improve our return on capital, while continuing to execute a focused drilling program in our core areas and grow our domestic oil volumes. The benefit of these cost savings cannot be overstated as they will result in a year over year improvement in our F and D costs leading to a more stable DD and A rate. We believe we can sustain the benefits realized to date, achieve additional savings in our drilling costs, receive our and reach our 2011 operating cost level over time without a loss in production or sacrificing safety. We are particularly pleased that we are on track to meet or exceed our drilling activity levels planned for the year, while spending less capital than planned as a result of these efficiencies. These achievements have generated higher margins, giving us confidence to allocate additional capital towards profitable growth opportunities. As Vicki discussed in last quarter's call, we are the largest oil and gas mineral acreage holder in California. With more than 2,100,000 net acres, we have a large and diverse portfolio of opportunities available to us across the state. We've reduced our overall operating costs in California by more than $4 a barrel equivalent to an expected average of under $19 for all of 2013. Improvement in our operating as well as our drilling costs has exceeded our targets and should allow for combined savings of at least $300,000,000 this year compared to 2012. As a result of these improvements and combined with more favorable permitting, we plan to increase our capital spending in California by about $500,000,000 to approximately $2,100,000,000 next year. Most of this increase will be directed towards unconventional drilling opportunities where we have more than 1,000,000 prospective acres for unconventional resources. In the Permian Basin, we've accumulated more than 1,700,000 net acres covering both relatively established emerging plays, anchored by our high our core high free cash generating CO2 flood reservoirs. We have recently created an exploitation team whose mandate is to optimize our drilling capabilities and accelerate the development of unconventional opportunities throughout the basin. This year, we have focused on delineating incremental opportunities in established plays as well as testing the potential of many emerging plays, which included the drilling of approximately 30 horizontal wells. We've also succeeded in reducing our drilling costs by more than 20 percent, which has increased our ability to enhance our economics utilizing horizontal drilling and multistage completions to develop established unconventional reservoirs. As a result of these efforts, we can now shift our development strategy, expect to spend an additional $500,000,000 in capital next year, largely directed towards increased drilling horizontal wells. The step up in capital will allow for additional 4 rigs, which will be dedicated to drilling horizontal wells in our focus plays at Wolfcamp, Wolfbone and Bone Springs in the Delaware Basin as well as the Wolfcamp in the Midland Basin. As an example of this, we recently completed a well in our South Curtis Ranch area, which is near our Mabey acreage. It was completed in the Wolfcamp B and has tested just over 1,000 barrels of oil a day, 77% of which is oil, 15% NGLs with a small amount of remaining natural gas. We have over 17,000 net acres that is prospective for this in the area. This represents a major change in our Permian-nine CO2 development strategy in which the number of horizontal wells drilled next year will count for more than 50% of total wells compared to only 10% during 2013. Turning to our international operations, our 30 plus year history of operating in Colombia has provided us with unique insight around heavy oil production, mature oilfield development opportunities. Historically, this has been among Oxy's most profitable operations. Experience associated with steamflood development is a core competency at Oxy, a skill that fits well with Columbia's strategy to grow its crude oil production. Going forward, we tend to focus our efforts on applying our expertise for the pursuit of high additional, high return oil redevelopment projects and we expect to participate in several more steam plant projects in the coming years. In our Middle East North Africa business and as Sandeep discussed, majority of the value of our production income and cash flow is derived from 3 key countries: Oman, Qatar and UAE. Majority of our regional capital is also deployed in these countries and we expect our MENA business will generate more than 2,000,000,000 dollars a year of annual free cash flow after El Hozan gas project becomes operational. We feel fortunate to have had many successful years operating in the region. Part of this we believe is a result of successfully executing on a number of challenging projects. We also feel that is in part due to the mutual respect we have for our partners, the host countries in which we operate and the people who reside there. If we were to sale of a minority interest would reduce our share of MENA within our overall portfolio, we expect to remain a major participant in the region with a focused presence. Our track record of success and strong relationships should allow us to compete for new projects and provide us with future growth of a smaller base. We look forward to forging new partnerships in the region, which will allow us to continue our profitable growth strategy. Opportunity for high growth is also present in our Chemicals business, where we plan to pursue a fifty-fifty joint venture with Mexichem to build a world scale ethylene cracker at the OxyChem plant in Ingleside. As a part of this long term strategy strategic supply relationship between companies, essentially all the ethylene produced in the cracker will be consumed by Oxy and the manufacture of vinyl chlorate monomer, utilizing our existing VCM production capacity. The VCM will then be delivered to Mexichem to produce poly polyvinylchloride PVC and PVC piping systems. Using the cracker, OxyChem's overall operations effectively consume more than 1 third of Oxy's domestic gas NGL production. Significant benefit of this project is that it provides a level of higher level of integration for the wellhead through the VCM production and sales. The project is just one example of several we plan to pursue in our effort to capture greater value in the downstream portion of natural gas and the NGL trains versus an independent upstream gas producer. Construction of the Ingleside Cracker project is expected to begin in mid-twenty 14. The facility is becoming commercially operational in 2017. We expect it to have a material benefit in our chemical earnings. OxyChem is also expected to continue to be free cash flow positive throughout the investment phase of the project. In the Midstream segment, our investment in the BridgeTex pipeline continues on track for a stable start up in mid-twenty 14. The roughly 450 mile long pipeline will be capable of transporting approximately 300,000 barrels a day of crude oil between the Permian region Gulf Coast refinery markets. We are confident these and other opportunities to deploy our capital will be meaningful drivers of our earnings growth over the coming years. I think we're now ready to take your questions. Tamika, can you please hold Your first question comes from the line of Doug Leggate with Bank of America Merrill Lynch. Thanks. Good morning, everybody. Steve, I've got a couple if I may. Good morning. So starting with the Middle East, there's been a lot of speculation over the potential value that may or may not be associated with this asset. I know you can't give specifics, but could you frame for us given the relative lack of transparency in terms of you've done a good job today laying out the businesses, but reserve bookings and so on are still somewhat lacking transparency. So can you help frame for us what you think a realistic acceptable range of value might be and whether or not the midstream would be part of that? I've got a couple of follow ups please. Yes. The Dolphin project would be part of the sale process. So that piece of our midstream business would be part of that sale. There are confidentiality agreements between the 3 in each of the countries. So you can't actually give you more transparency without violating the confidentiality agreements. So for example, we can't tell you the details in Oman or Qatar or Abu Dhabi. I think it's fair to say that we book only to the life of the lease. And as the extensions come, obviously, more reserves come. We also appreciate basically over that life. So the earnings are somewhat understated. I think if you look at the cash, we view it as an ongoing business. That is to say it's not just a pile of assets that we're going to deplete. To the extent it's ongoing business, we expect to receive a price that reflects the value of an ongoing business, not through a price of a depleting asset or the reserves that are necessarily the reserves are there. The countries can see the long term reserves. So I don't think there's a lot of issue with them not understanding what the long term outcome is. I don't really want to get I don't really want to negotiate with myself on the values. Okay. A related question then Steve on the buybacks the potential. I mean there's been a number of branded around in the press of $8,000,000,000 from the Middle East, but let's assume that was reasonable. I believe there are some tax issues around what you can bring back as an optimum level. But if we then look at planes and potential midcontinent sale, can you help frame for us what you see the scale of the buyback likely be? And if I may just add something to this. Acquisitions in the Permian Basin seem to have slowed down. I guess valuations have got something to do with that. You're generating a lot of cash. So how should we think about buybacks on a go forward basis to maybe enhance your per share growth? I think buybacks will be important element of per share growth in the next certainly the next few months. We have a lot of cash on the balance sheet. We had $3,800,000 at the end of the quarter plus the money from the sale of the midstream assets. We would expect to begin to repurchase some shares to shortly. As far as the scale goes, we're not going to build cash. We're not going to pay down. Debt reduction will be proportional. So if we sell 10% of the assets maybe the debt will go down 10%. We only have about $7,000,000,000 of debt. So it's not going to be a big user. These projects will not will probably allow us to still stay within our cash from operations next year. So it's probably not going to drain a lot. As far as acquisition is concerned, I think the issue in the Permian is about there's not a lot for sale. And that which is for sale isn't all that interesting. If companies get we have a lot of acreage. Acreage. I've just highlighted just one small area where we're doing well. We have a lot of acreage. And so the need to drive the business through large scale acquisitions is pretty modest at this point. So you should expect the bulk of the proceeds to go towards share repurchases. And now we're not going to build cash. So I think you should I can't tell you exactly the number. And one of the reasons why we're once we could frame this more clearly as to how much money is involved then we can talk about the last steps in this. But I think we can all see where we are. Our goals are really twofold. We need to make sure we continue to operate well because that's really what drives value. And we need to execute the things we've announced. So I think that's what we're trying to do. Once we get that lease in sight, then we'll talk about further restructuring steps. Okay. Last one for me. Is that helpful or not? I guess we're lacking specifics Steve. So obviously I think the market is kind of telling you that we're lacking specific. So I guess we'll have to wait until you can give more color. But if I could try one final one if I may. Your press release the other day failed to mention California. It continues to be a drag and frankly a steel on performer I guess in the end of the market. What are the parameters that you think may or may not contribute to your decision on whether or not California view on the restructuring on a go forward basis? I'll leave it there. Thanks. Yes. I think, let me go back to this question about WACC. I mean, you could come up with a very high number without me telling you exactly what it is for the share repurchase. I mean, so you might be off $1,000,000,000 or $2,000,000,000 but that's about all. I mean, you could use the numbers that are floating around out there. You could guess what the proceeds from the Mid Continent sale would be within a few $100,000,000 You can obviously see how much cash we have now. So I don't think anybody should be off very much in computing how much the share repurchase would be. There's debt reduction and other stuff is not large in comparison to that. As far as California is concerned, the fundamental question as a standalone business with a different model. The different model, if it's going to operate just like it does now, then it might be better off staying the way it is. But if it can operate better with a different model that is a higher capital model, basically no little or no dividends and with a more entrepreneurial background. But I think that it'd be better separated from the company. More to the point I think is that separated California from the rest could enhance the visibility and the attractiveness of the remaining business. And I think that's I think clear enough for now. Once we get some slightly better numbers on the proceeds of these two areas that we're working on now, then we can size California if we're going to do it Terreson with ISI. Good morning, everybody. Congratulations on your results. Thank you. Yes. Steve, you highlighted on some of the strategic review slides a major change in strategy in the Permian today. It's going to be driven by this new exploitation team. And on this point, I wanted to see whether you could provide some color or whatever color you might have on this new unconventional drilling group in the Permian? And also you also just mentioned a few minutes ago about the Plains All America position. And the question there is whether there's any strategic or operating rationale as to why the remainder may not be divested in the future. So two questions. Yes. I guess the second one is easy to say. It will be divested in the future. Thank you. So there's no when we entered into it, it was a private business. And I don't have any problem investing in a private business that shareholders can't access, if I think it makes sense for us. Once it becomes public and you can duplicate the ownership with yourself, there's no reason for us to hold it. I'm going to let Vicki answer the question about the operational group. Okay. First, I'd like to say, thanks to our current Permian unconventional team that's gotten us to where we are today, because currently we're running 7 horizontal rigs. We expect to ramp that up to 16 next year. So we're now getting more aggressive with our properties in the Permian, because we now understand them a little bit better. This exploitation team is going to be one that we have developed to get us into a position where we're more entrepreneurial and much more aggressive in the way that we attack our unconventional opportunities in the Permian. So this group, we expect to start helping us to more accelerate those opportunities that would have been 2 to 3 years out in our typical development schedules. This team also will focus on ensuring that we provide the technical support to the business unit to make sure that we're spacing our wells correctly that we're adequately drilling the our horizontal wells in the correct direction and spacing. So the bottom line is we just expect this to be a technical score to help us to get more aggressive. Great. Thanks a lot. Your next question comes from the line of Ed Westlake with Credit Suisse. Yes. Good morning, Steve. Good morning. There's a statement in your slides on slide 35 saying expect to complete strategic review in the coming months. Is that a statement just around the overall thinking about the business? Or is that around the timing that you might expect for making some of the disposals in the Mid Continent and valorization in the Mideast that you've discussed? And the decision about California. Right. Okay. So that's intended to be as soon as we have clarity about the proceeds. All right. Okay. And then very disruptive. I don't know if people don't understand it. We put out the announcement so that we could go do the work because you can't go secretly go sell 9% of your ashtranche. Once that's done and then we'll look at the next step of what we need to do. But you can't just disrupt the whole organization all at once with sort of this massive idea without some pretty specific numbers. And then a question that maybe you'll be able to answer the Middle East. Obviously, it seems like there's a decent amount of growth still to go for and thanks for the slides. Is there some sort of recovery factors you can give on these fields at present to give us some kind of a geological understanding even if you can't talk about reserve bookings that could help us think about the long term for these fields, particularly Amman, I guess? Unfortunately, that's part of what you're supposed to keep secret. But there are very high recoveries by U. S. Standards or by current U. S. Standards. They're like fields that were discovered in the U. S. In the 30s not like fields that are discovered last week here. Okay. And then the final one, it's used to chemical cracker. I mean, world scale is sort of $5,000,000,000 to $7,000,000,000 Is that the right ballpark for your No, no, no nowhere near that. This is under $1,000,000,000 our share. Okay. Great. Thanks very much. Thank you. Your next question comes from the line of Leo Mariani with RBC. Hey, guys. Just a question on the Permian here. Just looking at your oil production, it's kind of been flattish there for the last handful of quarters. Clearly, you're accelerating activity in 2014. You talked about an incremental $500,000,000 to drill horizontal, largely unconventional. You guys also talked about clearly significant proceeds coming in the door soon. I mean ballpark it's probably easy to get to something like a $10,000,000,000 type of number. Should we expect that is if you guys have success that as we get through 2014 that 2015 2016 can see a lot more incremental capital on the Permian given how big your acreage position is here? I certainly hope so. If it isn't, then it hasn't been successful. But we expect the Permian to be self funding because there's so much cash that comes out of the steel 2 business. Okay. I guess in terms of your activity there, you kind of mentioned that acquisitions were didn't seem like they were as paramount. I mean, do you think there's still potential for that down the road if stuff becomes available that looks more attractive to you guys? Or do you think you have enough acreage to really drill this aggressively for many years to come? I don't think we need to do any acquisitions. Obviously, it's something attractive comes along that's different, but we're certainly not going to press acquisitions. Okay. Good. Thank you. We're better off frankly buying the shares with the monies and doing the acquisitions. Okay. Thanks a lot. Appreciate it. Your next question comes from the line of Paul Sankey with Deutsche Bank. Hi. Good morning, everyone. Steve, do you think you can complete the Middle East deal by the end of the year? Complete? Because you got to sign a lot of documents and documents probably fill a room. So I think that I expect we'll have clarity as to the proceeds by the end of the year and probably signing on completion in the Q1. And when you talk about a minority, I think the previous guidance was 20%, 25% sale. Is that still I think you should think of it as being focused on how much money we can bring back in an efficient manner rather than the exact percentage. Yes. And that's being reported. So there's some amount of money which is a a sizable number that we can bring back in an efficient manner. The Middle East business generates a sizable amount of foreign tax credits. And so we have a pile of those that we can use. It would continue to generate foreign tax credits to shelter the income going forward. And so if you exceed what you have, you pay taxes U. S. Taxes on money that you would otherwise not pay taxes on. So we're mindful of that in this phase. I understand. I don't know if that was helpful or confusing. No. I think people have been talking about an $8,000,000,000 type number as being the ultimate proceeds and you work around the percentage share towards that. And then I think the year end guidance that you've kind of given at least what matters is the number is in line with what we're hoping? Yes. Without going to the exact numbers, I don't think that's useful. Again, we're in negotiations. We should not negotiate with sales on the phone. Yes, I understand. And the options for California is that a spin IPO? What are you thinking there? We really haven't decided what the options are. Generally simpler is better. Increased complexity is probably not something I'm up for at this point. So would that imply spin then? What's the simplest thing to do? I mean there's 2 simple things to do and only 2 simple. Everything else requires a lot of brainpower and we're I'm short of that right now. Fair enough. I think I'll leave it there. Thanks, Steve. Thank you. Your next question comes from the line of Spindel Pozo with IHS. Yes, good morning. I've seen a big run up in Delaware Basin stocks over recent months. I know you guys have a lot of acreage there. So do you think that the I think it's based on a relatively small number of successes in the horizontal Wolfcamp such as you had mentioned on your call. I'm wondering where do you think we stand in making this play more repeatable in the Delaware Basin? Vicki, you want to take a shot at that? That's true. There are relatively few wells. We are encouraged about what's going on. So let me talk here for a minute. And again, that's part of what the exploitation teams will be doing and working with our current business unit that is to look at the data in the Delaware. We do believe that there is potential there and it is repeatable. And one of the things that we're going to focus on trying to do is determine what drives the variations within the reservoir. This team has the skill sets we believe to work with the business units to accomplish that. And so it's just a variability that we want to understand a little bit better, but we do believe that success is repeatable. And in your opinion, is it more upside in the Wolfcamp formation or Bone Springs or equal just as an idea? And then separately, Wolfcamp in Midland Basin, how would you compare the 2 kind of answering the question the same way just like you did now? I think that the upside in both Wolfcamp and Bone Springs will be ultimately pretty equal. And the Wolfcamp and the Midland Basin certainly we've had some recent success there that based on the information we see a couple of wells we're drilling now and from offset operators where we're certain that that's going to be very successful. Thank you. And moving over to the Bakken for a moment. Most of your drilling, I think it's been in southwestern Dunn County. Is that to hold the acreage by production or is that just your own choice because you've got a lot of acreage outside of that area as well. And I'm just wondering what your plans are for developing that other acreage? We've been focused on holding the production holding it by production. Okay. And then The majority of the drilling is done for that purpose. Okay. Thanks. And then Pronghorn Sand in the Bakken, you mentioned that in your last press release. Have you had any successful wells in the Pronghorn Sand? I know that there's offset operators that have had success there. I'm wondering where when you guys plan to drill Pronghorn Sand or if you have already? Bill can answer that. Yes. We've drilled a couple of problem horn wells and we've been very pleased with the success that we've seen so far. So I think you could expect more of that. Okay. And then finally just a little bit of data points. If you could help me with the Dolphin project equity income. I know you've disclosed that in the past, but it was a while back. And just to bring me up to speed on what that is on an annualized basis and that equity income number, if it's a pre tax number or a post tax number? And you can get me that later if you want or if you know it, I'd appreciate it. Roughly 60% of the income in the midstream business is split between Gulf and midstream pipeline and the Plains interest. So if you take our midstream income for a year, I wouldn't use any quarter numbers. For a year, something like that. Okay. Thanks. But something like that. Okay. Thank you very much. Your next question comes from the line of Faisal Khan with Citigroup. Good morning. Good morning. Good morning. On the $2,000,000,000 of annual free cash flow you expect to generate out of the MENA portfolio after the Alhosin startup, can you discuss if that free cash flow number sort of assumes that you continue to spend capital on growth projects? And if you can also discuss if that the CapEx number kind of embedded in that free cash flow number if that's enough to sort of replace reserves? And the answer is continue to spend it on growth projects and it would be enough to replace reserves. So it includes some of the projects you're looking at in the UAE and in Oman some of the The 2 projects that are in hand now that we think we have. If we want to do something brand new that may have a different effect. But that's but if you look at what we have in hand and projects in Qatar and Oman and Abu Dhabi that sort of includes all of that. But if you said well, you're going to have some projects some other place it's radically different than we have a different outcome. But this includes enough to replace production. Okay. Understood. And then your comments on the sort of favorable permitting environment in California, is that a result of the law that was signed into or the legislation that was signed into law by Jerry Brown? Or was it is there something else that's going on in terms of how you're lining up the permitting process in the state? Vicki, can you answer that? Yes. I would say that the division of oil and gas and geothermal resources for the state of California has been trying diligently to ensure that there's more certainty around the permitting process. And so they've been processing permit applications as quickly as they can. Granted, it still takes a while in the state because of their personnel resources. But recently we've also been trying to anticipate the application of details from Senate Bill 4 that was just passed. And we're trying to ensure that we stay ahead of the anticipated specific requirements of that bill to ensure that we're not negatively impacted by that. So the Senate bill does it help provide more transparency to the process? Or does it make the permitting process more difficult? It's going to it will provide more transparency, but it will also require more monitoring from the operator standpoint, also more reporting. And we're hoping that the requirements are not so stringent that they overload the staff at the DOGGR. And that's the bigger issue for us is that increased permitting requirements is going to be a load on their staff. Okay. Okay. Thanks for the color. And just last question for me. Could you give us the sort of what you envision the capital cost being for the ethylene plant, the gross cost? Well, I said that half of it would be under $1,000,000,000 Okay. And so So, whether it's 750 or 800 or something like that that's sort of the range for half of it. Okay. And do you have all the permits in hand the air permits and the CO2 permits? Yes. I think we're about set to go. Okay. Great. I appreciate the time. Thank you. We'll be spending some money this year, but it will build up in 2014, 2015 2016. Okay, understood. Thank you for the time. Thanks. We do have time for one more question. Your final question comes from the line of John Herrlin with Societe Generale. Hi. Two quick ones. Given more of an unconventional focus, should we expect to see your pet camp go up in the U. S. Steve? PUDs as a percentage of proven. The actual PUD count is very large. How much they actually they were always very reluctant to book PUDs. And you got to put a gun to their head to get them to book PUDs. So I would suggest that the PUDs are likely not to change very much as a percentage. It doesn't mean there aren't PUDs. It's just they feel let me just tell you why. They feel they're borrowing from next year's program. So if they book a PUD, they book the barrels now and the money gets spent say next year. So they're afraid of just hurting their F and D costs next year. So basically you have this steady state of HUDs and BDP adds and therefore your F and D costs are from the perspective of people who do it more predictable. We can argue and I have with them that there's more pubs out there, but they tend to take a very conservative view of it. I don't think there's any question about that. Not the end of the world or worse things you could do. Okay. That's fine. I just was wondering whether you were going to be more like your peers because you are more conservative. No. I think it required brain surgery and we're not up for that. That's part of the myeloid mobility as I get older. Okay. Novobotomies are pipping. Next question. With California, you're spending more on G and G and you said you're going to do more on conventionally. Are you going to be outside existing areas for your unconventional activities? What I'm trying to get at is in terms of volume recruitment, will production activities be more protracted if you're not within your existing field areas or TBD to be I think we're going to build out from our field areas rather than go off. Part of building efficiency is to build out from your existing infrastructure. And we don't one of the keys to the next year or so is to keep the efficiency strong. So we'll build out from where we are. Okay. Great. Thank you. Thank you. Chris? Please give us a call if you have any questions further questions here in New York. And thanks for joining us today. Thank you.