西方石油 (OXY) 2010 Q4 法說會逐字稿

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  • Operator

  • Good morning, my name is Christie and I will be your conference operator today.

  • At this time I would like to welcome everyone to the Occidental Petroleum fourth quarter 2010 earnings conference call.

  • All lines have been placed on mute to prevent any background noise.

  • After the speakers' remarks, there will be a question-and-answer session.

  • (Operator Instructions)

  • Thank you.

  • Mr.

  • Chris Stavros, you may begin your conference.

  • Chris Stavros - Vice President Investor Relations

  • Thank you, Christie, and good morning, everyone.

  • Welcome to Occidental Petroleum's fourth quarter 2010 earnings conference call.

  • Joining us on the call this morning from Los Angeles are Dr.

  • Ray Irani, Oxy's Chairman and Chief Executive Officer, Steve Chazen, our President and Chief Operating Officer and Bill Albrecht, President of Occidental's Oil and Gas Operation.

  • Sandy Lowe, President of our International Oil and Gas business was not able to join us for today's call, as he is currently traveling in the Middle East.

  • In a moment, I will turn the call over to Dr.

  • Ray Irani for some opening remarks and comments regarding some of our recent transactions and new project announcements.

  • Steve Chazen will then review our fourth quarter and full-year 2010 financial and operating results.

  • Our fourth quarter earnings press release, Investor Relations supplemental schedules, and the conference call presentation slides, which refer to Steve's remarks, can be downloaded off of our web site at www.Oxy.com.I will now turn the call over to Dr.

  • Irani.

  • Dr.

  • Irani, please go ahead.

  • Dr. Ray Irani - Chairman, CEO

  • Thank you, Chris.

  • And good morning, ladies and gentlemen.

  • In a few minutes, Steve Chazen will provide details on our financial results for the fourth quarter and full year of 2010.

  • But first, I want to mention some key developments of the last week, and of the past quarter, that we believe are significant to continuing Oxy's success to 2010 and beyond.

  • Last week we announced that the government of Abu Dhabi selected Oxy to participate in the development of the Shah gas fields, one of the largest natural gas fields in the Middle East.

  • Oxy will hold a 40% participating interest in the 30-year contract, with Abu Dhabi National Oil Company, ADNOC, holding the remaining 60%.

  • We're indeed pleased that the Abu Dhabi government has chosen Oxy to participate with them in this major project.

  • This is another important step in the implementation of our growth strategy in the Middle East and in our relationship with the Emirates of Abu Dhabi.

  • You will recall while in 2007, Oxy submitted a bid on the Shah project and was not selected.

  • However, development of the field under the agreement announced last week, provides an exciting opportunity to create value for the people of Abu Dhabi and of course, for Oxy stockholders.

  • We expect it to provide similar returns to Oxy, as our traditional Middle East properties.

  • Working in close partnership with ADNOC, we will apply our expertise in this technically challenging project to develop high sulfur content reservoirs within the Shah field.

  • The project is anticipated to produce approximately 500 million cubic feet per day of sales gas, providing net to Oxy in the range of 200 million cubic feet a day.

  • In addition, the project is expected to produce about 50,000 barrels per day of condensate and natural gas liquids, which we expect to yield in the range of 20,000 barrels per day net to Oxy.

  • ADNOC is already in the process of developing the field, and a majority of its draining and procurement and construction contracts have already been awarded.

  • Production from the field is scheduled to begin in 2014.

  • Capital expenditures for the entire project are estimated to be in the range of $10 billion, with Oxy's share proportional to the ownership.

  • Another key development for Oxy, and very exciting, which we announced last month, was a strategic adjustments we have made to our asset base in order to improve the Company's performance and profitability.

  • We are selling our Oil and Gas operations in Argentina, which have not performed to our expectations.

  • The subsidiary of Sinopec, and expect after-tax proceeds to be about $2.5 billion.

  • We have made acquisitions and new producing areas for Oxy, North Dakota, and south Texas, which we believe have solid potential for growth.

  • We expect the combination of these transactions to immediately improve our earnings, return on capital employed, and free cash flow.

  • The North Dakota acquisition has already closed, and we anticipate the Argentina and south Texas transactions to close by the end of this quarter.

  • Two years ago, we went into North Dakota with a modest amount of acreage in the oil-rich Bakken and Three Forks formation of the Williston Basin.

  • Now we have expanded our position in the area to over 200,000 acres, by purchasing about 180,000 net contiguous acres from a private seller for about $1.4 billion.

  • We expect to grow our production in the Williston Basin from these properties to about 30,000 BOE per day over the next five years.

  • The south Texas acquisition from Shell, for about $1.8 billion, gives us properties, which have over 320 billion cubic feet of gas equivalent, in proven developed reservoirs, and are liquid rich with a solid inventory of drilling opportunities.

  • Oxy is already a major producer in Texas, and these south Texas assets further expand our footprint in the state.

  • We anticipate the new US assets immediately yield reasonable earnings and produce good free cash flow, even at current gas prices.

  • As gas prices improve in the future, and we optimize overall area opportunities, these properties will fit well with our overall presence, performance, and continued growth in the United States.

  • The US acquisitions, together those we made in the third quarter of last year, will replace our production from Argentina with better profits, return on capital employed, and free cash flow.

  • And as evidence of our confidence in Oxy's performance with the addition of our new US assets, Oxy's Board Of Directors has announced its intention to increase our common share dividend rate by 21% to an annual rate of $1.84 effective with the April 15 payment.

  • This will mark Oxy's 10th dividend increase since 2002, bringing the compounded annual growth rate over the period to 15.6%.

  • In 2011, we will maintain our focus on delivering value to our shareholders, and partners, as we continue improving our asset base, while growing production and reserves.

  • I will now turn the call over to Steve Chazen to report on Oxy's financial performance during the past quarter and full year.

  • Steve Chazen - President and COO

  • Thank you, Ray.

  • The core income was $1.3 billion, or $1.58 per diluted share in the fourth quarter of this year, compared to $1.1 billion, or $1.35 per diluted share in the fourth quarter of last year.

  • That income was $1.2 billion, or $1.49 per diluted share in the fourth quarter of 2010, compared to $938 million, or $1.15 per diluted share in the fourth quarter of 2009.

  • As required by accounting rules, Argentina has been classified as discontinued operations.

  • Therefore, Argentina's results have been excluded from continuing operations net of tax for all periods.

  • What this means is everything about Argentina is collapsed into a single line.

  • Details of Argentina's operating results for the years 2008 and '09, and by quarters in 2010 are included in the Investor Relations supplemental schedules.

  • Argentina has not been profitable for the last four years.

  • The 2010 fourth quarter also included after-tax non-core charges of $175 million for impairments predominantly of gas properties in the Rockies, and $80 million benefit related to foreign tax credit carry-forwards.

  • The fourth quarter 2010 core income included $110 million higher pre-tax expense, compared to the third quarter.

  • Or $70 million after-tax, $0.09 per diluted share from equity and related compensated programs, mostly due to the steep rise in the Company's stock during the final quarter.

  • Here is the second breakdown for the fourth quarter.

  • Oil and gas segment earnings for the fourth quarter of 2010 were $1.7 billion.

  • Realized crude oil prices increased 11.5% in 2010, but domestic natural gas prices declined 5.5% from the fourth quarter of 2009.

  • Production volumes for the fourth quarter of 2010 were 750,000 BOE a day, 5% increase compared to the 717,000 BOE a day, in the fourth quarter of 2009.

  • The fourth quarter production of 753,000 per day was slightly higher than third quarter production of 751,000 BOE per day.

  • The fourth quarter volumes compared to the third quarter were negatively impacted by 10,000 BOE a day from the effects of our production sharing contract, 6,000 BOE a day due to strikes in Argentina, and inclement weather in December, which impacted our California production.

  • In California, oil production was higher by 2,000-barrels a day in the fourth quarter, compared to the third quarter, and was offset by 1,000-barrels a day decline resulting from higher oil prices.

  • Affecting the production sharing contracts at our thumbs operation.

  • And by 3,000-barrels a day of lower natural gas liquids volume resulting from lower gas production.

  • Excluding Argentina, worldwide oil and gas production for the fourth quarter was 714,000 BOE a day, and the third quarter production would have been 716,000 BOE a day if Argentina were excluded.

  • The fourth quarter sales volume were 751,000 BOE a day.

  • Sales volumes different from production volumes due mainly to fourth quarter lifting in Argentina, we slipped from the third quarter, partially offset by Iraq production which will be sold in 2011, and a lifting in Colombia which was sold in the beginning of this year.

  • Exploration expense is $54 million in the quarter.

  • Chemical segment earnings for the fourth quarter of 2010 were $111 million, and in line with our earlier guidance.

  • Midstream segment earnings for the fourth quarter of 2010 were $210 million, compared to $163 million in the third quarter of 2010, and $81 million in the fourth quarter of last year.

  • The increase in earnings is mainly due to higher trading and marketing income.

  • Worldwide effective tax rate was 38% for the fourth quarter.

  • Now, let me turn to Oxy's performance during the last year.

  • Core income was $4.7 billion, or $5.72 per diluted share for the 12 months of this year, compared to $3.2 billion or $3.92 per diluted share for the full year of 2009.

  • Net income was $4.5 billion, or $5.50 per diluted share for the 12 months of 2010, compared with $2.9 billion or $3.58 per diluted share for the same period of 2009.

  • Income from the 12 months of 2009 included -- 2010 included $134 million of charges net of tax, and 2009 included $277 million net of tax.

  • The items noted on the schedule reconciling net income to core results.

  • Oil and Gas cash production costs which exclude production and property taxes were $10.19 a barrel for 2010, excluding Argentina.

  • Last year's 12 months costs were $8.95 a barrel, on the same basis.

  • The year-over-year increase reflects $0.32 a barrel in higher CO2 costs due to our decision to expense 100% of injected CO2, beginning this year and higher field support operations, work-over, and maintenance costs.

  • Taxes other than non-income were $1.83 a barrel for 2010 compared to $1.67 per barrel for all of 2009.

  • These costs which are sensitive to product prices reflect the effect of higher crude oil and gas prices in 2010.

  • Capital spending for the fourth quarter was about $1.4 billion, and $3.9 billion for the 12 months, excluding Argentina.

  • Capital expenditures by segment were 80% Oil and Gas, 13% in Midstream, and the remainder in Chemicals.

  • Cash flow from operations for the 12 months of 2010 was $9.1 billion, excluding Argentina.

  • We used $3.9 billion of the Company's cash flow to fund capital expenditures, $4.7 billion on acquisitions, and $225 million on foreign contracts.

  • These investing cash flow uses amounted to $8.8 billion.

  • We issued $2.6 billion of debt in the fourth quarter.

  • We also used $1.2 billion to pay dividends and $310 million to retire debt.

  • Argentina's net cash flow for the year was a negative $125 million.

  • After spending $415 million for capital expenditures, and contra extension payments.

  • These and other net cash flows increased our $1.2 billion cash balance at the end of last year, by $1.4 billion, to $2.6 billion, at December 31.

  • Free cash flow from continuing operations after capital spending and dividends but before acquisition activity and debt retirements was about $4.3 billion.

  • Our acquisition costs in the fourth quarter were $3.1 billion, which included the previous announced purchases of Oil and Gas bolt-on properties mainly in the Permian.

  • We expect to close the purchase of several addition properties and the sale of Argentina in the first quarter of 2011.

  • During the year, we spent $4.1 billion on Oil and Gas acquisitions, of which about 50% was on unproved properties.

  • On a preliminary basis, our 2010 reserve replacement ratio was about 150%.

  • Approximately one-third of the current year reserve adds came from acquisitions.

  • We will provide additional details regarding reserves as soon as the information is available.

  • The weighted average basic shares outstanding for the 12 months of 2010 were 812.5 million, and the weighted average alluded shares outstanding were 813.8 million.

  • And our debt to capitalization ratio was 14% at the end of the year and the 2010 return on equity was 14.7%, and the return on capital employed of 13.2%.

  • As we look ahead in the current quarter, our first quarter 2011 production will be impacted by the following factors.

  • First, we will no longer report Argentina production.

  • Second, the timing of completion of the new acquisitions, while the acquisitions of the Oil and Gas properties in North Dakota closed at year end, the acquisition of the south Texas properties is yet to close.

  • We have a planned one month maintenance and production shutdown at Elk Hills and Dalton.

  • The impact of the Elk Hills shut down, which will only impact natural gas and liquids production, will be about 8,000 BOE for the first quarter of 2011.

  • The impact of the Dalton shutdown will be about 5,000 BOE a day for the quarter.

  • We expect the first quarter oil and gas production volumes to be between 740,000 and 750,000 BOE a day, at fourth quarter average prices of $85 for WTI.

  • We expect sales volumes to be around 725,000 BOE a day.

  • The $5 increase in WTI would reduce our daily volumes by about 5500 BOE a day.

  • Once we know the first quarter's results, and the timing and the initial production rates on the transfer from the pending acquisitions, we can provide an accurate full-year production guidance.

  • Production growth will resume in the second quarter.

  • We reasonably expect by the end of the second half of the year, by at least by the end of the second half -- we reasonably expect by at least the second half of the year production will be similar to the run rate we showed you in last May's investor presentation, adjusted for oil price changes.

  • With current -- with regard to current prices at the current market prices a dollar per barrel change in oil price, impacts quarterly earnings before income taxes, by about $41 million.

  • The average fourth quarter WTI price was $85.17 per barrel.

  • A swing of $0.50 per million BTU's and domestic gas prices has a $36 million impact on quarterly earnings before income taxes.

  • This is a significant increase in gas price sensitivities, from what we have told you in the past.

  • The current NYMEX gas price is around $4.50 per MCF.

  • Additionally, we expect exploration expense to be around $85 million for seismic and drilling for our exploration programs.

  • The chemical segment is expected to provide earnings for the first quarter of about $125 million.

  • We expect margins and volumes to continue to improve as the economy strengthens.

  • We expect our combined worldwide tax rate in the first quarter of 2011 to be about 40%.

  • Our fourth quarter US and foreign tax rates are included in our Investor Relations supplements.

  • For all of 2011, we expect capital spending for the total year to be about $6.1 billion, compared to the 2010 total of $3.9 billion.

  • Both amounts exclude Argentina and the Shah field development project.

  • Occidental's share of the Shah field development capital will total about $4 billion over the next several years.

  • Our 2011 capital is close to our fourth quarter annualized run rate of $5.5 billion, and in line with the five-year capital program we gave you in the May investor presentation.

  • Plus the capital was deferred from 2010.

  • The breakdown of the 2010 and 2011 capital by area and segment is included in the supplemental schedules.

  • Our oil and gas DD&A expense for 2011 should be approximately $11.75 per BOE.

  • Depreciation for the other two segments should be about $500 million.

  • In California, we have about 520 geologically viable so-called de-risked shale drilling locations in California, excluding traditional Elk Hills.

  • Of these locations, about 250 are outside both of the Elk Hills proper, and the Kern county discovery area.

  • During 2011, based on a conservative view of the permitting process, we expect to drill a total of 107 shale wells outside of Elk Hills proper.

  • As additional permits become available, the level of drilling activity would pick up during the year.

  • We will also drill 28 exploration wells in California, in 2011.

  • About 50% of these willing for conventional exploration.

  • We expect the exploration activity will, at a minimum, create more unconventional drilling locations.

  • Copies of our press release and our supplemental schedules are available on our website, or on the SEC system.

  • We're now ready to take your questions.

  • Operator

  • Thank you.

  • (Operator Instructions).

  • David Heikkinen of Tudor Pickering.

  • David Heikkinen - Analyst

  • As we think about the industry and then your operations, we can qualitatively get some thoughts around primary potential in the Permian, also kind of the development potential, and exploration potential in California, but trying to quantify that has been difficult given current disclosure; particularly versus some of the smaller peers that we do follow.

  • Can you talk about how you think about both operationally, that asset operationally, and also how you think about how and what your disclosure process will be heading forward?

  • Steve Chazen - President and COO

  • If we take the two US assets, start with the Permian, which in some ways is easiest; I think last year we gave you a notion of how much additional was recoverable with the CO2 flooding process.

  • The drilling and the smaller opportunities -- there is a fair amount of potential there, but it is hard for us to quantify in a meaningful way.

  • We are not going to provide individual well data like some companies do.

  • So, I think the potential in the Permian is very sizable.

  • But we did provide last year how much additional CO2 flooding potential we thought there was, and we think that is probably a fairly conservative outlook.

  • As we switch to California, as the shale drilling program accelerates this year, it will be fairly obvious, we think, what the potential there is.

  • We have, I think I said 500 shale locations.

  • We don't think that the description of them is materially different from what we gave you in May.

  • That is roughly how much the recoverable per well is, the initial rates and the costs.

  • So, I think we have at least 500, and that's a very small percentage of our acreage.

  • So I think the potential there will become pretty obvious as the year progresses.

  • We start getting permits and start getting our production up.

  • Permitting process in California is fairly complicated once we leave the main field areas, so it may take a little longer than I would like, for sure.

  • But I think it will be pretty obvious when you look at production going forward, and I think you will see some pretty decent results as the year progresses.

  • David Heikkinen - Analyst

  • And then as I do think about the Permian operationally, core competencies and skill sets required to run a large CO2 flood versus running a larger primary program, can you talk about how you operationally run that?And then any details around activity more on the primary side, as far as, are you accelerating activity with the increased CapEx on more of the primary smaller opportunities there or -- ?

  • Steve Chazen - President and COO

  • Almost all of the increase is in primary drilling.

  • The numbers we're showing you is a percentage; you can multiply the percentage out.

  • Almost all of the increase is on primary drilling.

  • The capital in the CO2 program is very modest, because almost all capital is just CO2.

  • These are fields that are just increasing basically their slug size.

  • So that the increase is overwhelmingly in prime, what you would describe as primary drilling, we have a lot of acreage available, several of the areas -- we acquired some new areas or additional areas next to what we had.

  • I think you will see a pretty sizable impact of that as the year progresses.

  • But it is overwhelmed really by the size of the CO2 flooding opportunity, which is in billions of barrels, as opposed to hundreds of millions of barrels.

  • David Heikkinen - Analyst

  • And then, just bigger picture, and not trying to replace you, but have had the question about succession planning and thoughts at Oxy.

  • Can you talk about Board level and what the thoughts are around management and any -- ?

  • Steve Chazen - President and COO

  • I think we would let the Chairman of the Board discuss it.

  • Dr. Ray Irani - Chairman, CEO

  • What is your specific question?

  • David Heikkinen - Analyst

  • Basically, as you go through the transition, people ask who is behind Steve, and just want to understand kind of the Board level thoughts there.

  • Dr. Ray Irani - Chairman, CEO

  • Well, Steve will take over as CEO at the May meeting of this year, I will continue as Executive Chairman, and we do have other people behind Steve, but let's have Steve take over first, and we can also be looking at the replacement -- we have a bench, and we think we can execute our plans with our current man power.

  • David Heikkinen - Analyst

  • That's it.

  • Thanks, guys.

  • Operator

  • Our next question comes from the line of Paul Sankey of Deutsche Bank.

  • Paul Sankey - Analyst

  • Steve, can you just help me a bit with some of the volume outlook that you gave me, and the effect of California?

  • I think that you said that you're expecting volumes to be around 740,000 to 750,000 BOE in Q1, and 725,000 BOE of sales, but obviously that would be negatively impacted by the loss of Argentina.

  • Steve Chazen - President and COO

  • No, we've already done that.

  • Paul Sankey - Analyst

  • Okay, so that is all out.

  • Steve Chazen - President and COO

  • Yes.

  • Paul Sankey - Analyst

  • I think what you said was by second half, you would expect volume, second half 2011, you would expect volumes to be back in line with the volume outlook presented at the May analyst meeting, which the top line on that was like 837,000 BOE, but then there was a base tagger of 6%, should we think of it like as a percentage line or how should we work that out?

  • Steve Chazen - President and COO

  • It is hard to say.

  • The variance is built because of our demonstrated inability to predict all that well.

  • So, somewhere in that range.

  • But I think that run rate adjusted for the price, you have to take out the oil price change, that last year was not at $75.

  • So you have to adjust the production down for the product price.And so you should look for a run rate in the back half of the year for the Company, that looks like that -- Argentina was 40-some-thousand a day, or 48,000, or something like that, but we basically replaced that with the other stuff.

  • Paul Sankey - Analyst

  • So the net difference -- ?

  • Steve Chazen - President and COO

  • That difference is around zero, except for the noise in the first quarter of the hand-off.

  • Paul Sankey - Analyst

  • But then essentially what we're looking for is allowing for the change in price around the 6% growth rate being achieved by the second half of the year?

  • Steve Chazen - President and COO

  • I think that's right.

  • Paul Sankey - Analyst

  • Okay.

  • Great.

  • That clarifies it.

  • Sorry, I was getting a bit tangled up there.

  • Steve Chazen - President and COO

  • Argentina is out of the numbers I've given, and the new acquisitions are in it, and roughly speaking, they're a push once everybody's -- you have a full quarter.

  • Paul Sankey - Analyst

  • Okay.

  • Steve Chazen - President and COO

  • The first quarter is a little noisy.

  • The second quarter may be a little noisy, but by the last two quarters, we should be back in line, at that rate.

  • Paul Sankey - Analyst

  • Great, and then just on slide 7, at a very simplistic level, if I look at your Oil and Gas segment earnings, they're down from Q4 '09 to Q4 '10, despite whatever it is, $10 increase in the oil price and with increased volumes.

  • Can you just talk a little bit about what is going on there, and -- ?

  • Steve Chazen - President and COO

  • I think the two major factors, one, some of this employee expense got rolled into that; and second, it is not really operating costs.

  • The second is the mix, the mix is a little gassier.

  • Chris Stavros - Vice President Investor Relations

  • Paul, the slide you're referring to as well includes the impairment charges.

  • Because this reflects on a reported basis.

  • Paul Sankey - Analyst

  • Yes, that's right.

  • Okay.

  • I understand.

  • So that kind of explains that.

  • I will leave it there.

  • Thank you.

  • Steve Chazen - President and COO

  • Thanks.

  • Operator

  • Arjun Murti of Goldman Sachs.

  • Arjun Murti - Analyst

  • Steve, just a follow-up on the California shale comments you made.

  • I think you said about 107 wells outside of Elk Hills proper in the shale.

  • How many rigs do you need to do that?

  • Do you have them?

  • And where do you stand on completion crews, and the fracture stimulation side of things?

  • Thank you.

  • Steve Chazen - President and COO

  • We will let Bill answer that.

  • Bill Albrecht - President, Occidental Oil & Gas Operation

  • Hello, Arjun, good morning.

  • We are planning to run about 12 rigs, drilling exclusively shale wells; and that is in all of California, not just on Elk Hills proper.

  • Arjun Murti - Analyst

  • And do you have the 12 now or do you still need to procure some?

  • Bill Albrecht - President, Occidental Oil & Gas Operation

  • No, we have the 12 right now.

  • Arjun Murti - Analyst

  • And how about completion crews?

  • Bill Albrecht - President, Occidental Oil & Gas Operation

  • Well, a lot of these shale completions are acidized as opposed to fracturing, and we're in pretty good shape on our acid.

  • Arjun Murti - Analyst

  • Okay.

  • So this is a situation where, as you drill the wells, the production should show up as you drill the wells?

  • Bill Albrecht - President, Occidental Oil & Gas Operation

  • Yes, we shouldn't have a large inventory of wells waiting on completion due to a shortage of services.

  • Steve Chazen - President and COO

  • We're running along pretty well right now.

  • We are tracking the first three weeks of the month, we're right on.

  • We gave you a number here, for number of wells drilled, the locations are permitted and the rigs are in place and the completion crews are in place.

  • Unlikely, except for a rainstorm or something like that, it is unlikely that there is much down side to this.

  • Arjun Murti - Analyst

  • Right.

  • And in the analyst meeting you gave a range of 400,000 to 700,000 BOEs per well.

  • If you take 500,000 BOE's a well, times 100 wells, that is 0.5 billion barrels a year of opportunity.

  • From a reserve booking standpoint, is that how we should think about it?

  • Or is there some lag because you have to see production over time, and that's obviously just one year's drilling.

  • Steve Chazen - President and COO

  • No, I think the way you should look at it is, once you start a development program, and you drill a few wells, the rest are pretty much by analogy.

  • You don't get enormous variation on average.

  • So in theory, you could book a lot of PUDs.

  • We tend to be light on PUDs.

  • I think this past year, we're about 25% PUDs as a company.

  • So booking a lot of PUDs is not something we do an enormous amount of, but we do book PUDs.

  • Because a lot of these are very similar to each other.

  • So the statistical approach gives you a pretty conservative result.

  • We are working on -- our costs are coming down as repeatability and the completion techniques are improving.

  • So, I'm pretty optimistic that we will do pretty good.

  • But as far as the booking goes, we will book on a pretty conservative basis, but we are booking some PUDs.

  • Arjun Murti - Analyst

  • And then the last question on California, it looks like, at least relative to the 520, a decent number is within the current Kern discovery area as the shale opportunity.

  • Is that all still within that broad range of economics you provided at the analyst meeting?

  • Or is the Kern county -- ?

  • Steve Chazen - President and COO

  • Yes.

  • Arjun Murti - Analyst

  • It is, okay.

  • Will Iraq be accretive to earnings when you actually sell the oil in the first or second quarter of this year?

  • Bill Albrecht - President, Occidental Oil & Gas Operation

  • Yes.

  • Arjun Murti - Analyst

  • Terrific.

  • Thank you very much.

  • Operator

  • Doug Terreson of ISI group.

  • Doug Terreson - Analyst

  • In E&P, the growth outlook clearly appears to be improving with the new ventures, but Steve, my question with regards to potential for return enhancement between better performance on the base, some of the divestitures that I think Ray talked about and/or investment in some of the new ventures that were discussed.How do you envision normalized returns changing over the next several years related to some of these mechanisms, and which do you consider to be the most important for better returns?

  • Steve Chazen - President and COO

  • We will start with the fact of course, Argentina, which I said hadn't made any money in four years, so without a lot of effort I can improve returns.

  • Dr. Ray Irani - Chairman, CEO

  • 40,000 barrels a day making no profit.

  • Steve Chazen - President and COO

  • So I think that was a fairly easy thing for us to compute.

  • Doug Terreson - Analyst

  • Sure.

  • Steve Chazen - President and COO

  • The rest of the -- the only drag on the base, I think, the rest of the base ought to be improving, a little higher gas prices, doesn't need a lot, and a more aggressive -- California outcome should generate very high returns on invested capital.

  • And as that accelerates, we should be doing pretty good.

  • Same thing in the Permian, the CO2, remember the CO2 didn't really cost any additional capital.

  • Doug Terreson - Analyst

  • Right.

  • Steve Chazen - President and COO

  • And so the returns ought to improve there.

  • And that's really a big number.

  • The only down side is, we're going to invest the money in the Shah field.

  • Doug Terreson - Analyst

  • Right.

  • Steve Chazen - President and COO

  • And so that investment will show up as investment; and no production for four years.

  • So it will be a drag.

  • But I think the rest of it will easily overcome that.

  • Doug Terreson - Analyst

  • Okay.

  • Great.

  • Thanks a lot.

  • Steve Chazen - President and COO

  • Thanks.

  • Operator

  • Doug Leggate of Merrill Lynch.

  • Doug Leggate - Analyst

  • So, a couple of things I guess I'm afraid, the first one on California.Steve, you did mention this in one of your answers to the other questions, but just to be clear -- the 520 locations that you de-risked so far, approximately what are we talking about in terms of de-risked acreage on your 1.6 million acres.

  • Steve Chazen - President and COO

  • It wouldn't be material.

  • Doug Leggate - Analyst

  • So less than 10%?

  • Steve Chazen - President and COO

  • Oh, for sure.

  • Doug Leggate - Analyst

  • Okay.

  • So you take your rig count up, you triple it by the looks of things, from the start to the end of 2010.

  • Where do you think that trajectory gets to?

  • Are you still building rigs?

  • Not just in California, but across the lower 48?

  • Can you give some sense in this higher oil price environment, which I guess you didn't plan for, how that might play into your opportunity set in terms of activity levels.

  • Steve Chazen - President and COO

  • In California, once we get real clarity on the permitting, this thing could / will accelerate rapidly.

  • There is no reason, except right around the Kern county discovery area, why we can't put more rigs to work.

  • We just don't have the permits to drill the wells.

  • And so once we get clarity on that, in the back half of the year, there will be a fairly sizable increase in the rig count.

  • And the Permian, I think we're doing okay.

  • As the production starts to build, and we get more confidence in some of these smaller primary wells, we will probably build that up by a couple more rigs.

  • So the answer to your question is, as the year progresses, if it does what we hope, then the number of rigs will continue to build.So we would expect, as we exit this year, a year from now, to be at a much higher rig rate than we are now.

  • I can't tell you exactly when, because in California, we're still pretty much constrained by the permitting process.

  • Doug Leggate - Analyst

  • Okay.

  • I'm trying to reconcile the two -- Steve, I'm sorry to labor the point, so basically we have 12 rigs running I think is what Bill said before, and 520 locations, so let's assume you double the rig count in California.

  • How much running room do you really believe that you have there in terms of the shale drilling program?

  • Steve Chazen - President and COO

  • The 520 is a small percentage of the total that we actually have.If you count our contingent locations, and those sorts of things, right now we're triple this or something.

  • Doug Leggate - Analyst

  • Okay.

  • Great.

  • And I guess the final one for me is just going back to the production guidance.

  • The numbers you gave in May had you north of 800,000 barrels a day as an average for this year.Netting out Argentina, adding back the acquisitions, can you just help us a little bit with -- what you're trying to tell us with your guidance for the second half, what would you ideally be looking at in terms of an exit rate, if you like, for the end of 2011, if that is a number you can provide?

  • Steve Chazen - President and COO

  • I don't really think of it that way.

  • I think the simplest way to look at it is to say that the exit rate for this year will easily lead to next year's number, the following year's numbers, the 2012 numbers we've given you.

  • Doug Leggate - Analyst

  • The 2012 guidance is still --

  • Steve Chazen - President and COO

  • That's right.

  • So until we -- we may have to re-do it a little bit and raise it, but other than that, if you just look at the 2012 guidance, assume the Argentina and the acquisitions are a wash, just for this purpose, when you get through, I think -- so your run rate as you enter, at sort of December next year, will lead you to the following year's numbers we've given you.

  • Doug Leggate - Analyst

  • Adjusted for oil prices?

  • Steve Chazen - President and COO

  • Adjusted for oil prices, right.

  • Hopefully they will continue to go up, so that will be all right.

  • Doug Leggate - Analyst

  • I will leave it there.

  • Thanks.

  • Operator

  • Phillip Dodge of Tuohy Brothers.

  • Philip Dodge - Analyst

  • Good morning, thanks.

  • It looks like your US gas production increased quarter-to-quarter in the fourth quarter, even though California was down.

  • So if that is correct, can you fill us in on where some of the increases were taking place?

  • Steve Chazen - President and COO

  • We will let Bill answer that while he is looking at his tables here.

  • I could guess, but we will let Bill answer it for real.

  • Bill Albrecht - President, Occidental Oil & Gas Operation

  • One of the things to point to again is increased primary drilling in the Permian.

  • As you know, a big part of our program in the Permian on a primary basis is in the Wolfberry, and you get a lot of associated gas production with those Wolfberry barrels.

  • And you also, in terms of California shales, about 60% of the production on a typical shale well is going to be gas; and those are the two primary areas where we're focusing on in terms of primary development.

  • Philip Dodge - Analyst

  • Okay, and then next, could you bring us up to date on the expansion of the processing capacity in the discovery area in Kern River --

  • Steve Chazen - President and COO

  • The plant has been ordered, and we would expect it to be on in the first quarter of next year.

  • Philip Dodge - Analyst

  • Okay.

  • So no change?

  • Steve Chazen - President and COO

  • No change.

  • Philip Dodge - Analyst

  • And then finally is a detail, in Iraq, can you give us the gross production number for Zubair that goes along with the 11,000 barrels a day net?

  • Steve Chazen - President and COO

  • I can't.

  • Dr. Ray Irani - Chairman, CEO

  • We expect the exit rate for Iraq in 2011, the exit rate to be over 300,000 barrels a day.

  • Philip Dodge - Analyst

  • Okay.

  • And we just relate your ownership to that number, and we're pretty far along.

  • Steve Chazen - President and COO

  • It is more complicated than that.

  • Philip Dodge - Analyst

  • Can you say how much of that would be cost recovery oil?

  • Steve Chazen - President and COO

  • The cost recovery percentage is 50% of the excess over the base.

  • I think the base is 100,000 BOE.

  • Dr. Ray Irani - Chairman, CEO

  • The base was 180,000 barrels a day.

  • Philip Dodge - Analyst

  • Okay.

  • Cost, 50% over that, and you're over that now, obviously.

  • Steve Chazen - President and COO

  • Right.

  • Philip Dodge - Analyst

  • Okay.

  • Thank you.

  • Operator

  • Faisel Khan of Citigroup.

  • Faisel Khan - Analyst

  • Of the 107 shale wells outside of Elk Hills that you guys plan to drill, are those all vertical wells, or any horizontal wells planned in that program?

  • Steve Chazen - President and COO

  • Bill can answer that.

  • Bill Albrecht - President, Occidental Oil & Gas Operation

  • These are predominantly going to be vertical wells, although we do have a few horizontals tossed in, but predominantly they're going to be verticals.

  • Faisel Khan - Analyst

  • Okay, and as you step out into these other areas, is there sufficient infrastructure to move these volumes to market?

  • Steve Chazen - President and COO

  • That's why -- we're assuring that as we go.

  • Faisel Khan - Analyst

  • Okay.

  • So you're building the infrastructure out as you go along in this program?

  • Steve Chazen - President and COO

  • Or attaching to existing infrastructure.

  • That's part of the process of making sure these are the numbers we can deliver.

  • Faisel Khan - Analyst

  • Okay.

  • And then on the permitting side, when you file a permit, how long does it take -- you file a permit outside the traditional areas where you've been drilling before, how long does it take to get that drilling permit once you filed?

  • Steve Chazen - President and COO

  • That is a more complicated question than you probably want the answer to.

  • It depends.

  • You have to file a permit for your facilities, and a permit to drill the well.

  • If you're outside a field?

  • Faisel Khan - Analyst

  • Okay.

  • Steve Chazen - President and COO

  • And so it varies, based on the Air Quality Board, and those sorts of people.

  • It has been running right now significantly longer than historical, but that is probably because we have given so many more permits to look at, but it just depends.

  • Very difficult to give a rule of thumb, because it just depends.

  • But do you have -- you can think of it as two separate permitting processes.

  • One for the facilities, which would include a tank battery, would be a facility.

  • Faisel Khan - Analyst

  • Okay.

  • Dr. Ray Irani - Chairman, CEO

  • On a positive note, the new Governor of California, and his administration, really want to focus on accelerating job creation, and they do understand that if they speed up our permitting program, as well as other things they could do, this could lead to new jobs.

  • So they are focused on trying to be helpful.

  • Faisel Khan - Analyst

  • Okay.

  • Dr. Ray Irani - Chairman, CEO

  • But as Steve said, it is not something you can push a button and it happens.

  • Many of these permits have been applied for already, and others will be continuing to be applied for.

  • But there is an interest in Sacramento to speed up the permitting process.

  • We will see what happens.

  • But at least the intention is, very much by the Governor and his staff, to be helpful.

  • Faisel Khan - Analyst

  • Is there a man power issue in the permitting process in these -- ?

  • Dr. Ray Irani - Chairman, CEO

  • No, it is just paying attention.

  • I mean, look, you're dealing with the government, and the state of California.

  • And I think as the Governor and his people direct the speed up in some of this, I think we will get some results.

  • Faisel Khan - Analyst

  • Understood.

  • Thank you.

  • And then one last question on the Shah gas project, will the CapEx be ratable over the next four years, or will we see more up-front or more towards the back end?

  • Dr. Ray Irani - Chairman, CEO

  • More towards the back end of the four years.

  • Faisel Khan - Analyst

  • Okay.

  • Thank you.

  • Operator

  • Pavel Molchanov of Raymond James.

  • Pavel Molchanov - Analyst

  • Just a quick housekeeping item on the Bakken.

  • How many rigs do you guys plan to run in 2011?

  • Bill Albrecht - President, Occidental Oil & Gas Operation

  • Right now, Pavel, we're running 7 rigs in total, and we plan to ramp that to 12 rigs by the end of the year.

  • Pavel Molchanov - Analyst

  • Okay.

  • That's all I had, thank you.

  • Operator

  • John Herrlin of Societe Generale.

  • John Herrlin - Analyst

  • Steve, what is the average completed well cost estimate for the California wells?

  • Steve Chazen - President and COO

  • Shale wells?

  • John Herrlin - Analyst

  • Yes, exactly.

  • Steve Chazen - President and COO

  • Right around $4 million; drill completed and hooked up.

  • John Herrlin - Analyst

  • Okay, great.

  • In terms of your CapEx budget for this year, how much would you consider conventional and how much unconventional since you're getting into the Bakken, in shales and all that?

  • Steve Chazen - President and COO

  • Bakken is going to be small in the total, we will show you I think in the slide there, a small percentage for that.

  • And the rest is California, maybe half of California, maybe a little more than half.

  • John Herrlin - Analyst

  • Okay.

  • What are you seeing -- ?

  • Steve Chazen - President and COO

  • A lot of the drilling on Elk Hills is shale wells, which is why we have excluded it from this.

  • John Herrlin - Analyst

  • Okay.

  • With respect to the acquisition market, you're still going to have a fair amount of free cash in the current environment.

  • What are you seeing in the marketplace?

  • Steve Chazen - President and COO

  • Well, right now, our tummy is fairly full.

  • If there is some tuck-in acquisitions, or something like that we can do, but right now we're focused on delivering this year against our very sizable backlog of activity.

  • I'm not saying we wouldn't buy anything, but it has to be something that is easy -- doesn't stretch the organization.

  • John Herrlin - Analyst

  • Okay.

  • Last one for me.

  • On the services cost front, any issues with escalation in some of the areas you're working in, or is everything pretty much manageable for you?

  • Bill Albrecht - President, Occidental Oil & Gas Operation

  • Yes, John, this is Bill.

  • I think things are manageable.

  • We're starting to see a little bit of cost pressure on the work-over rig side in the Permian.

  • But that is really the only place that we're seeing any kind of current cost pressure.

  • John Herrlin - Analyst

  • Okay, great.

  • Thank you.

  • Operator

  • Steve Marrs of CitizensTrust.

  • Steve Marrs - Analyst

  • Hi, thank you for taking my question.

  • Speaking about your finances overall for this year, as input costs, what are you folks using for price for a barrel of oil for 2011?

  • Steve Chazen - President and COO

  • We generally don't provide outlooks for what we think, but I mean obviously oil is sitting between $85 and $90.

  • So it has to be something like that, because we're not going to forecast something radically different than that for this year.

  • Steve Marrs - Analyst

  • All right.

  • Thank you.

  • Steve Chazen - President and COO

  • Thanks.

  • Operator

  • Jeff Dietert of Simmons and Company.

  • Jeff Dietert - Analyst

  • It is Jeff Dietert with Simmons.

  • Good morning.

  • Steve Chazen - President and COO

  • Good morning.

  • Jeff Dietert - Analyst

  • You talked about what the Shah gas field development you provided gas processing volumes and production gas volume expectations.

  • Could you talk about associate condensate and NGLs?

  • Are those -- ?

  • Steve Chazen - President and COO

  • I think we provided that, too.

  • Dr. Ray Irani - Chairman, CEO

  • We said that the gross number is 50,000 barrels a day, and our share will be 20,000 barrels a day.

  • Jeff Dietert - Analyst

  • Okay.

  • Thank you.

  • Operator

  • Sven del Pozzo of IHS Herold.

  • Sven del Pozzo - Analyst

  • A quick question.

  • Macro natural gas, and Ruby pipeline, is that on schedule to still start up in the spring?

  • And what's your view of its effect on your overall gas price in California?

  • Steve Chazen - President and COO

  • We don't -- we market our own gas here in California, and so we -- California gas prices have been strong recently; above NYMEX.

  • I think California gas prices will stay fairly strong.

  • Sven del Pozzo - Analyst

  • Okay.

  • And regarding the unconventional development program, is most of that on your already vast -- it is already on your vast acreage position, so I'm trying to assess what political risk might be?

  • Is it just less because you're not going out and leasing new areas, so the state Lands Commission can't come in and really tell you what to do?

  • They might offshore, maybe that is more of a risk, but onshore, and I'm just wondering if you can give me a global statement regarding political risk of development of the unconventional resource base?

  • Steve Chazen - President and COO

  • I don't think it's -- most of the acreage is, in parts of the state which are away from the coast, and in areas that are basically oil and gas producing areas.

  • So it is not really a particularly great risk where we operate.

  • If you're talking about the frac fluids and stuff, we don't think that is an issue where we are.

  • Dr. Ray Irani - Chairman, CEO

  • Very low risk.

  • Sven del Pozzo - Analyst

  • Okay.

  • Thank you.

  • Operator

  • (Operator Instructions)Joe Stewart of Keybanc Capital.

  • Joe, your line is open.

  • Joe Stewart - Analyst

  • Hello, can you hear me?

  • Steve Chazen - President and COO

  • Yes.

  • Joe Stewart - Analyst

  • Can you talk about potentially testing horizontal targets in the Permian Basin, please?

  • Bill Albrecht - President, Occidental Oil & Gas Operation

  • Yes, Joe, we're currently drilling a number of Bone Springs locations, deeper Bone Springs, which as you know is just below the Avalon shale, and we're testing those with horizontals, and seeing some pretty encouraging results.

  • Joe Stewart - Analyst

  • Okay.

  • So you're just testing them on springs.

  • Any other formations at this point?

  • Bill Albrecht - President, Occidental Oil & Gas Operation

  • With horizontals?

  • Joe Stewart - Analyst

  • Correct.

  • Bill Albrecht - President, Occidental Oil & Gas Operation

  • Yes, we also have scheduled to drill several deeper Devonian locations, and test those with horizontals as well.

  • Joe Stewart - Analyst

  • Okay, and any chance you could tell us how many Bone Springs wells you're planning to drill in 2011?

  • Bill Albrecht - President, Occidental Oil & Gas Operation

  • Yes, it is a small number, I would say less than 10 wells.

  • Joe Stewart - Analyst

  • Okay.

  • Great.

  • Thank you very much.

  • Steve Chazen - President and COO

  • He's answering for our operated interest.

  • Not for what -- how many wells we have an interest in.

  • We have interest in almost all of the wells in the area from our acreage position, so he is answering for what his operations are going to do.

  • Joe Stewart - Analyst

  • I see.

  • Okay.

  • Thank you for the clarification.

  • Steve Chazen - President and COO

  • I think we're done now.

  • Chris Stavros - Vice President Investor Relations

  • If there is any further questions, please call us here in New York.

  • Thanks very much for joining us today.

  • Operator

  • Thank you.

  • This does conclude today's conference call.

  • You may now disconnect.