西方石油 (OXY) 2012 Q3 法說會逐字稿

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  • Operator

  • Good morning.

  • My name is Christy and I will be your conference operator today.

  • At this time, I would like to welcome everyone to the Occidental Petroleum third-quarter 2012 earnings release conference call.

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

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

  • (Operator Instructions)

  • Thank you.

  • Mr. Stavros, you may begin your conference.

  • Christopher Stavros - VP and Treasurer

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

  • Welcome to Occidental Petroleum's third-quarter 2012 earnings conference call.

  • Joining us on the call this morning from Los Angeles are Stephen Chazen, Oxy's President and Chief Executive Officer; Cynthia Walker, Oxy's Executive Vice President and Chief Financial Officer; Bill Albrecht, President of Oxy's Oil and Gas Operation in the Americas; and Sandy Lowe, President of our International Oil and Gas business.

  • In just a moment, I will turn the call over to our CFO, Cynthia Walker, who will review our financial and operating results for this year's third quarter.

  • Steve Chazen will then follow with comments on our strategy, progress, as well as providing some guidance for the remainder of this year.

  • Our third-quarter 2012 earnings press release, Investor Relations Supplemental Schedules, and the conference call presentation slides, which refer both to Cynthia's and Steve's remarks, can be downloaded off of our website at www.Oxy.com.

  • I'll now turn the call over to Cynthia Walker.

  • Cynthia, please go ahead.

  • Cynthia Walker - EVP & CFO

  • Thank you, Chris, and good morning everyone.

  • Income from continuing operations was $1.4 billion or $1.70 per diluted share in the third quarter of 2012, compared to $1.8 billion or $2.18 per diluted share in the third quarter of 2011, and $1.3 billion or $1.64 per diluted share in the second quarter of 2012.

  • The third quarter income from continuing operations improved by $0.06 per diluted share from the second quarter of this year.

  • The improvement reflected higher margins in the marketing and trading businesses, partially offset by lower earnings in the Chemicals segment.

  • In the oil and gas business, the effect of higher liquids production and domestic gas prices was partially offset by the impact of a 3% decline in realized worldwide crude oil prices.

  • Now let me turn to the segment breakdown for the third quarter.

  • In the oil and gas business, earnings for the third quarter of 2012 were $2 billion compared to $2 billion in the second quarter of 2012, and $2.6 billion in the third quarter of 2011.

  • Overall, third-quarter 2012 production was 766,000 barrels per day, flat with the record set by the Company in the second quarter of 2012, and up 4% from the third quarter of 2011.

  • Our domestic production was 469,000 barrels per day, an increase of 7,000 barrels per day from the second quarter of 2012, and most notably, the eighth consecutive quarter of domestic record volume growth for the Company.

  • Production was 8% higher in the third quarter of 2012 versus the third quarter of 2011.

  • Almost all the sequential quarterly increase came from the Permian and Williston basins.

  • California production was higher in liquids, but flat on an overall BOE basis with the second quarter, mainly due to lower gas volumes associated with initial startup issues of the new gas plant.

  • These issues were resolved mid-quarter, although the positive effect of the plant on overall third-quarter production was muted as a result.

  • Today, the plant continues to run as expected, and California's current production run rate is approximately 150,000 barrels per day.

  • In Latin America, volumes were 32,000 barrels per day.

  • And in the Middle East, volumes were 265,000 barrels per day.

  • I'll note meaningful sequential changes in Qatar production; however, details regarding other company-specific production levels are available, as usual, in the Investor Relations Supplemental Schedules that we provide.

  • Dolphin's production was 13,000 barrels per day lower than the second quarter, resulting for the full cost recovery of pre-startup capital, as we noted to anticipate last quarter.

  • Qatar's production was also impacted by a facility outage in August, which reduced production in the quarter by about 5,000 barrels per day.

  • The outage was subsequently resolved.

  • The rest of the Middle East partially offset these decreases in part due to higher spending levels.

  • Factors affecting production sharing and similar contracts, including oil prices, did not significantly impact the quarter's production volumes, compared to the third quarter of 2011 or the second quarter of 2012.

  • Third-quarter 2012 realized prices were mixed for our products compared to the second quarter of this year.

  • Our worldwide crude oil realized price was $96.62 per barrel, a decrease of about 3%.

  • Worldwide NGLs were $40.65 per barrel, also a decrease of about 3% from the second quarter, while domestic natural gas prices were $2.48 per million cubic feet, an improvement of 19%.

  • The change in worldwide crude oil realized price was primarily due to the mix of sales volumes in the quarter.

  • Third-quarter 2012 realized prices were lower than third-quarter 2011 prices for all of our products.

  • On a year-over-year basis, price decreases were 1% for worldwide crude oil, 27% for worldwide NGLs, and 41% for domestic natural gas.

  • Realized oil prices for the quarter represented 105% of the average WTI price, and 88% of the average Brent price.

  • Realized NGL prices were 44% of the average WTI price, and realized domestic gas prices were 90% of the average NYMEX price.

  • At current global prices, a $1.00 per barrel change in oil prices affects our quarterly earnings before income taxes by approximately $36 million, and $8 million for a $1.00 per barrel change in NGL prices.

  • A change of $0.50 per million BTU in domestic gas prices affects quarterly pre-tax earnings by about $35 million.

  • These price change sensitivities include the impact of production sharing and similar contracts, volume changes on income.

  • Oil and gas production costs were $15 per barrel for the first nine months of 2012.

  • This is compared to $12.84 per barrel for the full year of 2011.

  • The cost increase reflects higher well maintenance activity, in part reflecting our higher well count, higher work-over activity, and higher support and injection costs.

  • Taxes other than on income, which are generally related to product prices, were $2.43 per barrel for the first nine months of 2012, compared to $2.21 per barrel for the full year of 2011.

  • And third-quarter exploration expense was $69 million.

  • Now turning to the Chemicals segment, earnings for the third quarter of 2012 were $162 million compared to $194 million in the second quarter of 2012, and $245 million for the third quarter of 2011.

  • Both the sequential quarterly and year-over-year declines were due to lower Asian market demand, that drove export prices lower, partially offset by lower ethylene costs.

  • In the Midstream segment, earnings were $156 million for the third quarter of 2012 compared to $77 million in the second quarter of 2012, and as well in the third quarter of 2011.

  • The 2012 quarterly increase in earnings was in the marketing and trading business primarily, and power generation, partially offset by lower margins in the gas plants, reflecting lower NGL prices.

  • Our worldwide effective tax rate was 38% for the third quarter of 2012.

  • The lower rate compared to our guidance was attributable to a shift in the mix of income towards more domestic.

  • Our third-quarter US and foreign tax rates are included in the Investor Relations Supplemental Schedules.

  • In the first nine months of 2012, we generated $9.2 billion of cash flow from operations before working capital changes.

  • Working capital reduced our nine-month cash flow from operations by approximately $660 million to $8.5 billion.

  • Approximately $510 million of the working capital use occurred in the third quarter.

  • Capital expenditures for the first nine months of 2012 were $7.7 billion, of which $2.6 billion was spent in the third quarter.

  • Year-to-date capital expenditures by segment were 82% in the Oil and Gas business, 14% in Midstream, and the remainder in the Chemicals business.

  • Acquisitions for the first nine months of 2012 were $1.2 billion, of which $100 million was spent in the third quarter.

  • Financing activities, which include dividends paid, stock buybacks, and a $1.74 billion borrowing earlier this year, provided a $300 million net cash inflow for the first nine months of the year.

  • These and other net cash flows resulted in a $3.8 billion cash balance at September 30.

  • The weighted average basic shares outstanding for the first nine months of 2012 were 810.1 million, and the weighted average diluted shares outstanding were 810.8 million.

  • Diluted shares outstanding at the end of the quarter were approximately 810.1 million.

  • And lastly, our debt to capitalization ratio was 16%.

  • Copies of the press release announcing our third-quarter earnings and the Investor Relations Supplemental Schedules are available on our website at www.Oxy.com or through the SEC's Edgar system.

  • At this time, I'll turn the call over to Steve Chazen to discuss an update on our strategy, our operations, and also provide guidance for the fourth quarter of the year.

  • Stephen Chazen - President and CEO

  • Thank you, Cynthia.

  • Oxy's domestic Oil and Gas segment produced record volumes for the eighth consecutive quarter, and continue to execute in our liquids production growth strategy.

  • In the third quarter, domestic production of 469,000 barrel equivalents per day, consisting of 334,000 barrels of liquids and 812 million cubic feet of gas per day, was an increase of 7,000 barrel equivalents per day, comparable to second quarter of 2012.

  • The increase in domestic production over the second quarter of 2012 was almost entirely in oil, which grew from 249,000 barrels a day to 260,000.

  • Gas production declined to 28 million cubic feet of gas per day on a sequential quarterly basis, mainly in California, some of which was due to the initial startup issues of the new gas plant that Cynthia mentioned.

  • Compared with the third quarter of 2011, our domestic production grew by 8% or 33,000 barrels a day, of which 30,000 a day was oil production growth.

  • Our annualized return on equity for the first nine months of 2012 was 15%, and return on capital employed was 13%.

  • As we near the end of 2012, I want to take this opportunity to reflect on our strategy, our progress, and our future.

  • As a company, we continue to have three main objectives -- generate rates of return on invested capital significantly in excess of our cost of capital; achieve moderate growth of the business; and deliver continued dividend growth.

  • With regards to returns, we don't believe that a depleting or shrinking business, or selling profitable future opportunities to fund high declined production, can yield high rates of return.

  • One can reduce spending to achieve short-term higher returns, but these returns would not be sustainable, as the Company would deplete.

  • Our business models to balance the need for growth of the business while maintaining attractive returns.

  • We are currently in an investing phase and many of our businesses are higher than normal portion of our capital spent on longer-term projects.

  • This year we expect to spend approximately 25% of our total capital expenditures on future growth projects that will contribute to our operations over the next several years.

  • These expenditures include capital for the Al Hosn Shah gas project, which is expected to start production in late 2014.

  • Capital for gas and CO2 processing plants and pipelines to maintain or expand the capacity of these facilities to handle future production increases, part of the capital for the Chemicals segment and other items.

  • In our oil and gas business, we have built a portfolio of assets that allow us to execute this strategy.

  • Domestically and internationally have a mix of both higher return assets and higher growth assets.

  • Importantly, many of our higher growth assets are relatively early in their development, although we have already experienced meaningful success.

  • In the US, our Permian CO2 operations continue to be our most profitable business, generating the highest free cash flow after capital among our entire portfolio of assets.

  • In contrast, our Permian non-C02 business is one of the fastest-growing assets in our entire portfolio.

  • Since we began significant delineation development efforts in late 2010, we have grown production by over 25%.

  • As a result of the significant activity by us and our partners, our Permian acreage, where we believe resource development is likely, has gone from our estimate of about 3 million gross acres earlier in the year to about 4.8 million acres in October.

  • Oxy's share of this acreage grew from about 1 million acres to about 1.7 million acres during the same period.

  • The attached conference call presentation slide shows our current acreage position in the Permian.

  • In California, we have a very large acreage position with diverse geological characteristics and numerous reservoir targets.

  • As a result of development opportunities range with conventional to steam floods to water floods and shale drilling.

  • Drilling costs and expected ultimate recoveries also vary for each area.

  • In mid-2010, we shifted our development program to conventional/unconventional opportunities outside the traditional and more mature Elk Hills areas.

  • As a result, we've experienced strong production growth in these new areas, although traditional Elk Hills had experienced some decline.

  • As you can see on the attached conference call presentation slide, traditional Elk Hills production dropped from 41,000 barrels per day in the fourth quarter of 2010 to 37,000 in the third quarter of 2012.

  • Liquids production growth in the rest of California more than offset this decline during the same period, growing from 49,000 barrels a day to 69,000.

  • Traditional Elk Hills gas production declined from 22,000 equivalent barrels per day to 19,000 during the same period, which was mostly offset by an increase in gas production in the rest of California from 21,000 equivalent barrels a day to 23,000.

  • Recently, we further modified our programs to emphasize oil production in light of depressed gas prices and associated liquids.

  • As a result, gas production in all of California declined in the third quarter of this year.

  • Total California growth on a BOE basis is slower than we thought it would be, in part due to the higher than expected declines at Elk Hills, permitting issues, and more recently, low gas prices.

  • On a positive note, overall performance of the new resources has been consistent with expectations, including our unconventional opportunities for which well performance is similar to the type of curves we showed you a couple of years ago.

  • I would also note that our last several years we spent $370 million on the new Elk Hills gas plant.

  • The plant went into operation early July, notwithstanding initial startup issues, is possibly affecting our operational efficiency and production, including higher liquids yields.

  • The plant operated optimally for about one month in the last quarter and has been operating as expected since.

  • We will continue to focus on higher-return, low-cost opportunities in California.

  • And, as I mentioned, this is a very diverse opportunity set.

  • For example, one of the projects we haven't talked about much in the past is a major steam flood project in Lost Hills, where we expect to achieve significant production growth of about 15,000 barrels a day in several years from the current 4000 barrel a day rate.

  • Total oil in place is estimated to be about 500 million barrels.

  • Using reasonable assumptions, we expect to recover over 50 million barrels net to Oxy.

  • Our drilling costs in this area average in the low $200,000 per well and we expect to bring this average cost down over time.

  • In the Williston basin in North Dakota, we currently have over 310,000 net acres with significant resource potential, which we estimate to be about 250 million net barrels.

  • Our production in the basin has tripled since we entered the area over a year-and-a-year ago.

  • We have recently slowed our drilling activity, and significantly reduced our rig count in the basin as a result of cost pressures.

  • While well costs have subsequently declined modestly, we will only increase our rig count when costs come down enough to make returns competitive with the rest of our portfolio.

  • We believe that over the long-term, our resource basin in the Williston basin represents a significant opportunity for the Company.

  • In the midcontinent, including our assets in South Texas, we have significantly reduced our gas drilling.

  • However, we could ramp up our gas production rapidly and meaningfully if prices for gas and liquids improved from their current level on a sustained basis.

  • Internationally, our most significant businesses are in the Middle East region, where operations are characterized by limited duration contracts with high rates of return on invested capital during the contract term.

  • Our primary focus in the Middle East is the United Arab Emirates, Oman and Qatar, which includes Dolphin.

  • Most of our international capital is allocated to these countries, and we derive a very substantial portion of our international earnings and free cash flow after capital from Qatar and Oman.

  • Going forward, the UAE, where we are developing the Al Hosn gas project, is also expected to make significant contributions to earnings and free cash flow.

  • The Al Hosn gas project is approximately 61% complete and is progressing as planned.

  • The project made up about 11% of our total capital program for the first nine months of this year.

  • While capital spending is running higher for 2012 than our initially anticipated levels, total development capital for the project is expected to be in line with previous estimates.

  • Currently, the Al Hosn project is consuming sizable amounts of capital during its development phase.

  • We expect to see a significant shift in late 2014 when the project changes from being a cash consumer to a cash generator.

  • Once the project becomes operational, early free cash flow to generate should be approximately $600 million annually at roughly current oil prices and conservative sulfur prices.

  • The project has the potential for additional production in later years, which would significantly increase its cash flow.

  • We're going to spend approximately $1.2 billion on the Al Hosn project this year.

  • While once the project becomes operational, our free cash flow should increase by the difference between the capital -- between capital consumption and generation.

  • Based on our 2012 capital spend for the project, this would equate to a $1.8 billion increase in our annual cash flow.

  • Lastly, we are focusing on improving our returns through a comprehensive effort to reduce operating expenses and improve capital efficiency.

  • As we indicated in the past, our operating costs have been increasing for some time for a variety of reasons, including industry inflation; our desire to take advantage of high product prices by accelerating production through workovers which pay for themselves over a short period of time; and our recent rapid growth, which has caused some short-term inefficiencies.

  • We are embarking on an aggressive plan to improve our operational efficiencies over all cost categories, including capital, with a view toward -- with a view to achieve an appreciable reduction on our operating expenses and drilling costs to at least last year's levels.

  • We believe that we will start seeing the benefit of this plan clearly in the first quarter 2013, and achieve last year's cost levels by the end of the next year on a run rate basis.

  • Several initiatives have already begun and we are seeing good early results.

  • For example, during the third quarter, we reduced our drilling costs by over 15% in parts of Elk Hills.

  • Our goal next year is to reduce US well costs by about this amount.

  • I will now turn to guidance for the fourth quarter.

  • Our fourth-quarter capital spending will slow from the third quarter level to a run rate that we believe will be in line with next year's total capital program.

  • Our intention was to reduce capital spending meaningfully, starting in the third quarter.

  • However, this would have resulted in efficiency in areas where we're seeing positive results -- this is the Permian, parts of California, and Oman.

  • As we discussed in prior quarters, we are sharply reducing our pure gas drilling, and have more recently cut back our drilling in certain liquids-rich areas as well.

  • We are also in the process of eliminating our less productive rigs to improve our returns.

  • Our focus on much higher return oil drilling will result in a decline in our gas, and to a much lesser extent, NGL production in the future.

  • Turning to production expectations in the fourth quarter, over the last year, we achieved our goal of increasing domestic production by 6000 to 8000 barrels equivalent per day quarter-over-quarter.

  • We expect our fourth-quarter oil production to grow by about this much.

  • However, the expected decline in gas production resulting from the change in our capital program focus I discussed earlier, may offset some of the increased oil production on an equivalent barrels per day basis.

  • Internationally, at current prices, we expect production to be approximately flat with the third quarter, while sales volumes will increase slightly.

  • We expect fourth-quarter exploration expense to be [up] about $100 million for seismic and drilling in our exploration program.

  • The fourth quarter is typically the Chemical segment's weakest quarter.

  • We estimate fourth-quarter earnings will be about $140 million or slightly lower than the third quarter.

  • Along with seasonal factors will be global demand for the European and Asian economies, and rising natural gas costs to keep pressure on the margins.

  • We expect a worldwide tax rate for the fourth quarter of 2012 to increase to about 40% to 41%.

  • In closing, we believe that we have a deep portfolio of development opportunities that will allow us to continue to deliver returns that are 5 to 6 points above our cost to capital.

  • Total return to our shareholders is a combination of appreciation, stock price and dividends.

  • We have long believed that the job of management is to convert earnings that are retained into stock market value.

  • For example, if we retain $1 billion, we should be able to give the shareholders at least $1 billion increase in the market value of the Company.

  • Historically, we have generated closer to [$1.50] in value for each dollar kept.

  • This is a challenging proposition over time as the Company continues to grow.

  • An old Wall Street maxim is that the market is a voting machine over the short-term but a weighing machine over time.

  • We hope that this is true, as we firmly believe that our program of investing on a longer-than-usual-for-us timeframe will reap rewards for our shareholders.

  • If for some reason our investment plans do not generate acceptable stock market results over these next few months, we will return more of our retained earnings to our shareholders.

  • We have increased our dividends at a compounded rate of 15.8% over the last 10 years through 11 dividend increases.

  • We expect to increase our dividends again next year and in the future at a rate that would maximize return to our shareholders.

  • I think we're now ready to take your questions.

  • Operator

  • (Operator Instructions) Doug Terreson, ISI.

  • Doug Terreson - Analyst

  • Your emphasis on returns on capital was pretty clear from today's comments.

  • And on this point, I wanted to better understand the point about achieving 2011 cost levels by the end of '13.

  • But first, is that the correct interpretation?

  • And if so, does that imply the pre-tax cost savings will be above $1 billion, maybe $1.5 billion?

  • And if so, were there some specific compartments from which those cost savings will emanate that you can highlight to us today?

  • Stephen Chazen - President and CEO

  • Yes, there's two elements to the cost-saving.

  • One is operating costs.

  • And I think it's fairly straightforward to take the current $15 rate and subtract from last year's number, and multiply by 275 million barrels, which is roughly the annual production.

  • That will give you an idea of sort of the savings.

  • I hope to beat that, frankly.

  • We should be able to, but I think that's what we're going to say for now.

  • There may be some G&A savings too but we haven't really baked that in.

  • On the capital, I think it's fairly straightforward to say that the capital program for the US business will -- if we save 15% on wells, the capital for the US business will decline sort of by that amount.

  • So, cash flow savings, you're right about where that will be.

  • We may decline the US business by more than that, frankly.

  • But it just depends on how well they're converting dollars into returns.

  • We can delay drilling where the returns are as good as we would like, and we're going -- I'm going to be more aggressive in the capital program than I've been the last year.

  • So, a lot more negative feedback to the unit.

  • So I think you should look to lower capital levels next year for the US business.

  • The international business is a little more complicated, because a lot of that's really not in our control; but similar levels.

  • About the only increased area I see is in the Midstream where we're going to build a pipeline from our gathering system in our pipelines in the West Texas to the Houston area.

  • And that will cost us about $400 million.

  • And we hope to capture a fair amount of the differential and improve our returns that way.

  • But we're going to focus a lot more starting this quarter, but in the quarters ahead on improving the returns and translating more of the volume growth into profits.

  • Doug Terreson - Analyst

  • Right.

  • Thanks a lot, Steve.

  • Stephen Chazen - President and CEO

  • Thank you.

  • Operator

  • Doug Leggate, Bank of America Merrill Lynch.

  • Doug Leggate - Analyst

  • Steve, I've got a couple, if I may.

  • The first one is really on your very last comment about -- I don't want to paraphrase you too badly here, but if your current strategy doesn't translate to shareholder returns, or better shareholder returns than share price, I guess, are you going to take a different try?

  • Could I just ask you to elaborate on that a little bit?

  • Because obviously, there has been, as you're well aware, material underperformance of the stock.

  • And I'm just wondering how tolerant you're going to be of that on a go-forward basis before you (multiple speakers) --

  • Stephen Chazen - President and CEO

  • Not too tolerant, (multiple speakers) I think is the short answer.

  • I don't know whether -- I don't know the form that it will take.

  • But dividends are the easiest form, because that way everybody knows -- they actually get the check.

  • If the stock is trading at crummy levels, it will be more emphasis on share repurchase than we've done historically.

  • But my tolerance level is modest.

  • If we don't see improvements -- if I don't see real improvements in the returns, you know, the next couple of quarters' strategy will change.

  • Doug Leggate - Analyst

  • Got it.

  • My follow-up is really -- as you're well aware, there's been a fair amount of -- I'm not going to call it misinformation, but there's been a lot of questions and specifically around the California assets, given perhaps your -- the fact that you haven't given a lot of disclosure.

  • I'm curious when you talk about reallocating capital, if your tight curves are still per your presentation in 2010, and your liquids mix is as per your presentation, and of course, your costs evenly are down, and now you've got the gas plant, and I can go on and on and on about all the things that have lined up here -- it seems to us, anyway, that those have got to be some of the more compelling returns in the portfolio.

  • So, I'll just ask you to explain why are you not getting after that all the more aggressively, now you've got the gas plant in place, the costs down and so on, and seemingly the permits in place?

  • And I'll leave it at that.

  • Stephen Chazen - President and CEO

  • Yes, the permitting process, while it's working pretty well in the fields -- that is existing fields, extending beyond the fields is still slow.

  • And so -- and some of the plants, there's some air quality permits that are slow in coming.

  • The permitting process while it's a lot better say, in Elk Hills field or Buena Vista Field or some of the other fields.

  • Outside of the fields, it's still slower than it used to be.

  • You know, the only way I can assure that there's getting the squeal out of every dollar that they spend is to tighten their capital rather than give them more money.

  • And so, they will probably suffer less in the capital tightening, but they can still take their costs down considerably.

  • And the more capital -- I don't know how to say it but -- discourages prudent spending.

  • So, I think their capital program will not be as affected as some others, but will still be affected some.

  • And there are clearly some efficiencies that are needed there.

  • I think their operating costs are way too high and they need to bring their operating costs down by a whole bunch.

  • And, you know I understand that -- and to some extent, I'm pushed and pulled.

  • I've got half the shareholders think I should spend $2 billion a year on capital and the other half think I should spend $20 billion a year.

  • So I'm trying to maybe probably unsuccessfully sort of weave our way through this.

  • But I think if this thing doesn't -- if they don't get their operating costs down, which is what I'm most focused on -- because that translates immediately to profits -- then I'm going to continue to tighten there, and there will be some other changes there in the business unit.

  • Same thing, frankly, in the Permian, where their operating costs are still too high.

  • And the operating costs affect the profits right away and it affects our cash flow right away.

  • The capital affects it over time and our drilling -- we're simplifying our program.

  • We'll be drilling fewer different types of wells next year and that should make us more efficient.

  • I think we can prove the capital efficiency a fair amount, but where I'm looking for it is in the operating costs.

  • Because there, I can affect it more quickly.

  • And if they don't do it soon, there's going to be widespread changes in the operation.

  • Doug Leggate - Analyst

  • Let me go through a very quick follow-up.

  • There seems to be a perception that you've got something, probably indirect, that you've got something to hide in California with your failure to be more transparent.

  • Would you care to address that?

  • And then I'll leave it at that.

  • Stephen Chazen - President and CEO

  • Yes, sure.

  • I think the way -- I try to think about how to show this.

  • You know effectively, the only one drilling in California, so you can't look at somebody else, which is what you can do in the Permian or something like that.

  • We show you the actual -- again, this quarter, we take out old Elk Hills and we show you the growth in the other business.

  • That's really the best way to look at the total business.

  • The acquisition program doesn't add much in California because there really isn't any volumes to buy.

  • And so that's growing at a very high rate.

  • And if that were stand-alone business, you would think it was terrific.

  • This is the best way to show what's going on.

  • There's really nothing to hide.

  • We aren't drilling as many shale wells as somebody would like.

  • And the reason is -- and it goes back to this capital efficiency question, if I could bore you for a second.

  • A shale well has a very high decline rate, maybe 30%, 40% the first year, maybe more.

  • Okay, so, I could boost this year's production by drilling a bunch of shale wells.

  • But in order to keep the production flat next year, my capital program has to go up because I've got to drill more wells.

  • I mean, and so that goes against the capital efficiency that people are looking for in the free cash flow.

  • I'm trying to do more conventional drilling, which has a lesser decline rate, to keep the capital from bloating in California and I don't want it to bloat.

  • There's really nothing to hide and we show you this number with -- excluding Elk Hills.

  • The disappointment has been at Elk Hills where the decline rate has been worse than we thought.

  • And maybe the gas plant will make it better.

  • Maybe it won't.

  • It's doing fine now and we'll just have to see.

  • But there's really nothing to hide.

  • I disclosed the Lost Hills numbers for a reason.

  • In some reports somebody sent me -- I don't know where it came from, the guy estimated that the Lost Hills wells were costing $3 million each.

  • Now they cost roughly $200,000 each.

  • So either the guy doesn't know anything about California or it was deliberately designed to make the numbers for the total of California look worse.

  • Did somebody think we would drill 120 wells that had a $250 breakeven?

  • So we disclosed that.

  • And if you either take Lost Hills out of the numbers or put the right numbers in there, it doesn't really look so bad, while we could track the number of wells that were in that report, we couldn't track the other numbers that he used.

  • So I don't think there's anything to hide -- we've shown you what the aggregate is going on, which is all you really should care about.

  • Doug Leggate - Analyst

  • Thanks for answering it, Steve.

  • I appreciate it.

  • Operator

  • Ed Westlake, Credit Suisse.

  • Ed Westlake - Analyst

  • I guess I'll try another one on California.

  • And I know that's just because, obviously, there have been a lot of research reports that may or may not have been correct.

  • So you say that you have to reduce costs before you want to put more assets to work.

  • I mean, is that a concern that you have, that the average IP's are not as good as you are hoping?

  • I mean, is there any statistical well data you could share with us this morning?

  • Stephen Chazen - President and CEO

  • it isn't really the IP rates.

  • IP rates have actually gotten better.

  • It's the operating costs -- has reduced the margins to a point where -- they're going to overspend on operating costs and doesn't make sense to encourage that.

  • And so we're not going to -- with the reductions in the capital program in the cost of the wells that they say they can achieve, and that they will achieve, they'll be able to drill more wells for the same money, which is the true objective.

  • The leases aren't going anywhere.

  • So that's -- I'm a steward for this money.

  • Not -- you know the goal is not volume growth per se but profit growth.

  • And we focused on volume growth and the profit growth sort of went away.

  • So, that's not -- and California is a big piece of the total and you can't change the Company without proving California.

  • So for the near-term, there -- oil guys -- I think I tell people this all the time only half jokingly -- can only work on one thing at a time.

  • So, if you tell them you want volume growth, they'll give you volume growth but some of the other stuff doesn't show up.

  • And if you say, well, what I want is something else, it's only one thing at a time.

  • So I guess I'm going to have to be more agile in there, giving them objectives, maybe to give quarterly objectives, not annual ones.

  • But if the operating costs that they're running in California doesn't make any sense to me, they were running a lot less -- half -- two years ago.

  • And they need to be back to that.

  • If they do that, they'll have plenty of capital to drill the wells.

  • Ed Westlake - Analyst

  • Great.

  • And then a follow-up on the CapEx side.

  • I mean, and this is focused more on the Midstream.

  • $1.4 billion I guess this year, which is obviously ramped up -- some of that shale; some of it's integrity in the domestic business.

  • But as you look at your plans, and I think you said that CapEx would go up next year, because you want to build this additional pipe.

  • But is there a year in which that, as you look at the forward plans, that you've done enough of that spend and it will fall to free up some free cash as well?

  • Stephen Chazen - President and CEO

  • I would -- once we're through this pipeline, and the Al Hosn project, the spending on the plant will basically end in 2014.

  • And it will fall next year.

  • You shift from a plant phase to a drilling phase, so the actual spending on Al Hosn will decline some next year and more of the following year, as you go from building to building out the plant.

  • I think Chris showed you a picture of the plant in the presentation there.

  • It's just not a small plant, so it's going to take -- but, so spending will decline some on the plant next year, and by following year, it will be down considerably.

  • And we should be through the pipeline next year.

  • It's a one-year program, really.

  • So, that will fall off pretty sharply -- unless there turns out to be -- you should understand that if this arbitrage continues, where you can buy oil in our pipeline system at $85 and sell it on the Gulf Coast at $100, we'll probably spend more gathering other people's oil and shipping it through our lines.

  • And that's -- until we do enough of it that the arbitrage goes away.

  • Ed Westlake - Analyst

  • Thanks very much.

  • Operator

  • Paul Sankey, Deutsche Bank.

  • Paul Sankey - Analyst

  • Good morning, everyone, and welcome to Cynthia.

  • Steve, that was very interesting, and your words were interesting about, quite specifically, if things don't change within the next few months, which came not long after you had said how the market is a voting and weighing machine, depending on your time frames.

  • Are you saying that if the stock price doesn't improve over the next -- relative performance doesn't improve over the next few months, you would essentially radically change the strategy -- if you like, the long-term strategy?

  • Were you saying that if you don't get the cost improvements over the next few months, you would radically change the strategy?

  • Thanks.

  • Stephen Chazen - President and CEO

  • Well, I think we're saying some of each.

  • If the relative performance doesn't improve, then we'll return more money to the shareholders, one way or another.

  • Paul Sankey - Analyst

  • Relative stock performance?

  • Stephen Chazen - President and CEO

  • Relative stock performance.

  • I think it's also useful to note that we have -- I don't know, a 75% or so correlation to WTI as a stock, which is a lot more than other people.

  • So, you know, to some extent some of it's caused by a decline in WTI, I think.

  • But putting that aside, the costs are how I intend to make the performance of the stock do better.

  • So, you've got to say what's the tool to make it so?

  • The tool is bringing the costs under control and improving the profitability.

  • If that doesn't work, that is to say the profitability improves and the stock continues to be a dog, then we'll have to rethink the whole thing.

  • Paul Sankey - Analyst

  • To use your words, the stock has been a dog over the past year, I'm not sure why you haven't, for example, put -- A, change the dividend most recently, but B, why there's been so little buyback in the recent months?

  • Stephen Chazen - President and CEO

  • The buyback is -- basically, when we know what the earnings are, we stop buying back.

  • And so, a lot of the decline for whatever reason shows up in the month before the earnings call.

  • But buybacks are -- as far as raising the dividend, we raise it once a year.

  • And it's, whatever, 16% compounded growth of the dividend over a decade, starting not from zero like some companies.

  • So I don't know what the complaint would be, but the fundamental dividends are raised once a year.

  • And it goes with setting the program.

  • So we go to the Board, we set the program and we figure out how much we're going to spend, and we figure out how much the dividends go with it.

  • So it's all done together.

  • I think doing the dividends in a vacuum doesn't give the Board the kind of oversight that it should have.

  • Paul Sankey - Analyst

  • No, I guess my point was that your balance sheet would suggest you could do both.

  • I mean, you could be buying back stock aggressively as well as pursuing the cost.

  • Stephen Chazen - President and CEO

  • We could.

  • Paul Sankey - Analyst

  • Now, in the past, you've talked about -- I guess this is going to be a pretty obvious answer -- but in the past, you've said you have a vision of the value of the stock on any given day.

  • And I think what you're saying, obviously, is that you feel it's poorly valued relative to what I think you think it's really worth.

  • But again, I still don't understand why the buyback has been so muted, given that.

  • Stephen Chazen - President and CEO

  • The buyback was done on a formula basis.

  • And if -- and at the current levels -- or current levels this morning, anyway when I woke up -- you get one set of numbers at higher levels, you basically buy less back.

  • You look at the -- we don't look at relative performance when we do the share buyback.

  • The share buyback is against absolute value.

  • And so the lower the stock falls, the more shares are bought back.

  • Paul Sankey - Analyst

  • Right.

  • And then, finally from me, it sounds like the action you would take would be a radical -- let's say radical, I don't know if that's the right word -- financial approach probably cutting CapEx aggressively, probably significantly raising the dividend, possibly buying back stock.

  • Is there an alternative strategy alternate strategy that would be, for example, to split the Company, sell the Company, anything in the other direction?

  • Stephen Chazen - President and CEO

  • I don't know if anybody's got enough money to buy it.

  • So --

  • Paul Sankey - Analyst

  • Let me ask about splitting.

  • Stephen Chazen - President and CEO

  • Splitting -- you know you've got to be -- if you split it, you really have to have assets that would be valued materially differently than the overall.

  • And very difficult right now to see -- I don't know what an international business would trade for, or -- so I think that before you go down the splitting-the-Company route, you've got to see whether you can bring your costs under control.

  • Paul Sankey - Analyst

  • And the last -- very last one from me.

  • Would you consider special dividends?

  • Or do you want to make those a regular (multiple speakers) --?

  • Stephen Chazen - President and CEO

  • Regular dividends work better.

  • Paul Sankey - Analyst

  • Yes, thank you.

  • Operator

  • Arjun Murti, Goldman Sachs.

  • Arjun Murti - Analyst

  • Yes, Steve, just kind of following up on that last point there.

  • So if there's the possibility that underperformance continues that you cut CapEx and raise the cash return to shareholders, I mean, the Al Hosn project, that CapEx is going to be what it's going to be.

  • You've added acreage in the Permian, you've added acreage in the Bakken; you've got a huge acreage position in California.

  • Presumably it doesn't make sense to just sit on these assets.

  • Assets sales, joint ventures, bringing in others to drill this stuff -- is that part of the plan or --?

  • You know, practically speaking, what does it really mean to cut CapEx when you've been building up these big acreage positions over the years?

  • Thank you.

  • Stephen Chazen - President and CEO

  • Yes, in the poorer performing or the lower opportunity areas, you might think of doing something like that.

  • In the stuff that's got long-term very strong potential, you don't really want to sell your futures.

  • So, but you could cut the capital -- for example, you could cut the capital.

  • We haven't really added much acreage to the Permian.

  • All we're showing you here is that the areas that we think that have resource potential have grown.

  • We haven't really bought the acreage.

  • That's just re-characterizing what we own.

  • The -- you don't know, but you don't really want -- I don't -- if you have stuff that has long-term potential, you don't really want to sell your futures if you can afford it.

  • But if you looked and you said, well, okay, for the next -- you could cut the US business, especially long-term leases or ownership outright -- you could cut the capital.

  • And then as the Al Hosn project comes on in a couple of years, suddenly you've got a $1.8 billion swing, and so you could bring your capital, you could use some of that then.

  • So I view it as sort of a deferral mechanism rather than just sort of cutting it.

  • But if they can't generate the returns and some of the assets, we might farm some out to people who might operate more efficiently.

  • Arjun Murti - Analyst

  • Absolutely.

  • So I know you've worked on the organization over the years, and I think it was a couple of years ago you were pretty honest about, classically, you guys are an EOR company, not a shale drilling company.

  • You're now kind of again going after that same operational execution ability.

  • Do you have to acquire a company that can do this stuff for you?

  • I mean, we (multiple speakers) --?

  • Stephen Chazen - President and CEO

  • No.

  • I don't think so.

  • It's two years ago, we had this exact conversation in New York.

  • And I said that we were shifting the business from a -- for want of a better word -- an EOR acquisition company -- /acquisition company to something that was more operational and more traditional.

  • And I said it was not going to be easy.

  • And I was right.

  • And we've lowered -- I don't how to say it -- the average experience level, I guess is the politically correct way of saying it -- of the people.

  • And so, some more mistakes have been made than might otherwise have been made.

  • But I think we're getting there -- I hope we're getting there.

  • I'm just in a hurry because I'm older than the average.

  • So, it's taken longer and been more difficult to change the organization to operational efficiency.

  • One of the issues we have is, outside the United States, our competitors have names like Shell and Exxon and BP, and they operate differently than a small company might operate.

  • We spend a sizable percentage of our capital on environmental health and safety issues, similar probably in the percentages that Exxon or somebody like that would -- and in both the US and internationally.

  • The -- a smaller producer simply probably doesn't do that.

  • And so we're never going to be the absolute best because of the fact we're more environmentally-focused than some small producer can be.

  • On the other hand, we can be a lot better than we are.

  • And it's been more difficult, no question about it -- it's come -- I knew it would be difficult.

  • And we've made a number of changes in the people that are running the assets; brought more aggressive people in, and if need be, we'll make more changes.

  • Arjun Murti - Analyst

  • You know, just the final one on this point, Steve.

  • I think for any larger company, there's really no great examples of being able to grow at a fast rate and generating good returns.

  • Sometimes over a few years, luck happens and it can happen, but you've had a 5% to 8% growth objective.

  • You've historically had top quartile returns on capital.

  • Is this really just an acknowledgment that having both of those goals is just not possible, and you are picking returns right now?

  • Stephen Chazen - President and CEO

  • Well, pretty much a lot of the growth is baked in for the next few years with the capital we've invested.

  • So -- but we need to do it with returns.

  • It isn't just about volume growth.

  • Now, at some point in size, the need for capital comes.

  • So typically, whatever they say -- I mean they may sell assets to fund it -- is spending, I don't know, 150% of it's cash flow on capital.

  • We obviously aren't spending anywhere near that or would we.

  • So you can't grow as quickly as they do.

  • We spend more on capital as a percentage than large integrated.

  • So it's an attempt to do both.

  • I don't know where you come out in the percentages.

  • Obviously, if we said we're going to grow 15% a year, that wouldn't be something we could do.

  • But we need to grow at a moderate rate.

  • Because I think the business -- if you don't grow at least some -- and on a regular basis, I don't mean by saying, well, in 2040 -- in 2017, we're on track for our 2017 program, and we're going to grow in 2017.

  • Meanwhile we're going to deplete 5% a year.

  • That's not what I call growth.

  • But regular growth, you'd have a hard time attracting people.

  • Investors tend not to like it.

  • They tend to compare you to basically depleting businesses.

  • So you've got to have a fair amount of growth.

  • I don't know what the right percentage is -- right now, it's 5% to 8%.

  • We're running really about 5% currently.

  • There will be a boost in 2015 from the Al Hosn project, which will bring the growth rate up.

  • Over a long-term, we're not going to just make the -- if you continue to drill high decline wells, your capital will soar.

  • Because if your wells or declining 30%, 40%, you need huge amounts of cash to keep -- to replace the 40% and grow.

  • And so we're shifting the program to more stable things so we can keep the capital under control.

  • That's really what we're doing underneath the hood, if you were to think -- look at it that way.

  • Instead of drilling as many high decline wells, we're drilling more, we're doing more stuff that has a lesser decline rate, which is what we historically did.

  • Was that too long answer?

  • Arjun Murti - Analyst

  • That's terrific.

  • Thank you so much, Steve.

  • Operator

  • Matthew Portillo, Tudor Pickering Holt.

  • Matthew Portillo - Analyst

  • Just a few quick questions from me.

  • You mentioned that on the release, the Q4 CapEx, and I was just curious if you could give us a specific number that you're looking at for Q4 CapEx?

  • Stephen Chazen - President and CEO

  • Since my reliability on this has been crummy, the only thing I'll give you is that, in September, we ran about $785 million and we're coming -- you know, on a month -- that's a monthly number.

  • And it's coming down from that as the wells come -- as it comes down.

  • So, that would give you sort of a feel for it.

  • And I think that's a -- but I don't -- I've missed it so many quarters, I'd just as soon not miss it one more.

  • Matthew Portillo - Analyst

  • Sure.

  • And then just on the M&A front, could you talk a little bit about the M&A market today and kind of your interest level?

  • It seems like kind of with the packages in the market today, there might not be that much interest; but just curious on your views.

  • Stephen Chazen - President and CEO

  • We always look at stuff in our core areas.

  • Core areas -- really right now the only area I would call core right now is the Permian.

  • There's a rush to do, by private people, to do something by the end of the year, lest their tax rates go up.

  • You know, there might be some things but they would be oily and basically in the Permian if there was anything.

  • There's some other stuff going around that's pretty gassy and I'm not sure we would do that.

  • The market is not good for sellers, particularly.

  • May not be good for buyers either, but it's definitely not good for sellers.

  • So, especially for larger packages, I think you can do a $100 million deal and get 25 people to bid.

  • At $500 million, you're lucky you track one.

  • And I think that's really where the market is today, where there's money for small deals and really no money for large deals -- or larger being $500 million deals.

  • You know we don't have any appetite for large-scale M&A.

  • We've said that for several quarters.

  • Is that a good enough answer?

  • Matthew Portillo - Analyst

  • That is, thank you.

  • And just the last question from me.

  • Could we get just, I guess, a quick update on maybe where your rig count is roughly in the Permian, California and midcon Bakken?

  • And then as we think about that 2013 program, could you give us just a rough direction on maybe where those are heading, either up or down, just directionally, trying to get a better sense of that capital allocation?

  • Thank you.

  • Stephen Chazen - President and CEO

  • I don't -- as far as next year goes, we've sent the team back several times, as you could probably tell by the tone of my voice.

  • So I'd hate to talk about what next year is going to look like at this point.

  • We've cut back materially.

  • I think in the Williston -- Bill, in the Williston, how many rigs you running?

  • Bill Albrecht - President of Domestic Oil & Gas Operations

  • We have four running right now, Stephen.

  • (multiple speakers)

  • Stephen Chazen - President and CEO

  • And so, and we peaked at --?

  • Bill Albrecht - President of Domestic Oil & Gas Operations

  • We peaked at 14.

  • Matthew Portillo - Analyst

  • Does that give you a feel for the Williston?

  • Stephen Chazen - President and CEO

  • 14.

  • California, it varies a lot.

  • We might drop -- and the type of rigs run.

  • And so running about --

  • Bill Albrecht - President of Domestic Oil & Gas Operations

  • 20 in California.

  • Stephen Chazen - President and CEO

  • -- about 20 -- about 20 in California.

  • The Permian also there's been some rigs dropped and we peaked at --?

  • Bill Albrecht - President of Domestic Oil & Gas Operations

  • We peaked at around 32 and (multiple speakers) --

  • Stephen Chazen - President and CEO

  • We're sort of half that.

  • Bill Albrecht - President of Domestic Oil & Gas Operations

  • We're at -- yes, we're at 21 now.

  • Stephen Chazen - President and CEO

  • 21?

  • Okay.

  • Matthew Portillo - Analyst

  • And is that just a function of kind of where we are in the capital spend for this year?

  • Or is that really, as we think about your program, and I know you said you continue to go back to the drawing board -- but just trying to get a sense of, is that activity going to accelerate a little bit into next year?

  • Or you're pretty happy with the levels (multiple speakers) that this has been?

  • Stephen Chazen - President and CEO

  • (multiple speakers) I think the way I'm thinking about it at this point is, that more or less, going into next year, it's going to look like this.

  • My current plan would be to withhold a fair amount of capital from the units that is drilling at these levels, until I can see which units are doing well and which ones are not.

  • And those that do well will get some more rigs to run, and those that don't, won't.

  • And so, I think if you're going into the first quarter, you'll see sort of this level, because that's the way we sort of managed it at this point.

  • Beyond that, we'll just see.

  • Matthew Portillo - Analyst

  • Thank you very much.

  • Operator

  • Faisel Khan, Citigroup.

  • Faisel Khan - Analyst

  • I'm just trying to reconcile some of the comments you made on California.

  • So I mean my understanding is the opportunity in California for you is supposed to have amongst the lowest breakeven sort of oil prices in those sort of projects or those sort of wells that you're drilling.

  • But CapEx is running about $2 billion a year.

  • You seem to say you're having higher declines in Elk Hills and costs in California are higher, and it seems like you're trying to rein in some of those costs.

  • So what is it that this is such a great opportunity, what is the -- is it not what you thought it was two years ago when you first started out on the program (multiple speakers) --?

  • Stephen Chazen - President and CEO

  • No, the operating costs have doubled.

  • Faisel Khan - Analyst

  • Okay, so is the resource opportunity not the same also (multiple speakers) --?

  • Stephen Chazen - President and CEO

  • No, the resource opportunity is the same.

  • It's the cost to extract it.

  • If you thought that was fundamental, that's one thing, and then you say, well, okay.

  • But it's not -- I think it's fixable.

  • Faisel Khan - Analyst

  • Does that mean the F&D costs that you kind of talked about maybe a couple of years ago of $5.00 a barrel, $10 a barrel are more like closer to $20 right now in the current environment?

  • Stephen Chazen - President and CEO

  • They're below $20, but they've come up with the well costs.

  • And so they need to bring those down closer to where we were.

  • And they need to bring their operating costs down.

  • And the only way to do that is not to give them more money to drill wells -- even though the wells are economic, more than economic.

  • Because gas prices here are a little higher than the rest of the country and oil prices are higher.

  • To throw more money at it is just simply the wrong solution here.

  • Faisel Khan - Analyst

  • Sure, no, I understand that.

  • In the rig count in California, is 20 rigs now?

  • Weren't you at 35 kind of a little bit earlier in the year?

  • So it sounds like you've done like an about-face on that program.

  • Bill Albrecht - President of Domestic Oil & Gas Operations

  • It was around 30.

  • Stephen Chazen - President and CEO

  • 30.

  • Faisel Khan - Analyst

  • Okay, so within a short period of time, you've cut 10 rigs out of the operation?

  • Stephen Chazen - President and CEO

  • Because we didn't like what that would have cost to the wells.

  • Faisel Khan - Analyst

  • Okay.

  • And once again, the type of wells that you're drilling, this is all kind of the same depth, homogenous sort of opportunities?

  • Or is it kind of different opportunities spread across (multiple speakers) --?

  • Stephen Chazen - President and CEO

  • It's different opportunities.

  • And again, as I said earlier, we've shifted the program to lower decline wells.

  • Faisel Khan - Analyst

  • Okay.

  • So that means the shale program that you guys had outlined before has kind of been pulled back?

  • Stephen Chazen - President and CEO

  • Some.

  • Not a lot.

  • Faisel Khan - Analyst

  • And the exploration program that you guys were running in California?

  • Stephen Chazen - President and CEO

  • The exploration program has been slowed by the other permitting process.

  • Faisel Khan - Analyst

  • Okay.

  • Stephen Chazen - President and CEO

  • We're well behind on the exploration program, by the way.

  • So we're two years behind where we thought we'd be.

  • Faisel Khan - Analyst

  • And then if I were to look at your returns on capital employed, you're talking about a 13% sort of number for 2012.

  • How would that split between international and domestic?

  • Stephen Chazen - President and CEO

  • I don't know.

  • International generates higher returns on capital employed, and that's really -- that's how the Company is structured.

  • I said it from the beginning -- the high returns on invested capital come out of the international business the highest.

  • And then domestic business generally -- because the leases are forever, and in the international business, they're basically cut off by the life of the contract.

  • So the upside, if you will, in the reservoirs over time and the long-term product price goes largely to the country.

  • But you generate good returns meanwhile.

  • Domestically, you get to keep all that.

  • So you generate more money domestically, but the returns are less.

  • And that's the balance in the Company and that's how you generate the above-average returns compared to an E&P, which are well into the mid-single digits.

  • Faisel Khan - Analyst

  • Okay, fair enough.

  • And then last question for me.

  • So going into next year, given this focus on returns and given where the rig count is, do you still think you can grow production year-over-year?

  • Stephen Chazen - President and CEO

  • Yes.

  • Faisel Khan - Analyst

  • Okay, fair enough.

  • Thank you.

  • Christopher Stavros - VP and Treasurer

  • We have time for one last question.

  • Operator

  • And your final question comes from (multiple speakers) --

  • Operator

  • Your final question comes from John Herrlin of Societe Generale.

  • John Herrlin - Analyst

  • Yes, hi, Steve.

  • Just some quick ones.

  • You've been complaining about returns now for several quarters.

  • Why weren't you more proactive with the organization?

  • Or why it just takes them that long to react?

  • Stephen Chazen - President and CEO

  • I don't know.

  • I mean, I don't know why I wasn't more -- it wasn't that I didn't try.

  • I just apparently didn't translate.

  • John Herrlin - Analyst

  • Okay.

  • That's fine.

  • Regarding (multiple speakers) --

  • Stephen Chazen - President and CEO

  • (multiple speakers) And I've made some changes in the management structure.

  • John Herrlin - Analyst

  • Yes.

  • Regarding the Permian, you had about a 36% working interest.

  • Given the potential there, why not higher?

  • Because it seems like it's probably kind of your historic level.

  • Stephen Chazen - President and CEO

  • Sorry?

  • John Herrlin - Analyst

  • With the Permian acreage (multiple speakers) --

  • Stephen Chazen - President and CEO

  • Oh, I see.

  • John Herrlin - Analyst

  • -- you know, your working interest was about 36%.

  • Stephen Chazen - President and CEO

  • Oh, I see, the gross and net (multiple speakers), using the play acreage.

  • John Herrlin - Analyst

  • Correct.

  • Correct.

  • Stephen Chazen - President and CEO

  • Yes.

  • Okay.

  • John Herrlin - Analyst

  • Why not higher?

  • Because it seems like that's probably more your historic level.

  • Stephen Chazen - President and CEO

  • Yes.

  • It'd be nice if it were higher.

  • And we acquired some properties in the last couple of years into areas that we historically hadn't been active.

  • And those tended to be smaller interest, so you wound up with a lower average working interest in the new plays.

  • And that's really -- it's just a result of -- we'd like to have higher interest.

  • And in the end, when you drill a well, you might wind up with a higher interest, by the way.

  • John Herrlin - Analyst

  • Sure.

  • Okay, last one from me is on the Bakken.

  • You know, you've also kind of complained about those operations as well.

  • Is that really critical to you going forward long-term?

  • Stephen Chazen - President and CEO

  • I think in the remarks, I've pointed out the large amount of resource base there.

  • I believe that product on a relative basis have improved recently, to one of the issues is at least partially on its way to resolution.

  • The other issue is, that the wells cost too much.

  • And we need large-scale reductions in the cost.

  • If we can get the large-scale reductions, then the assets -- clearly, an asset we could -- that will be fine.

  • If you can't achieve the large-scale reductions in costs that are required, then it's something for study.

  • John Herrlin - Analyst

  • Okay, thank you.

  • Stephen Chazen - President and CEO

  • Thanks.

  • Operator

  • With that, I will hand the floor back over to Christopher Stavros for closing remarks.

  • Christopher Stavros - VP and Treasurer

  • Thanks, everyone, for dialing in this afternoon.

  • And I expect you'll be calling us here in New York.

  • Thanks.

  • Operator

  • Thank you, this does conclude today's conference call.

  • You may now disconnect.