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Operator
Good morning.
At this time, I would like to welcome everyone to the third quarter 2008 earnings conference call.
After the speakers' remarks, there will be a question-and-answer session.
(OPERATOR INSTRUCTIONS).
Mr.
Stavros, you may begin your conference.
Christopher Stavros - VP of IR
Thank you, and good morning everyone.
I'd like to welcome you to Occidental's third quarter 2008 earnings conference call.
Joining us on the call from Los Angeles are Dr.
Ray Irani, our President and CEO, and Steve Chazen, our Senior Vice President and CFO.
In just a moment, I will be passing the call over to Steve who will spend some time discussing our balance sheet and cash flows and also review our third quarter and nine months financial results.
Our third quarter earnings press release, Investor Relations supplemental schedules and the conference call presentation slides which refer to Steve's remarks can be down loaded off of our website at www.oxy.com.
I'll now turn the call over to Steve Chazen.
Please go ahead.
Steve Chazen - CFO, SVP
Thank you, Chris.
We'll discuss earnings in detail in a few minutes.
However, we would like to start with cash flows and our balance sheet.
Our cash flow from operations for the nine months of 2008 was $8.1 billion.
We used $3.2 billion of the company's cash flow to fund capital expenditures, $3.3 billion for acquisitions, and $680 million to pay dividends.
We also spent $1.5 billion to repurchase 19.4 million common shares.
These and other net cash outflows decreased our $2 billion cash balance at the end of last year by $550 million, to $1.45 billion at September 30th.
Debt was $1.8 billion at the end of September which was unchanged from December 31st, 2007.
Our debt to capitalization ratio is 6%.
Next year we have maturities totaling $714 million.
After that we have maturities of $239 million in 2010 and $368 million in 2012.
We ended the quarter with $1.45 billion in cash in the balance sheet, we recently borrowed on another $1 billion which could be used to cover debt maturities.
And we will pay $1.25 billion for the plains transaction.
We have available unused lines of committed bank credit of $1.5 billion.
Pro forma debt to total capitalization with the recent debt issue was 9% or about $0.98 per BOE of proved reserves.
Occidental generates significant cash flows over a wide range of prices.
As noted in the cash flow available for capital and other uses slide included in the Investor Relations package.
For example, in 2005 when the WTI price were $57 a barrel and production from Continuing Operations was 466,000 BOE a day, we had free cash flow of $2 billion after spending $2.3 billion for capital expenditures and $500 million for dividends.
Cash flow from Continuing Operations is after interest and income taxes.
Continuing Operations excludes Russia, horn mountain, Equador and Pakistan.
If you adjust for the 2005 dividends of $483 million, and $131 million net interest expense, and current 2008 annualized amounts of $912 million for dividends and interest expense, we would have cash flow available for capital expending in excess of $3.9 billion.
Additionally, production has increased from increased to 594,000 BOE per day in 2008, compared to 466,000 BOE a day for 2005.
This is after removing horn mountain, Equador, Russia and Pakistan from the 2005 numbers.
The increase in production is primarily from dolphin, Argentina and domestic additions.
These new programs on average generate more cash flow than the programs they replace.
Difference between the first nine months run rate of 594,000 BOE a day, and 466,000 BOE a day of 2005 is about 45 million BOE per year.
Using the production outlook, we gave you for next year in the last quarter's report of about 650,000 BOE a day, the difference is about 200,000 BOE a day or about 70 million barrels per year.
Therefore, we would have well over $3.9 billion in cash available for capital expenditures in the 2005 $57 per barrel price.
Let me now begin discussion of the third quarter's results.
Net income for the quarter was $2.3 billion or $2.78 per diluted share, compared to $1.3 billion or $1.58 per diluted share in the third quarter of 2007 when prices were $75 per barrel.
Here's the segment breakdown for the quarter.
Oil and gas third quarter segment earnings were $3.618 billion, compared to $1.955 billion for the third quarter of 2007.
Oil and gas core results for third quarter of 2007 were $1.914 billion after excluding gain for the sale of oil gas and interest and ex floor raise properties.
The following accounted for the increase in oil and gas earnings between these quarters.
Higher worldwide oil and gas realizations resulted in increase of $1.8 billion of earnings over the comparable period last year.
Occidental's average realized crude oil price in 2008 third quarter was $104.15 per barrel an increase of 54% from the comparable period last year.
Oxy's domestic average realized gas price for the quarter was $9.35 per MCF compared to $5.90 for the third quarter of last year.
Worldwide oil and gas production for the third quarter of 2008 averaged 588,000 barrels of oil equivalent per day increase of 3% compared with the 570,000 BOE a Daypro ducks in the third quarter of last year.
The bulk of the production improvement was a result of 31,000 BOE per day higher production of the dolphin project which began production last year at this time.
Partially offsetting these increases were 5,000 BOE per day of lower volumes attributable to Hurricane Ike resulted from pipeline curtailments due to third party NGL fraction.
And 13,000 BOE a day and lower volumes for the Libya operations due to the new contract which I discussed in last quarter's conference call.
Exploration expense of $61 million in the quarter, below our guidance of $90 million to $110 million.
Oil and gas cash production costs for the first nine months of 2008 were $14.80 a barrel, compared to last year's cost of $12.33 a barrel.
Approximately 38% of the increase related to increased energy costs.
Increase reflected higher production taxes and add valorrum, workovers and field operating costs.
Chemical segment earnings for the third quarter of 2008 were $219 million, which was higher than our guidance of $135 million to $150 million.
Higher earnings were attributable primarily to higher caustic soda prices.
Chemicals earned $212 million in last year's third quarter.
Midstream earnings for the third quarter of 2008 were $66 million, decrease of $20 million from last year's results.
The decline in earnings was due to lower crude oil marketing margins, partially offset by higher pipeline income from dolphin, higher NGL margin in the gas processing business and improved margins on the power generation side.
The worldwide effective tax rate was 40% for the third quarter.
Let me now turn briefly to our performance for the first nine months.
Net income was $6.414 billion or $7.79 per diluted share for the first nine months of 2008.
Compared to $3.948 billion or $4.69 per diluted share for the same period last year.
The nine months 2008 reported net income was another record, and was 62% higher than the first nine months of 2007 net income.
Income for the first nine months of 2007 included a $1 billion benefit net of tax, the items noted on the schedule attached.
Capital spending was $1.2 billion for the quarter and $3.2 billion for the first nine months.
We expect our total capital spending for the year to be about $4.5 billion to $4.7 billion.
Our preliminary estimate is that next year's capital spending will be no greater than this year's.
The weighted average basic shares outstanding for the nine months were $820.1 million, the weighted average diluted shares outstanding were $823.8 million.
At September 30th, there were 810.1 million basic shares outstanding, and the diluted share amount was approximately 813.8 million.
Oxy's 2008 annualized return on equity was 34% within an annualized return on capital employed of 32%.
As we look ahead in the current quarter, we expect oil and gas production to be in the range of 610,000 to 625,000 BOE a day during the fourth quarter, at approximately current oil prices.
We expect fourth quarter production increases in the Middle East and North Africa, reflecting lower product prices on our production sharing contract, higher domestic production and production increases from Argentina.
With regard to prices, a $40 per barrel decrease in WTI prices from the third quarter would reduce oil and gas fourth quarter earnings before income taxes by about $1.5 billion.
Further changes of $5 per barrel in oil prices will impact oil and gas quarterly earnings before income taxes by about $190 million.
A $3 per million BTU decline in domestic oil prices in the third quarter would decrease oil and gas by $140 million.
Additionally, we expect exploration expense to be about $150 million for seismic and drilling for exploration programs.
We expect chemical segment earnings for the fourth quarter to be about $150 million.
High caustic soda prices are expected to continue through the period, offset by weakness in the construction and housing markets impacting domestic demand.
Despite the difficult economic conditions, a seasonally weak fourth quarter and concerns over export opportunities over the balance of the year, we believe this approximate earnings is likely.
We expect our combined worldwide tax rate for the fourth quarter to be about 44%.
Expect the rate to increase due to proportionately foreign source income and higher anticipated currently non-deductible foreign exploration.
Our third quarter US and foreign tax rates are included in the Investor Relations supplement.
Copies of the press release announcing our results and the schedules are available on our website or through the Edgar system.
We're now ready to take your questions.
Operator
(OPERATOR INSTRUCTIONS).
We'll pause for just a moment to compile the Q&A roster.
Your first question comes from the line of Michael LaMotte with JP Morgan.
Michael LaMotte - Analyst
Thanks, good morning.
Steve Chazen - CFO, SVP
Good morning.
Michael LaMotte - Analyst
Steve, if I could ask about the CapEx a little further, you mentioned that in '09 you don't expect it to be any greater than '08.
I'm really trying to get a sense as to what the mix could look like, though.
I know you have a good bit of discretionary spend in there, particularly with respect to workovers and that workover was a big portion of your volume guidance last quarter for '09 and 2010.
Can you talk about how that might change and what impact that might have on volumes next year?
Steve Chazen - CFO, SVP
Most of the workover was started late this year, in the back half of this year.
Michael LaMotte - Analyst
Okay.
Steve Chazen - CFO, SVP
And so I don't think you'll see much change in 2009 from this change.
From the workovers that may have worked at $90 obviously have been stopped and because some of it was intended to just generate a quick hit.
So at this point, we probably wouldn't fool with the guidance for next year.
Michael LaMotte - Analyst
Either on CapEx or volumes?
Steve Chazen - CFO, SVP
For the volumes.
Michael LaMotte - Analyst
Yeah.
Steve Chazen - CFO, SVP
CapEx, we're still working on the CapEx.
We expect that the costs will decline this year, this coming year, as demand for Oilfield Services declines, certainly in the United States.
So it's pretty hard for us to guess what the impact will be, but right now we're working on a program that is somewhat less than the current run rate.
Michael LaMotte - Analyst
Okay.
And then --
Steve Chazen - CFO, SVP
We would be more specific if we knew, you understand.
Michael LaMotte - Analyst
I understand.
That's good color.
On the billion dollar debt issuance, that price is around 7%, is that right?
Steve Chazen - CFO, SVP
7%, right.
Michael LaMotte - Analyst
If I think about priorities for use of cash, you mentioned the 714 due in '09.
7% is not bad, particularly in this market.
How would you think about sort of reloading again to take out the 714 in order to keep powder dry for acquisitions or other opportunities?
Steve Chazen - CFO, SVP
I don't know.
I just don't know.
Just depends on where we are then.
So I just really don't know.
Michael LaMotte - Analyst
Okay.
Steve Chazen - CFO, SVP
If it changed -- right now, there's-I'm told BBB issuer, we're a middle A issuer.
In BBB issuers, there's $100 billion of them waiting in the queue for rates into the single digits, I guess.
I think it's going to be a very difficult year next year for people to refinance and so we'll see.
More likely than not, I wouldn't bet my life on it, but more likely than not we'll have enough free cash flow that we won't need to worry about the 714 of maturities.
Michael LaMotte - Analyst
Certainly looks that way now.
Steve Chazen - CFO, SVP
Yeah.
Michael LaMotte - Analyst
And then lastly from me on Argentina, up volumes a little bit in 4Q, so no real impact yet on what's going on down there?
Steve Chazen - CFO, SVP
If you look at the map, it's a long way between Buenos Aires andAntarctica.
So the noise doesn't have any affect.
We continue to be optimistic in improving our results in Argentina.
Michael LaMotte - Analyst
Thanks.
Operator
Next question comes from the line of Michael Jacobs with Tudor Pickering Holt.
Michael Jacobs - Analyst
Thank you and good morning.
Steve Chazen - CFO, SVP
Good morning.
Michael Jacobs - Analyst
Just going back to CapEx and thinking about how to overlay your comments on '09 CapEx with your high graded assets that generated more cash flow per barrel of production today than similar assets generated in '05, when we think about that cash flow and compare it to capital spending from '05 to '06 when oil averaged roughly $60 a barrel, if oil prices afternoon $60 a barrel in '09 should we infer that Oxy would spend between.
How high could that number go up?
Steve Chazen - CFO, SVP
I think you should expect that we'll spend about the same next year that we spent this year, which is 4.5 or so.
So we just show you here on this table what we actually spent that year, but we've got a significantly bigger company and some commitments to stuff.
So we'll probably spend closer to the 4, 4.5 area.
But at that price, there's still a lot of room I think.
Michael Jacobs - Analyst
If you were forced to cut capital, could you point us towards where the first cuts would come out of within the overall?
Steve Chazen - CFO, SVP
If you're stuck with the current environment, which I don't know what that means exactly, but let's say if it were to freeze for a nanosecond before it changed, your gas drilling at $6 in MCF is probably something we would defer.
Our leases are long lives.
So we're not really doing anything to our inventory.
We're just slowing that up a little bit.
Some workovers or recompletions that might have worked in an $80 or $90 environment, you would probably slow that up.
We expect also that the oil field service costs are going to come down nicely here and we hope to contribute to that decline.
Michael Jacobs - Analyst
Great.
And just a final question.
We would appreciate hearing your thoughts on what oil price you think the Middle East needs to maintain its social programs and whether your outlook for securing additional development projects has become more positive in light of the rapid drop in oil prices?
Ray Irani - President and CEO
This is Ray Irani.
I just read that the prime minister of Quatar, which is one of the richest countries of the region, said they needed $55 million to balance the budget for spending plans and he thought that the current oil prices were too low.
That's what he says.
Clearly, they are suffering also, as you have probably read.
The stock market started, down 50% this year today.
Others in the region are down 20% or so.
Some of their banks are struggling, which proves, again, when the US has a flu, the rest of the world can struggle, some have pneumonia.
So the economy of the world is being affected, including the Middle East.
How bad this recession is deep worldwide, will affect clearly demand and psychology of the market.
But as Steve said, we feel quite comfortable, $57 a barrel we'll still have free cash flow going through the numbers here.
So from there, you can draw any conclusions you want.
Michael Jacobs - Analyst
Great.
Thank you very much.
Operator
Our next question comes from the line of Ryan Todd with Deutsche Bank.
Unidentified Participant - Analyst
Yeah, hi, everyone it's actually Paul here.
Steve Chazen - CFO, SVP
Good morning.
Unidentified Participant - Analyst
Good morning, Steve.
Steve, could you help us a little bit with OpEx and how that will be affected by the downturn.
I guess DD&A is going to be sticky but then obviously the cash issues, I wondered if you could just walk us through some of those, how those will change, thanks.
Steve Chazen - CFO, SVP
DD&A is going to be sticky, although it remains to be seen when we redo year end reserves how that turns out.
But that's money already spent so that's part of the cash flow.
Operating costs obviously production taxes are going to fall sharply.
And electricity costs and CO2 costs for the third party CO2 which is tied directly to oil prices and I would guess our workover -- I know our workover costs are probably going to decline sizably and you'll start to see that in the fourth quarter.
So I would guess there would be a fairly sizable reduction over the next two quarters in operating costs, even if we do nothing.
I would like to remind you that about a year ago we engaged on a G&A reduction program which we're starting to see some of the positive effects of that and some of the other things that we've done in anticipation of a downturn, although I can't say I predicted this.
Unidentified Participant - Analyst
Can you give us a sense of the shares of those various parts that you mentioned there?
Steve Chazen - CFO, SVP
It's about -- it's around a couple of bucks a barrel equivalent, I would guess.
The other part that's a little tricky, in our production sharing contracts we pay all the operating costs and recover it through cost recovery.
And so as the volume goes up, as the production sharing contracts generate more barrels, the cost per barrel will decline from that too, because you have more barrels to spread your operating costs over.
That may be a little hard to see, but -- and that maybe added $0.30 in the last year to our operating costs per barrel, just that change from last year's average price of 72 to this year's 113, you've got about $0.30 from that fooling around with the production sharing contracts.
So there's a lot of moving parts.
It's hard for us to get an exact number.
Unidentified Participant - Analyst
But you're better than we are.
Steve Chazen - CFO, SVP
Yeah.
Unidentified Participant - Analyst
What about labor costs?
I mean, I guess we'd expect labor costs to be pretty stick right.
Steve Chazen - CFO, SVP
Certainly our labor costs will be sticky but they're probably not going to go up either.
Unidentified Participant - Analyst
What kind of proportion would they be of the overall cost?
Steve Chazen - CFO, SVP
Not very much of the total.
I would guess it's no more than 1/3 of the operating costs.
Maybe less.
Unidentified Participant - Analyst
You mentioned that there was activity at 90 that you're not going to continue obviously at 65.
What kind of volume impact does -- how much?
Steve Chazen - CFO, SVP
Not much.
Unidentified Participant - Analyst
Like 1,000 a day or something?
Steve Chazen - CFO, SVP
Certainly below 5,000.
Whether it's 1,000 or 1,500 or 2,000, I don't really know but it's not -- certainly within our error band.
Ray Irani - President and CEO
I mean, we want to remind you that Steve mentioned our volume next year we expect to be up significantly.
In spite of controlling capital spending, we expect that to continue at current oil prices.
Unidentified Participant - Analyst
That's the 650,000 a day that you had --
Ray Irani - President and CEO
that's correct.
Unidentified Participant - Analyst
So effectively you've cut your CapEx but you've maintained your volume guidance.
Steve Chazen - CFO, SVP
For the next -- ultimately, the cutting the capital if it has any effect would be beyond the forecast period.
Ray Irani - President and CEO
And bear in mind, if oil prices continue at this level, I would expect tightening of supply and demand in a few years to take place, because we're not the only ones in the universe and capital spending by foreign governments will be affected and they are the bulk of the production in this world.
Unidentified Participant - Analyst
What was your perspective on the OPEC meeting?
I thought some of the language was interesting from the Saudi's particularly.
What was your interpretation of what happened?
Ray Irani - President and CEO
I mean, the Saudi's have a difficult decision to make.
We're between Presidents and they don't want to appear to be contributeing to the economic downturn in the United States.
So they were very careful in agreeing to the production cut and because the last thing they needed was to announce the production cut and the price of oil jumps up to high numbers and then people start throwing stones again.
My interpretation is 1.5 million barrels a day was announced.
Clearly, for that to happen, the bulk of that reduction has to come from Saudi Arabia, Kuwait and EUE.
Because the other countries, which were looking for much higher cuts at this point in time, probably won't contribute to that cut materially.
So looking at the end result, the announced cut did not raise prices significantly.
As a matter of fact, prices went down.
So specifically my interpretation of the Saudis see that what was announced was appropriate in today's political environment.
international political.
Unidentified Participant - Analyst
Do you think there will be a reopening of opportunities in the Middle East.
I know we seem to change our view of this every six months.
Ray Irani - President and CEO
I think it's too early to make a conclusion.
I'm leaving for the Middle East in a week to pursue our business there and other opportunities we're working on.
Unidentified Participant - Analyst
Great.
Thank you, gentlemen.
Operator
Our next question comes from the line of Jason Gammel with Macquarie.
Jason Gammel - Analyst
Thank you.
I just had a quick question on the 2009 debt maturities first of all.
My understanding that is the bulk of those maturities are actually consolidated subsidiary debt.
Is there an actually cash outflow for Oxy when that debt comes due.
Steve Chazen - CFO, SVP
The answer is it depends.
The debt is dolphin debt.
And we could it will either be refinanced by dolphin, in which case there would be no outflow, or we would pay our share which is what we currently planned for.
Jason Gammel - Analyst
Okay.
Excellent.
So the 714 is not necessarily the full cash outflow.
I just wanted to check on the liquidity portion there.
One more if I could, please.
In the second quarter you announced a plan with Sandridge to go forward with a CO2 extraction plant where you would be the offtaker of the CO2 for EOR purposes.
Sandridge just announced pretty significant cuts to their capital budget.
Would you be willing to fund the century plant in order to open up the incremental EOR activity that would represent or would you just defer those EOR projects until such time as you could get another source of CO2.
Steve Chazen - CFO, SVP
We are funding the century plant.
That's all Oxy money.
There's no Sandridge money at all.
So the plant itself is being built with Oxy money.
Sandridge is building it but they're building it with our money.
So I don't think there's any real risk to the plant.
I think your question really is about their well drilling program.
They have a deliver a pay commitment for the bank.
They have to deliver the gas when it's ready to the plant.
If you don't deliver, bad things happen.
So.
Jason Gammel - Analyst
Okay.
Thanks for the clarification on that, Steve.
Steve Chazen - CFO, SVP
Sure.
Operator
Your next question comes from Pavel Molchanov with Raymond James.
Pavel Molchanov - Analyst
Hi, could you guys give us a quick update on the level of CapEx you anticipate in Libya next year and similarly, what oil price you think supports continued activity in your properties there?
Steve Chazen - CFO, SVP
We don't know.
It's subject to approval of the Libyan government for the capital level.
Remember, the Libyans have to put up half the money and so it's a little more complicated than just what we want to do.
Libyan production is fairly low cost, so I don't really know what the number would be, but, $25, $20, somewhere, it might be lower than that, because the lifting cost is quite low and the capital is really for growth rather than maintenance, so I just don't -- it's really hard for us to come up with a firm number.
All of these estimates about what something might be economical at some oil price or gas price, you have to make some assumption about oil field service and steel costs and that sort of thing.
You can't really make the assumption that oil is going to be or gas -- gas is going to be $5 in MCF oil is going to be $25 a barrel and steel is going to be $2,200 a ton.
Those numbers just don't go together.
So it's very difficult for people to come to grips, companies to come to grips with what the break-even price of anything is with radically changed product prices.
Ray Irani - President and CEO
I think the accurate thing is what Steve said earlier, at current oil prices or $57 even a barrel, Oxy will have free cash flow next year.
Our capital spending will be at or below what we're going to spend this year, which is about $4.5 billion, and we'll have significant growth in volume, which we estimate currently at 650,000 barrels a day in 2009.
I think those numbers are much more accurate than if you start digging into the pieces.
We've been looking at the pieces and we've given you our best estimates for the overall picture.
Pavel Molchanov - Analyst
That helps.
Just a quick follow-up on Libya.
The numbers that you will propose to the Libyan government, are they going to be for the same level of spending or increased or decreased level of spending?
Ray Irani - President and CEO
Well, we are meeting in Libya, our people are meeting in Libya to look at these things and as far as what we are going to put together with them, it's the plan we had before.
But as we said, it's not a one man show here.
They are partners of ours and so they have to approve those programs.
Pavel Molchanov - Analyst
Understood.
Thank you very much.
Ray Irani - President and CEO
Frankly, usually you have to prod those government entities to go along.
So we have some influence on the spending but not totally in our hands.
Pavel Molchanov - Analyst
Yep.
Got it.
Thank you.
Steve Chazen - CFO, SVP
Do have to fund half the money and so it's not so clear as -- the Libyan central government might decide that a road is more valuable than more drilling, for all we know.
Pavel Molchanov - Analyst
Got it.
Steve Chazen - CFO, SVP
Thank you.
Operator
Your next question comes from the line of Monroe Helm with CM Energy.
Monroe Helm - Analyst
My question's for Steve.
Steve Chazen - CFO, SVP
Hi, Monror, how are you?
Monroe Helm - Analyst
I'm doing great, how are you doing?
Steve Chazen - CFO, SVP
Good,.
Monroe Helm - Analyst
You know, you're probably the most astute CFO in the oil patch.
Steve Chazen - CFO, SVP
I hate to see who is in second place.
Monroe Helm - Analyst
(LAUGHTER) A lot of people are in last place.
Can you kind of give us your perspective on the government's efforts to free up the banking system here, what implications that may have for the willingness of the commercial banks to lend to the kind of the middle to smaller size ENP companies and whether or not problems they may be having in the banking system could be opportunisties for you guys to pick off assets at a lot cheaper price than you could have absent just declining oil and gas prices.
Steve Chazen - CFO, SVP
In the last month or two, we've made offers, people have come to say would you buy these small assets and we've made offers and the offers have been rejected, by the way.
But we were the only bidder because there's no cash.
And right now, the sellers are looking at six months ago prices and the buyers are looking at a lot lower than that, shall we say.
And so there's really not much going on now.
I think there's a lack of reality and the small producers I think are going to have a very difficult time with the banks, getting more capital at this point.
And as I talked about earlier, there's enormous backlog in the BBB space for bond deals and never mind the BB space.
So it's hard for me to envision banks being enthusiastic lenders to companies that in my view are overleveraged already.
Monroe Helm - Analyst
So we could see some forced selling of some of these assets?
Steve Chazen - CFO, SVP
Tough year.
I think once the reality comes, I think they believe that somehow on December 31st or January 1st there's going to be this incredible change.
Monroe Helm - Analyst
Right.
In the reporting of reserves?
Steve Chazen - CFO, SVP
I don't know what it is.
Some change that the world's going to get better and once again happy days will be here again.
And I think the damage to the banking system is so much greater than it's been in my lifetime, that I don't believe that.
And a lot of the buyers who competed for properties, I don't mean just the companies but whatever they're called, leverage miers, just are going to be out of the business.
So I think it's going to be a very tough environment for someone who has got too much debt.
The right amount of debt for this industry I have always felt is about zero.
Monroe Helm - Analyst
(LAUGHTER).
Well, you're pretty close to it so you're about right.
Steve Chazen - CFO, SVP
Zero would be about right.
Monroe Helm - Analyst
Do you think we'll see some of these bank lines being reduced to the point where some of these overleveraged companies would be forced to sell assets by the bank to get down to the roaring base.
Steve Chazen - CFO, SVP
Unfortunately for the banks, most of these people reuped their lines within the last few years so it's really hard to reduce it.
So I think their lines will be there.
But with the cash -- even with the reduced capital spending plans that some of these people have, I don't see where the free cash flow comes from to do what they're saying and they're relying -- some of them are relying on asset sales to stupid buyers and I'm sure there are some stupid buyers but probably not an infinite number.
Monroe Helm - Analyst
Your preference has been I believe you communicated to me your preference has been for North American oil and you have seen more opportunities in North America as opposed to the Middle East where people maybe bid down the rates of returns on some of the big projects.
Given what's going on in the worldwide financial system, don't know about some of the projects in the Middle East but is your preference still for North America?
Is it still for oil?
Or could we see you be more aggressive on the gas side, given some opportunities that might come up from weak sellers who have maybe assets and are merging unconventional resource plays where returns could be quite good once the gas price recovers.
Is that something that could be of interest to you?
Steve Chazen - CFO, SVP
It's really not about oil and gas but about money.
So if we see better returns in gas that's where we'll spend what we have and where we don't, we won't.
We are interested in building inventory of drilling locations that we can harvest over the next decade.
So that's probably says probably maybe more gas.
But we have to manage what we know how to do.
We can't do something that's out of character because the learning curve is too steep.
Monroe Helm - Analyst
Okay.
Well, congrats on your results and thanks for the great answers.
Steve Chazen - CFO, SVP
Thank you.
Operator
Your next question comes from the line of Eric Mielke with Merrill Lynch.
Eric Mielke - Analyst
Good afternoon.
I'd like just to stay with the theme of the earlier caller.
On potential for asset deals.
Are you surprised that we haven't seen corporate deals in these markets?
Steve Chazen - CFO, SVP
No.
Again, I think you have a -- let's say you're a small producer, medium sized producer, whatever you want to call them and your stock's $20 today and six months ago it was $80.
I think it's very difficult to go to the Board and say I'd like to take $20 of Joe Blow's stock or $20 of cash or whatever it is and I think until the reality comes that this is sort of the way it is, I don't think you'll see much, I could be wrong, of course, unlikely to be wrong, but I really wouldn't expect to see much until next year.
I think almost all of the medium, small, whatever you want to call them producers think things are going to be back to something like normal in the first and second quarter of next year and so they're stretching themselves to make it through then, which time things will be better, they believe.
Maybe they will.
I certainly hope they'll be better.
They might not be.
I think that's when the rubber will hit the road and I think that's when they'll be looking for deals.
Eric Mielke - Analyst
Distressed sellers scenario.
Steve Chazen - CFO, SVP
Distressed seller scenario and I don't think you'll see that until sometime next year.
Eric Mielke - Analyst
Great.
And given earlier discussion, do you have an update on dolphin and the long-term growth plans there?
Ray Irani - President and CEO
Dolphin is doing very, very well, it continues to produce above design capacity and because by production sharing contract there, volume would be increasing next year because today's oil prices are lower than they were last year.
Steve Chazen - CFO, SVP
As far as the additions go, that's really a negotiation between governments.
Eric Mielke - Analyst
And the current environment is not conducive for that?
Steve Chazen - CFO, SVP
We don't know.
It's a negotiation between governments.
Eric Mielke - Analyst
Okay.
Thank you.
Steve Chazen - CFO, SVP
Thanks.
Operator
(OPERATOR INSTRUCTIONS).
Your next question comes from John Reardon with Crowell Weedon.
John Reardon - Analyst
My question's been answered so thank you very much and have a good day.
Operator
There are no further questions at this time.
Steve Chazen - CFO, SVP
Thank you everyone for dialing in and listening this morning and have a good day and please call us in New York if you have any further questions.
Thank you.
Operator
Thank you.
This concludes today's conference call.
You may now disconnect.