西方石油 (OXY) 2013 Q3 法說會逐字稿

Good morning and welcome to the third-quarter 2013 earnings release conference call.

(Operator Instructions)

Thank you.

Mr Stavros, you may now begin.

Thank you, Tamika.

Good morning, everyone, and thank you for participating in Occidental Petroleum's third-quarter 2013 Earnings Conference Call.

On the call with us this morning from Los Angeles are Steve Chazen, Oxy's President and Chief Executive Officer; Cynthia Walker, our Chief Financial Officer; Willie Chiang, Oxy's Vice President of Operations and head of our midstream business; Sandy Lowe, President of our International Oil and Gas Operations; Bill Albrecht, President of Oxy Oil and Gas in the Americas; and Vicki Hollub, Executive Vice President of Oxy's US oil and gas operations.

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

Sandy Lowe will then provide a brief overview of our oil and gas operations in the Middle East, focusing on the key countries for Oxy, as well as our strategic objectives for the region.

Steve Chazen will then follow with a discussion of our strategic initiatives and some of our growth opportunities.

As a reminder, today's conference call contains certain projections and other forward-looking statements within the meaning of the federal securities laws.

These statements are subject to risks and uncertainties that may cause actual results to differ from those expressed or implied in these statements and our filings.

Our third-quarter 2013 earnings press release, the Investor Relations supplemental schedules and conference call presentation slides, which refer to our prepared remarks, can be downloaded off of our website at www.oxy.com.

I'll now turn the call over to Cynthia.

Cynthia, please go ahead.

Thank you, Chris, and good morning, everyone.

My comments will reference several slides in the conference call materials that Chris referenced and are available on our website.

Overall in the third quarter we continued the solid execution seen in the first half.

Total Company production was 767,000 BOE per day and importantly we produced 267,000 barrels of oil domestically.

This is on track to achieve our second-half growth objectives.

In addition, with three quarters of successful execution behind us we are confident that we will exceed the goals we set for the year for operating costs and capital efficiency.

We had core earnings of $1.6 billion or $1.97 per diluted share.

And for the first nine months of 2013 we generated $9.4 billion of cash flow from continuing operations before changes in working capital and ended the quarter with $3.8 billion of cash on our balance sheet.

If you turn to slide 3 you'll see a summary of our earnings for the quarter.

Core income was approximately $1.6 billion or $1.97 per diluted share.

As you can see this is an improvement over both of the prior quarters.

Compared to the second quarter of 2013 the current quarter results reflected improved oil and gas segment earnings driven by higher realized oil prices and domestic volumes, as well as higher core earnings in the chemical segment and improved performance in the midstream segment, driven by higher margins and the marketing and trading businesses, largely due to commodity price movements.

Now I will discuss the segment performance for the oil and gas business and begin with earnings on slide 4.

Oil and gas earnings for the third quarter of 2013 were $2.4 billion, an increase over both the second quarter of 2013 and the third quarter of 2012.

On a sequential quarter-over-quarter basis improvements came from higher oil prices and domestic volumes.

Volume increases resulted largely from higher oil production in California, the Permian and Williston and improved Columbia listings.

Moving to slide 5, you'll see a summary of production changes during the quarter.

As I mentioned, total production for the quarter was 767,000 barrels per day, a decrease of 5000 barrels per day over the second quarter and an increase of 1000 barrels per day over the year ago quarter.

On a sequential quarterly basis these results reflect domestic oil production growth, as a result of our drilling program, as well as a resumption of Permian production following plant turnarounds and weather interruptions in the second quarter.

As you can see we also experienced an improved environment in Colombia, although disruptions continued to impact production in the quarter and we've seen the same early in the fourth quarter.

MENA production was lower primarily due to the impact of full cost recovery on our contract in Yemen, lower spending in Iraq, some maintenance in Qatar and labor issues in Libya.

Excluding certain of these impacts and the disruptions in Colombia, our overall International production was in line with our guidance on the last call.

On a year-over-year basis full cost recovery and other adjustments under our production sharing and similar contracts also reduced MENA production by about 7000 barrels per day.

If you turn to slide 6 I'll now discuss our domestic production in a bit more detail.

Our domestic production was 476,000 barrels per day, an increase of 6000 barrels per day from the second quarter of 2013 and an increase of 7000 barrels per day from the third quarter of 2012.

Focusing on our commodity composition, oil production increased 6000 barrels from the second quarter driven by California, the Permian and the Williston Basin.

For the first nine months of 2013 our domestic oil production has increased by 13,000 barrels per day.

This is a 5% increase versus the same period in 2012.

NGL production increased 2000 barrels per day versus the second quarter.

Natural gas volumes were lower by about 11 million cubic feet a day compared with the second quarter, almost entirely in the Permian as a result of third party processing bottlenecks.

Moving to our realized prices for the quarter and the comparison to benchmark prices, you can see the summary on slide 7. Compared to the second quarter our worldwide crude oil realized price increased about 6%, primarily reflecting changes in benchmark prices.

We experienced improvement in NGL prices domestically, which contributed to a 5% increase in worldwide NGL realized prices, while domestic natural gas realized prices experienced a 14% decrease driven by the decline in the benchmark.

You'll note we also included updated price sensitivities.

Next I will cover production costs on slide 8. Oil and gas production costs were $13.60 per barrel in the third quarter and $13.64 per barrel for the first nine months of 2013 compared to $14.99 per barrel for the full year of 2012.

As you can see domestic operating expenses increased slightly from the second quarter of 2013.

This was due to the timing of certain planned work over activities.

International production costs have remained fairly consistent with 2012 levels, excluding the impact of the facilities turnarounds in Qatar and Dolphin that affected the first quarter of this year.

We're very pleased with our performance on operating costs this year.

And we'll beat our full-year target.

Taxes other than on income, which are generally related to product prices, were $2.61 per barrel for the first nine months of 2013 compared with $2.39 per barrel for the full year of 2012.

Third-quarter exploration expense was $68 million and we expect fourth quarter exploration expense to be about $100 million.

Turning to chemical segment core earnings on slide 9. Third-quarter earnings of $181 million were $37 million higher than the second quarter, primarily driven by strong caustic soda export volumes and lower energy and ethylene costs.

Looking ahead to the fourth quarter demand for chlor alkali products is typically lower due to seasonal factors.

We expect fourth quarter 2013 earnings to decline to approximately $100 million driven by these seasonal factors coupled with lower foreign East demand and lower caustic soda spot and export prices.

On slide 10 is a summary of midstream segment earnings.

They were $212 million for the third quarter of 2013 compared to $48 million in the second quarter of 2013 and $156 million in the third quarter of 2012.

The 2013 sequential quarterly improvement in earnings resulted mainly from higher marketing and trading performance driven by commodity price movements during the quarter.

The year-over-year improvement was driven by improved margins in our pipeline and gas processing businesses.

The worldwide effective tax rate on core income was 40% for the third quarter.

The lower tax rate than guidance resulted from lower volumes in Libya, where tax rates are significantly higher than our overall effective tax rate.

We expect our combined worldwide tax rate in the fourth quarter of 2013 to remain in the 40% to 41% range.

Slide 11 summarizes our year-to-date 2013 cash flow.

In the first nine months of 2013 we generated $9.4 billion of cash flow from continuing operations before changes in working capital.

Working capital changes increased our cash flow from operations by $400 million to $9.8 billion.

Capital expenditures for the first nine months of 2013 were $6.4 billion, of which $2.2 billion was spent in the third quarter.

We generated approximately $270 million of cash from the sale of a chemical investment and used $340 million for acquisitions of domestic oil and gas assets.

After paying dividends of $1 billion and other net flows, our cash balance was $3.8 billion at September 30.

Our debt to capitalization ratio remained at 15% at the end of the quarter.

Our annualized return on equity for the first nine months of 2013 was 14% and return on capital employed was 12%.

Last I'll turn to the fourth quarter outlook.

With respect to production, domestically as I mentioned we are on track to achieve our second-half oil growth average of 6000 to 8000 barrels per day increase over the first half average.

Our natural gas and NGL volumes are expected to decline modestly in the fourth quarter due to lower drilling on gas properties and natural decline, coupled with the effect of a major turnaround in the Permian.

Internationally we expect total production to be about flat in the fourth quarter compared to the third quarter, excluding the impact of insurgent activity in Colombia.

We expect International sales volumes to increase in the fourth quarter, recouping the deferred listings we experienced earlier in the year.

Our annual capital is expected to be about $9 billion.

This is about $600 million lower than the $9.6 billion program we've previously discussed.

Of this reduction approximately $200 million resulted from achieving better than planned efficiencies in our oil and gas program, particularly in our drilling costs.

An additional $200 million resulted primarily from the deferral of certain oil and gas facilities and midstream projects into 2014.

And a further $100 million from lower than planned spending in Iraq.

We are particularly pleased that we are on track to meet or exceed our planned drilling activity levels for the year, while spending less capital than planned as a result of efficiency initiatives.

I'll now turn the call over to Sandy Lowe, who will provide an overview of our Middle East North Africa operations.

Thank you, Cynthia.

As you are aware we have had a successful involvement in the Middle East North Africa region for over 40 years.

We are active in key major oil-producing countries in the region and have formed excellent relationships at all levels.

The countries in which we operate include Oman, Qatar, the United Arab Emirates, Iraq, Bahrain, Libya and Yemen.

We have a diverse set of projects in the region and manage all of our projects with high safety standards creating local jobs and development opportunities for people in local communities.

Our current producing operations have generated over $20 billion of net free cash flow in the past 15 years and are currently generating annual free cash flow of around $1.6 billion, excluding the Al Hosn gas project capital, which is currently running at about $1 billion annually.

We reasonably expect that our Middle East business will generate over $2 billion of free cash flow annually once the Al Hosn gas project becomes operational.

We have invested $9 billion of capital in the middle East region since 2010, 75% of which has been spent in Oman, Abu Dhabi and Qatar.

We have drilled over 2500 wells in the region during this time and currently have 37 drilling rigs running.

We have also spent $300 million on exploration since 2010.

Our projects make a significant contribution to the economies of these countries, employing around 15,000 full-time employees and contractors, not counting the workforce at the Al Hosn gas project which is currently over 34,000.

We have drilled several types of wells throughout the region.

These include onshore oil wells in Oman, offshore wells in Qatar and sour gas wells onshore Abu Dhabi.

The production from our wells ranges from 200 to 4500 barrels of oil per day and our gas rates are as high as 120 million standard cubic feet per day.

Our Middle East operations are designed to leverage our technical expertise base and central support groups, such as project management, engineering, exploration and drilling.

We apply this knowledge locally to successfully execute our projects.

We've used this central support approach effectively in the areas of reservoir characterization, flood implementation, drilling and completion techniques, and management of major projects.

This enables us to apply best practices across the region while minimizing the deployment of Western expatriates and maximizing opportunities for nationals in each country.

We expect that our net Middle East production for 2013 will exceed 260,000 barrels of oil equivalent per day representing about 35% of Oxy's total production worldwide.

When the Al Hosn gas project reaches full operational status, in 2015, it should add net production of over 60,000 barrels of oil equivalent per day.

Our 2013 Middle East development capital is expected to be about $3 billion, with about 44% spent on water flood projects, 34% on the Al Hosn gas project, 12% on steam floods, and 10% on primary production.

We will drill over 750 development wells this year and plan on around 665 wells next year.

Our strategic goals for our Middle East business can be summarized as follows.

Continue to be a growing, profitable and vibrant business in the Middle East region.

Continue to be a preferred strategic partner with the host countries where we operate.

Expand our Middle East area of business by partnering with local investors to secure strategically important growth projects.

Continue to successfully execute projects.

Achieve returns in excess of 20% on our invested capital.

Continue our investment philosophy where our presence makes meaningful contributions to the host economies and makes a positive difference to the lives of the people in local communities, including increased education and employment opportunities for nationals.

We have a strong track record in each of the goals summarized above and believe we will be able to deliver successfully on each of these going forward.

In particular, we have developed and nurtured close relationships with key partners in the countries we operate.

We have always been respectful of the interests, expertise and values of the host countries.

This philosophy has over time led to mutual respect and helped us grow our operations profitably.

I will now provide a brief summary of our operations in three of the key countries in the Middle East region, which collectively make up 70% of our current production, 85% of our income from operations, and nearly all of our free cash flow.

We spend about 75% of our Middle East capital in these three countries as well.

Oman.

We've been present in Oman for 34 years and operating blocks nine, 27 and 62 in the North of Oman and block 53, which is the Mukhaizna field.

We are the largest independent oil producer in Oman and have a highly skilled and loyal national staff.

Our Omani staff has grown from 246 in 2005 to 1858 today.

Most of our national employees have developed their skills and experience within Oxy, including opportunities to train and work on Oxy projects in the United States and other countries.

As a result over 81% of our employees are Omani nationals and Omani citizens now hold most of the high-level executive positions, including the President of our Oman business unit.

Oxy's gross production is expected to be about 230,000 barrels of oil equivalent per day in 2013 with a net of 76,000 in Oman.

Our Omani operations are a significant free cash flow generator.

We expect to continue to achieve returns well in excess of 20% from our Oman projects.

Northern Oman.

In northern Oman a combination of development wells, exploration success, and the application of water flooding techniques has led to an increase in gross production from 92,000 to 106,000 barrels of oil equivalent per day since 2010.

We have a large pipeline hub in gas plant at [Sephora] associated with the producing wells in northern Oman.

This infrastructure enables us to rapidly and efficiently bring new wells into production.

Most wells initially free flow and later have either gas lift or electric submersible pumps installed.

We have maintained our gross average operating costs at around $5.50 per barrel with the key drivers being down hole maintenance, surface operations and support costs.

We have drilled 107 out of our 153 planned wells for this year.

These are typically horizontal wells with lateral length of between 1800 and 3500 feet.

Recent production rates have been as high as 3800 barrels of oil equivalent per day, with an average for 2013 of around 550.

During 2014 we plan to drill another 125 development wells.

Over the next five years our plans include drilling 400 development and water injection wells.

We expect our annual drilling capital to be between $250 million to $300 million per year.

We believe our development program will increase gross production to about 125,000 barrels of oil equivalent per day during this period.

Our exploration program in northern Oman has been one of our most successful ever as a Company with a discovery rate of greater than 60%.

We attribute this success to our use of technology such as horizontal drilling, state-of-the-art 3-D seismic, as well as the development of new play concepts.

Our discoveries this year, mostly coming from horizontal wells, have an average production of 3000 barrels of oil equivalent per day and produce over 70% oil.

We continue to expand our technical understanding and have a robust inventory of future drilling prospect.

In addition, we are nearing completion of a 2000 square mile 3-D seismic program, which should further enhance our growth portfolio.

This new seismic data over blocks nine and 27 should yield many attractive prospects and enable us to continue exploring in these areas for many years.

Over the next five years we expect to drill more than 50 exploration wells, 13 of which are planned for 2014, and to generate more than 250 new development drilling locations.

Our block 62 development is in the early stages of engineering, with a number of gas producers already drilled.

We are planning to further delineate one of the larger structures by the end of this year allowing an updated development plan to be presented to the government during 2014.

Mukhaizna.

Mukhaizna is one of the world largest steam flood projects.

At the end of 2012 it ranked third in the world in terms of steam flood production, ahead of the large known US steam floods.

Oxy's involvement in the Mukhaizna field began in 2005.

Since that time we have increased gross production from 8000 to 125,000 barrels of oil per day.

And produced 160 million barrels of oil from the field.

We had drilled over 2000 wells, of which 825 are producers.

The steam wells enable injection of over 500,000 barrels per day.

Way feed recovery systems on power generators account for 20% of our steam.

We continue to optimize the development plan of this field with the government and our partners and we expect to continue executing our infield drilling program.

The anticipated peak production is estimated to be between 135,000 and 140,000 barrels of oil per day.

We expect to drill 340 wells this year.

Recent rates have been as high as 830 barrels of oil per day with an average for 2013 of around 330.

We plan to drill another 300 wells in 2014.

We currently have six rigs running in Mukhaizna.

In addition to the main Mukhaizna reservoirs, we are delineating the extensive Kahmah fractured carbonate heavy oil reservoir, which lies above the main pay in Mukhaizna.

We presently have one rig dedicated to this activity.

Another milestone will be reached in Mukhaizna next year with the drilling of our first deep exploration well in the field.

Qatar.

We presently operate three shallow water offshore oil fields in Qatar, Idd El Shargi North Dome, Idd El Shargi South Dome, and Al Rayyan.

We also have an interest in the Dolphin project, which has been a great success since its start.

Through our plans for various projects in Qatar we expect to achieve returns well in excess of 20%.

In nearly 20 years in Qatar we have invested $4.3 billion and produced 680 million barrels of oil.

Our operations in Qatar provides significant free cash flow.

Current production is around 106,000 barrels of oil per day for 2013 from the three fields, netting 67,000 barrels of oil per day to Oxy.

Dolphin's current production net to Oxy is about 38,000 barrels of oil equivalent per day.

In Qatar, as in Oman, we are focused on the development of national staff and have successful national employees in all levels in the Company.

Oxy has established itself as an active and committed member of the community.

During our presence in Qatar we have forged strong and effective relationships with a number of organizations in the focus areas of health, education, arts and culture, and sports.

Examples include partnering with the Supreme Education Council and the Weill Cornell Medical College in the promotion of a healthy lifestyle, which is aligned with Qatar's 2030 national vision.

Other initiatives related to specific causes such as diabetes, cancer, working with the Al Noor Institute for the Blind, and partnering with the Qatar Museums Authority in supporting a number of sporting events.

In the Idd El Shargi North Dome we will drill 17 wells in 2013 from jack-up rigs in a water depth of around 130 feet.

Over the course of our involvement in Qatar since 1994, we have drilled 268 horizontal producing wells and over 100 horizontal water injectors.

Recent well production rates in Idd El Shargi North Dome have been as high as 4500 barrels of oil per day with an average for 2013 around 1460.

As part of improved Phase -- as part of our recently approved Phase V development plan we will drill another 205 wells at a cost of $1.2 billion.

We plan to drill 36 of these wells in 2014.

The development plan includes the installation of new wellhead platforms, the compression and power platform, and various pipelines and related facilities.

We believe that as a result of this development we will be able to continue the plateau gross production of 100,000 barrels of oil per day for many years to come.

We also have new development opportunities being planned for the Idd El Shargi South Dome and Al Rayyan fields.

Dolphin.

The Dolphin project remains one of the flagship projects in the region and it has been a great success since coming on stream in 2007.

The project involves production from wells located on two offshore platforms in the North field of Qatar.

Wet gas flows to the onshore gas plant at Ras Laffan where we process it into condensate natural gas liquids and sulfur.

The dry gas is exported on the long-term contract to the UAE via a 48-inch 230-mile subsea pipeline.

In addition to the 2 billion cubic feet a day of contracted gas from Qatar, we transport additional gas on an interruptible basis to customers in the UAE.

While meeting a significant portion of the UAE's gas needs, Dolphin also provides gas to Oman.

We are currently expanding gas compression facilities in Ras Laffan to achieve the maximum pipeline capacity of 3.5 billion cubic feet per day to handle additional volumes.

We believe substantial opportunities remain in the region to sign up additional customers to provide gas transportation up to the full capacity of the Dolphin pipeline, generating additional midstream revenues and cash flows.

We expect our 2013 net production from dolphin to be around 38,000 barrels of oil equivalent per day with significant free cash flow, which we believe will grow over time as we take on new customers.

United Arab Emirates.

Oxy's initial experience in the UAE was as a partner in offshore exploration during the 60s.

Most recently Oxy has had a presence in the UAE since 2000.

Since then our Abu Dhabi office has developed into a regional hub supporting our Middle East assets with engineering, geoscience, business development, operations, supply chain, and finance resources.

During this time the dolphin midstream infrastructure has continued to expand and the pipeline system now extends for 475 miles throughout the UAE and into Oman.

The Al Hosn gas project, where we are partnering with the Abu Dhabi national oil company, ADNOC, involves the development of the Shah sour gas field in the Western region of Abu Dhabi.

Production from the field contains natural gas and condensate, along with high concentrations of hydrogen sulfide and carbon dioxide.

A large processing plant is currently under construction with an average 34,000 workers at the site.

This is a world scale mega project with the involvement of major engineering, construction and manufacturing companies from around the world.

It remains on schedule and on budget.

When completed the plant will be able to process about 1 billion cubic feet a day of gas from the field and separate it into sales gas, condensate, natural gas liquids and sulfur.

Oxy's net share of production is expected to be over 200 million standard cubic feet a day of sales gas and more than 20,000 barrels of NGLs and condensate.

By the end of 2013 the project will be about 92% complete and will start up next year.

The 2013 Oxy share of Al Hosn capital is expected to be about $1 billion.

Total project cost is expected to be on budget at about $10 billion with Oxy's share of $4 billion.

We expect production from the project to start in the fourth quarter of 2014.

Once the field achieves steady-state annual average free cash flow to Oxy should be approximately $600 million at current liquids prices.

Currently we are spending about $1 billion per year, so steady-state operations should provide a net cash flow swing of $1.6 billion annually.

As we have recently announced, we are currently looking to sell a minority interest in our Middle East North Africa operations.

We believe this will give us an exciting opportunity to possibly partner with key regional players.

This sale will reduce the Middle East North Africa share in our overall portfolio.

We believe a partnership with regional investors will align us with local interests in our existing operations and on new opportunities throughout the Middle East to achieve future growth from a lower base.

In summary, we believe we are well-positioned to meet each of our strategic goals in the region.

Specifically, we have a highly profitable, vibrant and growing business.

We have developed strong and lasting relationships with host countries where we are welcome and invited to stay.

We will continue to be a preferred strategic partner to them in the years to come.

Our plans to sell a minority in our Middle East North Africa operations will assure that we will continue to grow our Middle East North Africa business profitably over time by securing strategically important future projects.

Our development and operating plans will ensure continued success in executing our projects.

We will continue to achieve returns in excess of 20% of our invested capital.

We are continuing to apply our investment philosophy where our presence makes meaningful contributions to the host economies and makes a positive difference in the lives of the people in the local communities, including increased education and employment opportunities for nationals.

In closing I would like to emphasize we're very excited about our presence and our opportunities in the Middle East.

We believe that our excellent relationships and partnership with key regional players coupled with our long regional experience and our track record of timely project execution will allow us to continue to enhance our rich growth potential of the region.

I will now turn the call over to Steve Chazen who will discuss our strategic initiatives.

Thank you, Sandy.

Earlier this month we announced the initial phase of the Company's strategic review as a part of an effort to streamline and focus our operations in order to better execute the Company's long-term strategy and enhance value for our shareholders.

In result of the initial actions, Oxy's Board of Directors has authorized the following.

To pursue a sale of minority interest in the Middle East North Africa operations in an financially efficient manner, as Sandy just discussed; pursue strategic alternatives for selective mid-continent assets, including our oil and gas interest in the Williston, Hugoton, Piceance Basin of the Rocky Mountain assets; and the completed sale of a portion of our 35% interest in the general partner of Plains All-American pipeline.

This resulted in pretax proceeds of $1.4 billion.

This initial sale process is concluded and we've received the proceeds.

Our cash balance of $3.8 billion at the end of the quarter does not include these proceeds.

Oxy's remaining interest in the Plains All-American pipeline, based on the IPO price, is valued at approximately $3.3 billion.

As we indicated these are our first formal steps in our efforts to streamline the business, concentrate in areas where we have depth and scale, and improve overall profitability.

Our goal is to become a somewhat smaller company with more manageable exposure to political risk.

We will continue to seek additional strategic alternatives for the Company to maximize total returns to our shareholders.

These actions are expected to generate a significant amount of proceeds, together with the excess cash and the Company's balance sheet, these funds will largely be used to reduce Oxy's capitalization.

While we expect to use a substantial and a vast majority of these proceeds to repurchase our shares, we also anticipate paying down some of our debt on a proportional basis.

We expect to retire $600 million of bonds due in December.

We also expect to reinvest a portion of these proceeds in high return growth opportunities throughout the business, several of which I will discuss in a moment.

We continue to make steady progress and expect to complete the strategic review in the coming months and will disclose material developments as they occur.

Approximately a year ago our oil and gas business embarked on an aggressive plan to improve our operational efficiency across all cost categories, including capital, with a view to achieving an appreciable reduction in our operating expenses and drilling costs.

Our teams are to be commended for doing a superb job on this front, exceeding our initial goals.

We continue to run ahead of our full-year objectives to improve domestic operational and capital efficiencies.

For example, we have reduced our domestic well cost by 22% and operating costs by about 18% relative to last year.

This is ahead of our previously stated targets of 15% well cost improvement and total oil and gas operating costs below $14 a barrel.

Total annualized savings from these operating costs and capital efficiency initiatives amount to $1.2 billion compared to last year.

Expect these savings to result in additional development opportunities as previously marginal projects are now economic.

The purpose of these initiatives is to improve our return on capital, while continuing to execute a focused drilling program in our core areas and grow our domestic oil volumes.

Enough of these cost savings cannot be overstated, as they will result in a year-over-year improvement in our F&D costs leading to a more stable DD&A rate.

We believe we can sustain the benefits realized to date, achieve additional savings in our drilling costs, receive and reach our 2011 operating cost level over time without a loss in production or sacrificing safety.

We are particularly pleased that we are on track to meet or exceed our drilling activity levels planned for the year, while spending less capital than planned as a result of these efficiencies.

These achievements have generate higher margins, giving us confidence to allocate additional capital towards profitable growth opportunities.

As Vicki discussed in last quarter's call, we are the largest oil and gas mineral acreage holder in California, more than 2.1 million net acres.

We have a large and diverse portfolio of opportunities available to us across the state.

We've reduced our overall operating costs in California by more than $4 a barrel equivalent due to an expected average of under $19 for all of 2013.

Improvement in our operating as well as our drilling costs has exceeded our targets and should allow for combined savings of at least $300 million this year compared to 2012.

As a result of these improvements and combined with more favorable permitting, we plan to increase our capital spending in California by about $500 million to approximately $2.1 billion next year.

Most of this increase will be directed towards unconventional drilling opportunities where we have more than 1 million prospective acres for unconventional resources.

In the Permian Basin we've accumulated more than 1.7 million net acres covering both relatively established and emerging plays, anchored by our core, high free cash generating CO2 flood reservoirs.

We've recently created an exploitation team, whose mandate is to optimize our drilling capabilities and accelerate the development of unconventional opportunities throughout the basin.

This year we have focused on delineating incremental opportunities in established plays, as well as testing the potential of many emerging plays, which included the drilling of approximately 30 horizontal wells.

We have also succeeded in reducing our drilling costs by more than 20%, which has increased our ability to enhance our economics utilizing horizontal drilling and multistage completions to develop established unconventional reservoirs.

As a result of these efforts we can now shift our development strategy, expect to spend an additional $500 million in capital next year largely directed towards increased drilling of horizontal wells.

This step up in capital will allow for additional four rigs which will be dedicated to drilling horizontal wells in our focus plays of Wolfcamp, Wolfbone and Bone Springs in the Delaware Basin, as well as the Wolfcamp in the Midland basin.

As an example, as we recently completed a well in our South Curtis Ranch area, which is near our [Mabedi] acreage.

It was completed in the Wolfcamp and has tested just over 1000 barrels of oil a day, 77% of which is oil 15% NGLs with a small amount of remaining natural gas.

We have over 17,000 net acres that are perspective for this in the area.

This represents a major change in our Permian nine CO2 development strategy, in which a number of horizontal wells drilled next year will account for more than 50% of total wells compared to only 10% during 2013.

Turning to our International operations, our 30 plus year history of operating in Colombia has provided us with unique insight around heavy oil production, mature oil field development opportunities.

Historically, this has been among Oxy's most profitable operations.

Experience associated with steam flood development is a core competency at Oxy, a skill that fits well with Colombia's strategy to grow its crude oil production.

Going forward we tend to focus our efforts on applying our expertise towards the pursuit of high additional, high return oil redevelopment projects and we expect to participate in several more steam plant projects in the coming years.

In our Middle East North Africa business, and as Sandy's discussed, majority of the value of our production income and cash flow is derived from three key countries, Oman, Qatar and UAE.

Majority of our regional capital is also deployed in these countries.

And we expect our MENA business will generate more than $2 billion a year of annual free cash flow after the Al Hosn gas project becomes operational.

We feel fortunate to have had many successful years operating in the region.

Part of this we believe is a result of successfully executing on a number of challenging projects.

We also feel it is in part due to the mutual respect we have for our partners, the host countries in which we operate and the people who reside there.

Though the sale of a minority interest would reduce our share of MENA within our overall portfolio, we expect to remain a major participant in the region with a focused presence.

Our track record of success at strong relationships should allow us to compete for new projects and provide us with future growth off a smaller base.

We look forward to forging new partnerships in the region, which will allow us to continue our profitable growth strategy.

Opportunity for high growth is also present in our chemicals business, where we plan to pursue a 50-50 joint venture with Mexichem, build a world scale ethylene cracker at the OxyChem plant in Ingleside.

As a part of this long-term strategy, strategic supply relationship between companies.

Essentially all of the ethylene produced in the cracker will be consumed by Oxy in the manufacture of vinyl chloride monomer, utilizing our existing VCM production capacity.

The VCM will then be delivered to Mexichem to produce polyvinyl chloride PVC and PVC piping systems.

Using the cracker OxyChem's overall operations effectively consume more than one-third of Oxy's domestic gas NGL production.

Significant benefit of this project is that it provides a level, higher level of integration from the wellhead through to VCM production and sales.

The project is just one example of several we plan to pursue in our effort to capture greater value in downstream portion of natural gas and the NGL trains versus an independent upstream gas producer.

Construction of the Ingleside cracker project is expected to begin in mid-2014 with the facilities becoming commercially operational in 2017.

We expect it to have a material benefit in our chemical earnings.

OxyChem also expect to continue to be a free cash flow positive throughout the investment phase of the project.

In the midstream segment our investment in The BridgeTex pipeline continues on track for scheduled start up in mid-2014.

The roughly 450-mile long pipeline will be capable of transporting approximately 300,000 barrels a day of crude oil between the Permian region and the Gulf coast refinery markets.

We are confident these and other opportunities to deploy our capital with meaningful drivers of our earnings growth for the coming years.

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

(Operator Instructions)

Doug Leggate, Bank of America Merrill Lynch.

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

So starting with the Middle East, there's been a lot of speculation over the potential value that may or may not be associated with this asset.

I know you can't give specifics, but could you frame for us given the relative lack of transparency in terms of you've done a good job today laying out the businesses, but reserve bookings and so on are still somewhat lacking transparency.

So, can you help frame for us what you think a realistic acceptable range of value might be and whether or not the midstream would be part of that?

And I've got a couple follow-ups please.

The Dolphin project would be part of the sale process.

So, that piece of our midstream business would be part of that sale.

There are confidentiality agreements between the three -- in each of the countries.

So, you can't actually give you more transparency without violating the confidentiality agreements.

So, for example we can't tell you the details in Oman or Qatar or Abu Dhabi.

I think it's fair to say that we book only to the life of the lease.

And as the extensions come, obviously, more reserves come, we also appreciate basically over that life.

So, the earnings are somewhat understated.

I think if you look at the cash.

We view it as an ongoing business.

That is to say it's not just a pile of assets that we're going to deplete.

To the extent it's ongoing business we expect to receive a price that reflects the value in ongoing business, not the price of a depleting asset or the reserves that are -- necessarily the reserves that are there.

The countries can see the long-term reserves.

So, I don't think there's a lot of issue with them not understanding what the long-term outcome is.

I don't really want to negotiate with myself on the values.

Okay.

A related question then, Steve, on the buybacks, the potential.

There has been a number of billions run in the press of $8 billion from the Middle East, but let's assume that was reasonable.

I believe there was some tax issues around what you can bring back as an optimum level.

But if we don't look at Plains and potential mid-continent sale, can you help frame for us what you see the scale of the buyback likly would be and if I may just add something to this.

Acquisitions in the Permian Basin seem to have slowed down.

I guess valuations have got something to do with that.

You're generating a lot of cash.

So, how should we think about buybacks on a go forward basis to maybe enhance your per share growth?

I think buybacks will be an important element of per share growth in the next, certainly in the next few months.

We have a lot of cash on the balance sheet.

We had $3.8 billion at the end of the quarter.

Plus the money from the sale of the midstream assets.

We would expect to begin to repurchase some shares shortly.

As far as the scale goes, we're not going to build cash.

We're not going to pay down -- debt reduction will be proportional, so if we sell 10% of the assets, maybe the debt will go down 10%.

Only have about $7 billion of debt.

So, it's not going to be a big user.

These projects will not probably allow us to still stay within our cash from operations next year.

So, it's probably not going to drain a lot.

As far as acquisition's are concerned, I think the issue in the Permian is about there's just not a lot for sale.

And that which is for sale isn't all that interesting.

We have a lot of acreage.

I've just highlighted just one small area where we're doing well.

We have a lot of acreage.

And so the need to drive the business through large-scale acquisitions is pretty modest at this point.

So, you should expect the bulk of the proceeds to go towards share repurchases.

What else, we're not going to build cash.

So, I think you should -- I can't tell you exactly the number.

And one of the reasons why we're -- once we could frame this more clearly, as to how much money's involved then we can talk about the last steps in this.

But I think we can see where we are.

Our goals are really twofold.

We need to make sure we continue to operate well, because that's really what drives value.

And we need to execute the things we've announced.

So, I think that's what we're trying to do.

Once we get that at least in sight, then we'll talk about further restructuring steps.

Okay.

Last one from me if I may --

Do you find that helpful or not.

I guess we're lacking specifics, Steve, so, obviously I think the market's telling you that we're lacking specifics.

So, I guess we'll have to wait until you can give more color.

But if I could try one final one if I may, your press release the other day, failed to mention California.

It continues to be a drag and frankly I see an underperformer, I guess, in the eyes of the market.

What are the parameters that you think may or may not contribute to your decision on whether or not California can do better on its own?

I think that is clearly one of the key gating items for the market's view on the restructuring on a go forward basis.

I'll leave it there.

Thanks.

Yes.

I think you go back to this question about what -- you could come up with a very high number without me telling you exactly what it is for the share repurchase.

So, you might be off $1 billion or $2 billion, but that's about all.

You could use the numbers that are floating around out there.

You could guess what the receipts from proceeds from the mid-continent sale would be within a few hundred million dollars.

Obviously, see how much cash we have now.

I don't think anybody should be off very much in competing how much the share repurchase would be.

The debt reduction, the other stuff is not large in comparison to that.

As far as California is concerned, the fundamental question is, can it operate better as a standalone business with a different model?

The different model, if it's going to operate just like it does now, then it might be better off staying the way it is.

But if it can operate better with a different model, that is a higher capital model, basically little or no dividends and with a more entrepreneurial background, then I think that we better separated it from the Company.

More to the point, I think, is that to separate California from the rest could enhance the visibility and the attractiveness of the remaining business.

And I think that's clear enough for now.

Once we get some slightly better numbers on the proceeds of these two areas that we're working on now, then we can size California if we're going to do it appropriately.

Thanks for taking my questions, Steve.

Doug Terreson, ISI.

Congratulations on your results.

Steve, you highlighted on some of the strategic review slides a major change in strategy in the Permian today.

It's going to be driven by this new exploitation team.

And on this point I wanted to see whether you could provide some color or whatever color you might have on this new unconventional drilling group in the Permian and also you also just mentioned a few minutes ago about the Plains All-America position and the question there is whether there's any strategic or operating rationale as to why the remainder may not be divested in the future.

So, two questions.

The second one's easy to say.

It will be divested in the future.

Thank you.

So, when we entered into it it was a private business.

And I don't have any problem investing in a private business that shareholders can't access if I think it makes sense for us.

Once it becomes public and you can duplicate the ownership yourself, there's no reason for us to hold it.

I'm going to let Vicki answer the question about the operational group.

Okay, first I'd like to say thanks to our current Permian unconventional team that's gotten us to where we are today, because currently we're running seven horizontal rigs.

We expect to ramp that up to 16 next year.

So, we're now getting more aggressive with our properties in the Permian, because we now understand them a little bit better.

This exploitation team is going to be one that we have developed to get us into a position where we're more entrepreneurial and much more aggressive in the way that we attack our unconventional opportunities in the Permian.

So, this group we expect to start helping us to more accelerate those opportunities that would have been two to three years out in our typical development schedules.

This team also will focus on ensuring that we provide the technical support to the business unit to make sure that we're spacing our wells correctly.

That we're adequately drilling our horizontal wells in the correct direction and spacing.

So, the bottom line is we just expect to be a technical support to help us to get more aggressive.

Great.

Thanks a lot.

Ed Westlake, Credit Suisse.

There's a statement in your slides on slide 35 saying expect to complete strategic review in the coming months.

Is that a statement just around the overall thinking about the business or is that around the timing that you might expect for making some of the disposals in the mid-continent and divestiture in the Mideast that you've discussed?

And a decision about California.

So, that's intended to be as soon as we have clarity about the proceeds.

Right.

Okay.

And then?

Very disruptive.

People don't understand it.

We put out the announcement so that we could go do the work, because you can't go secretly sell 9% of your assets.

Once that's done and then we'll look at the next step of what we need to do.

But you can't just disrupt the whole organization all at once with some sort of this massive idea without some pretty specific numbers.

And then a question that maybe you will be able to answer on the Middle East.

Obviously, there seems like there's a decent amount of growth still to go for and thanks for the slides.

Is there some sort of recovery factors that you can give on these fields at present to give us some kind of a geological understanding even if you can't talk about reserve bookings that could help us think about the long-term for these fields?

Particularly Oman?

Unfortunately, that's part of what you're supposed to keep a secret.

They're very high recoveries by US standards.

Or by current US standards.

They're like fields that were discovered in the US in the '30s.

Not like fields that are discovered last week here.

Okay.

And then the final one.

Just the chemical cracker, It is world scale is sort of $5 billion to $7 billion.

Is that the right ballpark?

No.

No.

Nowhere near that.

This is under $1 billion our share.

Okay.

Great.

Thanks very much.

Leo Mariani, RBC.

Question on the Permian here.

Just looking at your oil production, it's kind of been flattish there for the last handful of quarters.

Who your accelerating activity in 2014.

Talked about an incremental $500 million to drill horizontal largely unconventional.

You guys also talked about clearly significant proceeds coming in the door soon.

Ballpark is probably easy to get to something like a $10 billion type of number.

Should we expect, that is if you guys have success as we get through 2014 that 2015 and 2016 can see a lot more incremental capital on the Permian given how big your acreage position is here?

I certainly hope so.

If it isn't, then hasn't been successful.

But no, we expect the Permian to be self funding, because there's so much cash that comes out of the CO2 business.

Okay.

I guess in terms of your activity there, you kind of mentioned that acquisitions didn't seem like they were as paramount.

Do you think there's still potential for that down the road if stuff becomes available that looks more attractive to you guys?

Or do you think you have enough acreage to really drill this aggressively for many years to come?

I don't think we need to do any acquisitions.

No.

Obviously, if something attractive comes along that's different, but certainly not going to press acquisitions.

Okay.

We're better off, frankly, buying the shares with the money than doing the acquisitions.

Okay.

Thanks a lot.

Appreciate it.

Paul Sankey, Deutsche Bank.

Steve, do you think you can complete the Middle East deal by the end of the year?

Complete, no.

You have got to sign a lot of documents and the documents probably fill a room.

So, I think that I expect we'll have clarity as to the proceeds by the end of the year and probably a signing and completion first quarter.

And when you talk about a minority, I think the previous guidance was 25% sale.

Is that still the number?

I think you should think of it as being focused on how much money we can bring back in an efficient manner rather than the exact percentage.

Yes.

And that's being reported as --?

So, there's some amount of money, which is a sizable number, that we can bring back in an efficient manner.

The Middle East business generates a sizable amount of foreign tax credits.

And so we have a pile of those that we can use.

It would continue to generate foreign tax credits to shove through the income going forward.

And so if you exceed what you have, you pay taxes, US taxes on money that you would otherwise not pay taxes on.

So, we're mindful of that in this phase.

I understand.

I don't know if that was helpful or confusing.

No.

I think people are talking about an $8 billion type number as being the ultimate proceeds and you work around the percentage share towards that and then I think the year-end guidance that you've given at least what matters is the number is in line with what we are hoping.

We're not going to exact numbers.

I don't think that's useful.

Again, we're negotiations -- negotiate with ourselves on the phone.

Yes.

I understand.

And the options to California, is that a spin IPO?

What are you thinking there?

Thanks.

We really haven't decided what the options are.

Generally, simpler is better.

Increased complexity is probably not something I'm up for at this point.

So, would that imply a spin then?

What's the simplest thing to do?

There's two simple things to do.

And only two simple.

Everything else requires a lot of brain power.

And I'm short of that right now.

(laughter) fair enough.

I think I'll leave it there.

Thanks.

Sven Del Pozzo, IHS.

We've seen a big run-up in Delaware Basin stocks over recent months.

I know you guys have a lot of acreage there, so do you think that the -- I think it's based on a relatively small number of successes in the horizontal Wolfcamp, such as you had mentioned on your call.

I'm wondering, where do you think we stand in making this play more repeatable in the Delaware Basin?

Vicki, do you want to take a shot at that?

That's true.

There are relatively few wells.

We are encouraged about what's going on.

So, we'll let Vicki talk here.

And, again, that's part of what the exploitation teams will be doing in working with our current business unit and that is to look at the data in the Delaware.

We do believe that there's potential there and it is repeatable.

And one of the things that we're going to focus on trying to do is determine what drives the variations within the reservoir.

This team has the skill set, we believe, to work for the business units to accomplish that.

And so it's just a variability that we want to understand a little bit better, but we do believe that success is repeatable.

And in your opinion is it more upside in the Wolfcamp formation or Bone Springs or equal, just as an idea?

And then separately Wolfcamp in the Midland Basin, how would you compare the two answering the question the same way just like you did now?

I think that the upside in both the Wolfcamp and the Bone Springs will be ultimately pretty equal.

And the Wolfcamp in the Midland Basin certainly we've had some recent success there that based on the information we see from a couple of wells we're drilling now and from offset operators where we're certain that that's going to be very successful.

Thank you.

And moving over to the Bakken for a moment.

Most of your drilling I think it's been in southwestern Dunn County.

Is that to hold that acreage by production or is that just your own choice, because you've got a lot of acreage outside of that area as well.

And I'm just wondering, what your plans are for developing that other acreage.

We've been focused on holding the production, holding it by production.

Okay.

And then --

The majority of the drilling is done for that purpose.

Okay.

Thanks.

And then Pronghorn Sand in the Bakken, you mentioned that in your last press release.

Have you had any successful wells in the Pronghorn Sand?

I know that there's offset operators that have had success there.

I'm wondering when you guys plan to drill Pronghorn Sand or if you have already.

Bill can answer that.

We've drilled a couple of Pronghorn wells and we've been very pleased with the success that we've seen so far.

So, I think you could expect more of that.

Okay.

And then finally, just a little bit of data points.

If you could help me with the Dolphin project equity income.

I know you've disclosed that in the past but it was a while back and just to bring me up to speed on what that is on an annualized basis and if that equity income number if it's a pretax number or post-tax number and you can get me that later if you want or if you know it, I'd appreciate it.

Roughly 60% of the income in the midstream business is split between Dolphin midstream pipeline and the Plains interest.

So, if you take our midstream income for a year, I wouldn't use any quarter numbers.

For a year about 60% comes from those two.

And it's maybe not quite equally divided, but something like that.

Okay.

Thank you very much.

Faisel Khan, Citigroup.

On the $2 billion of annual free cash flow you expect to generate out of the MENA portfolio after the Al Hosn start up, can you discuss if that free cash flow number sort of assumes that you continue to spend capital on growth projects?

And if you can also discuss if that -- the CapEx number embedded in that free cash flow number if that's enough to replace reserves?

The answer is we would continue to spend it on growth projects.

And it would be enough to replace reserves.

That includes some of the projects you're looking at in the UAE and in Oman some of the (multiple speakers).

Includes the projects that are in hand now that we think we have.

If we went and did something brand-new, that may have a different effect, but if you look at what we have in hand and projects in Qatar and Oman and Abu Dhabi, at the start up that includes all of that.

But if you said, well, you could have some projects some other place, that's radically different than -- that would maybe different outcome.

But this includes enough to replace production.

Okay.

Understood.

And then your comments on the favorable permitting environment in California, is that a result of the law that was signed into or the legislation that was signed into law by Jerry Brown or was it is -- is there something else that's going on in terms of how you're lining up the permitting process in the state?

Vicki can answer that I think.

Yes.

I would say that the Division of Oil and Gas and Geothermal Resources for the State of California has been trying diligently to ensure that there is more certainty around the permitting process.

And so they've been processing permit applications as quickly as they can.

Granted it still takes a while in the state because of their personnel resources, but recently we've also been trying to anticipate the application of details from Senate Bill 4 that was just past and we're trying to ensure that we stay ahead of the anticipated specific requirements of that bill to ensure that we're not negatively impacted by that.

So, the Senate Bill, does it help provide more transparency to the process or does it make the permitting process more difficult?

It's -- it will provide more transparency.

But it will also require more monitoring from the operator standpoint, also more reporting.

And we're hoping that the requirements are not so stringent that the overload the staff at DOGGR.

And that's the bigger issue for us is that increased permitting requirement is going to be a load on their staff.

Okay.

Thanks for the color.

Last question for me, could you give us what you envision the capital cost being for the ethylene plant?

The gross cost?

Well, I said that half of it would be under $1 billion.

Okay.

So, the moral -- so, whether it's 750 or 800 or something like that, that's sort of the range.

Okay.

For half of it.

And do you have all the permits in hand, the air permits and the CO2 permits?

I think we're about set to go.

Okay.

Great.

I appreciate the time.

Thank you.

We'll be spending some money this year, but it will build up in 2014 and 2015 and 2016.

Okay.

Understood.

Thank you for the time.

John Herrlin, Societe Generale.

Two quick ones.

Given more of an unconventional focus, should we expect to see your PUD count go up in the US, Steve?

Such as a percentage of proven?

(multiple speakers)

I understand.

The actual PUD count is very large.

How much they actually -- they were always very reluctant to book PUDs and you've got to put a gun to their head to get them to book PUDs.

So, I would suggest that the PUDs are likely not to change very much as a percentage.

Doesn't mean there aren't PUDs, it's just that -- they feel they are borrowing from next year's program.

So, if they book a PUD, they book the barrels now and the money gets spent say next year.

So, they are afraid of hurting their F&D cost next year.

So, basically you have this steady-state of PUDs and PDP adds and therefore your F&D costs are from a perspective of people that do it more predictable.

We can argue, and I have with them, that there's more PUDs out there.

But they tend to take a very conservative view of it.

I don't think there's any question about that.

Not the end of the world.

There's worse things you could do.

Okay.

That's fine.

I just was wondering whether you're going to be more like your peers because you are more cautionary about that.

No.

I think it requires brain surgery.

And we're not up for that as part of my lack of ability as I get older.

Okay.

No lobotomies or pipping.

Next question.

With California, you're spending more on G&A.

And you said you're going to do more conventionally.

Are you going to be outside existing areas for your unconventional activities?

What I'm trying to get at is in terms of volume recoupment, will production activities be more protracted if you're not within your existing field areas?

Or TBD, to be determined.

I think we're going to build out from our field areas rather than go off.

Part of building efficiency is to build out from your existing infrastructure.

And one of the keys to the next year or so is to keep the efficiency strong.

So, we'll build out from where we are.

Okay.

Great.

Thank you.

Thank you.

Please give us a call if you have any questions, further questions here in New York.

And thanks for joining us today.

Thank you.

Thank you.

And this concludes the third quarter 2013 earnings release conference call.

Thank you for joining.

You may now disconnect your lines.