Occidental Petroleum Corporation Q3 2008 Earnings Call Transcript

Oct.28.08 | About: Occidental Petroleum (OXY)

Occidental Petroleum Corporation (NYSE:OXY)

Q3 2008 Earnings Call

October 28, 2008 11:30 am ET

Executives

Christopher Stavros - VP IR

Ray Irani - Chairman and CEO

Steve Chazen - President and CFO

Analysts

Michael LaMotte - JPMorgan

Michael Jacobs - Tudor Pickering, Holt

Paul Sankey - Deutsche Bank

Jason Gammel - Macquarie Research Equities

Pavel Molchanov - Raymond James

Manuel Heim - CM Energy

Erik Mielke - Merrill Lynch

John Reardon - Crowell Weedon

Operator

At this time, I would like to welcome everyone to the third quarter 2008 Earnings Call.

All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions). Thank you. Mr. Stavros, you may begin your conference.

Christopher Stavros

Thank you [Vicenta] and good morning everyone. I'd like to welcome you to Occidental's third quarter 2008 earnings conference call.

Joining us on the call from Los Angeles are Dr. Ray Irani, Oxy's Chairman and CEO; and Steve Chazen, our President and CFO. In just a moment, I will be passing the call over to Steve who will spend some time discussing our balance sheet and cash flows, and also review our third quarter and nine months financial results.

Our third quarter earnings press release, Investor Relations supplemental schedules, and the conference call presentation slides which refer to Steve's remarks can be downloaded also from our website at www.oxy.com.

I'll now turn the call over to Steve Chazen. Steve, please go ahead.

Steve Chazen

Thank you, Chris. We'll discuss earnings in detail in a few minutes. However, we would like to start with cash flows and our balance sheet.

Our cash flow from operations for the nine months of 2008 was $8.1 billion. We used $3.2 billion of the company's cash flow to fund capital expenditures, $3.3 billion for acquisitions, and $680 million to pay dividends.

We also spent $1.5 billion to repurchase 19.4 million common shares. These and other net cash outflows decreased our $2 billion cash balance at the end of last year by $550 million to $1.45 billion at September 30th.

Debt was $1.8 billion at the end of September which was unchanged from December 31st, 2007. Our debt-to-capitalization ratio was 6%.

Next year we have maturities totaling $714 million. After that we have maturities of $239 million in 2010, and $368 million in 2012. We ended the quarter with $1.45 billion of cash in the balance sheet. We recently borrowed on another $1 billion which could be used to cover debt maturities, and we will pay $1.25 billion for the Plains transaction. We have available unused lines of committed bank credit of $1.5 billion.

A pro forma debt-to-total capitalization with the recent debt issue was 9%, or about $0.98 per BOE of proved reserves.

Occidental generates significant cash flows over a wide range of prices. As noted in the cash flow available for capital and other uses slide including the Investor Relations package.

For example, in 2005 when the WTI price were $57 a barrel, and production from continuing operations was 466,000 BOE a day, we had free cash flow of $2 billion after spending $2.3 billion for capital expenditures and $500 million for dividends.

Cash flow from continuing operations is after interest and income taxes. Continuing operations excludes Russia, Horn Mountain, Ecuador and Pakistan. If you adjust for the 2005 dividends of $483 million, and $131 million net interest expense, and current 2008 annualized amounts of $912 million for dividends and interest expense, we would have cash flow available for capital expending in excess of $3.9 billion.

Additionally, production has increased to 594,000 BOE per day in 2008, compared to 466,000 BOE a day for 2005. This is after removing Horn Mountain, Ecuador, Russia and Pakistan from the 2005 numbers. The increase in production is primarily from Dolphin, Argentina and domestic additions. These new programs on average generate more cash flow than the programs they replace.

The difference between the first nine months run rate of 594,000 BOE a day, and 466,000 BOE a day of 2005, is about 45 million BOE per year. Using the production outlook, we gave you for next year in the last quarter's report of about 650,000 BOE a day; difference is about 200,000 BOE a day or about 70 million barrels per year.

Therefore, we would have well over $3.9 billion in cash available for capital expenditures in the 2005, $57 per barrel WTI price.

Let me now begin discussion of the third quarter's results. Net income for the quarter was $2.3 billion or $2.78 per diluted share, compared to $1.3 billion or $1.58 per diluted share in the third quarter of 2007 when prices were $75 per barrel.

Here's the segment breakdown for the quarter. Oil and gas third quarter segment earnings were $3.618 billion, compared to $1.955 billion for the third quarter of 2007. Oil and gas core results for third quarter of 2007 were $1.914 billion after excluding gain for the sale of oil and gas interest and exploration properties.

The following accounted for the increase in oil and gas earnings between these quarters. Higher worldwide oil and gas realizations resulted in increase of $1.8 billion of earnings over the comparable period last year. Occidental's average realized crude oil price in 2008 third quarter was $104.15 per barrel, an increase of 54% from the comparable period last year.

Oxy's domestic average realized gas price for the quarter was $9.35 per mcf, compared to $5.90 for the third quarter of last year. Worldwide oil and gas productions third quarter of 2008 averaged 588,000 barrels of oil equivalent per day, increased to 3% compared with the 570,000 BOE a day production in the third quarter of last year.

The bulk of the production improvement was a result of 31,000 BOE per day of higher production of the Dolphin Project which began production last year at this time. Partially offsetting these increases were 5,000 BOE per day of lower volumes, attributable to Hurricane Ike, resulted from pipeline curtailments due to third party NGL fractionators along the Gulf Coast being [shut-in], and 13,000 BOE a day in lower volumes for Libya operations due to the new contract which I discussed in last quarter's conference call.

Exploration expense was $61 million in the quarter, below our guidance of $90 million to $110 million. Oil and gas cash production costs for the first nine months of 2008 were $14.80 a barrel compared to last year's cost of $12.33 a barrel. Approximately 38% of the increase is related to increased energy costs. The increase reflected higher production tax and ad valorem tax, workovers and field operating cost.

Chemical segment earnings for the third quarter of 2008 were $219 million, which was higher than our guidance of $135 million to $150 million. The higher earnings were attributable primarily to higher caustic soda prices. Chemicals earned $212 million in last year's third quarter.

Midstream earnings for the third quarter of 2008 were $66 million, a decrease of $20 million from last year's results. The decline in earnings was due to lower crude oil marketing margins, partially offset by higher pipeline income from Dolphin, higher NGL margin in the gas processing business and improved margins on the power generation side. The worldwide effective tax rate was 40% for the third quarter.

Let me now turn briefly to our performance for the first nine months. Net income was $6.414 billion or $7.79 per diluted share for the first nine months of 2008 compared to $3.948 billion or $4.69 per diluted share for the same period last year. The nine months 2008 reported net income was another record and was 62% higher than the first nine months of 2007 net income.

Income for the first nine months of 2007 included a $1 billion benefit net of tax to the items noted on the schedule attached. Capital spending was $1.2 billion for the quarter and $3.2 billion for the first nine months. We expect our total capital spending for the year to be about $4.5 billion to $4.7 billion. Our preliminary estimate is that next year's capital spending will be no greater than this year's.

The weighted average basic shares outstanding for the nine months were 820.1 million. The weighted average diluted shares outstanding were 823.8 million. At September 30th, there were 810.1 million basic shares outstanding, and the diluted share amount was approximately 813.8 million. Oxy's 2008 annualized return on equity was 34% with the annualized return on capital employed of 32%.

As we look ahead in the current quarter, we expect oil and gas production to be in the range of 610,000 to 625,000 BOE a day during the fourth quarter at approximately current oil prices. We expect fourth quarter production increases in the Middle East and North Africa, reflecting lower product prices on our production sharing contract, higher domestic production and production increases from Argentina.

With regard to prices, a $40 per barrel decrease in WTI prices from the third quarter would reduce oil and gas fourth quarter earnings before income taxes by about $1.5 billion. Further changes of $5 per barrel in oil prices will impact oil and gas quarterly earnings before income taxes by about $190 million. A $3 per million BTU decline in domestic gas prices from the third quarter would decrease oil and gas quarterly earnings before income taxes by $140 million.

Additionally, we expect exploration expenses to be about $150 million for seismic and drilling for exploration programs. We expect chemical segment earnings for the fourth quarter to be about $150 million. High caustic soda prices are expected to continue through the period, offset by weakness in the construction and housing markets impacting domestic demand.

Despite the difficult economic conditions, a seasonally weak fourth quarter and concerns over export opportunities over the balance of the year, we believe these approximate earnings are likely.

We expect our combined worldwide tax rate for the fourth quarter to be about 44%. We expect the rate to increase due to proportionately foreign source income and higher anticipated currently non-deductible foreign exploration. Our third quarter U.S. and foreign tax rates are included in the Investor Relations supplement.

Copies of the press release announcing our results and the schedules are available on our website or through the Edgar system.

We're now ready to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Michael LaMotte with JPMorgan.

Michael LaMotte - JPMorgan

Thanks. Good morning.

Steve Chazen

Good morning.

Michael LaMotte - JPMorgan

Steve, if I could ask about the CapEx a little further, you mentioned that in '09 you don't expect it to be any greater than '08. I'm really trying to get a sense as to what the mix could look like, though. I know you have a good bit of discretionary spend in there, particularly with respect to workovers and that workover was a big portion of your volume guidance last quarter for '09 and 2010.

Can you talk about how that might change and what impact that might have on volumes next year?

Steve Chazen

Well, most of the workover was started late this year in the back half of this year.

Michael LaMotte - JPMorgan

Okay.

Steve Chazen

I don't think you'll see much change in 2009 from this change.

Michael LaMotte - JPMorgan

From the --.

Steve Chazen

From the workovers that may have worked at $90 obviously have been stopped, because some of it was intended to just generate a quick hit. So, at this point, we probably wouldn't fool with the guidance for next year.

Michael LaMotte - JPMorgan

Either on CapEx or volumes?

Steve Chazen

For the volumes.

Michael LaMotte - JPMorgan

Yeah.

Steve Chazen

CapEx, we're still working on the CapEx. We expect that the costs will decline this coming year, as demand for oil field services declines, certainly in the United States. So it's pretty hard for us to guess what the impact will be, but right now we're working on a program that is somewhat less than the current run rate.

Michael LaMotte - JPMorgan

Okay.

Steve Chazen

We would be more specific if we know.

Michael LaMotte - JPMorgan

Sure, I understand. That's good color. On the $1 billion debt issuance, that price is around 7%, is that right?

Steve Chazen

7%, right.

Michael LaMotte - JPMorgan

Okay. If I think about priorities for use of cash, you mentioned the 714 due in '09. 7% is not bad, particularly in this market. I mean, how would you think about sort of reloading again to take up the 714 in order to keep powder dry for acquisitions or other opportunities?

Steve Chazen

I don't know. I just don't know. Just depends on where we are then. So, I just really don't know.

Michael LaMotte - JPMorgan

Okay.

Steve Chazen

If it changed, right now I'm told BBB issuers were a middle A issuer, but a BBB issuers, there is about $100 billion of them waiting in the queue for rates into the single-digits, I guess. So, I think it's going to be a very difficult year, next year, for people to refinance and so, we'll see. More likely than not we'll have enough free cash flow that we won't need to worry about the 714 of maturities.

Michael LaMotte - JPMorgan

So it certainly looks that way now?

Steve Chazen

Yeah.

Michael LaMotte - JPMorgan

And then lastly from me on Argentina, up volumes a little bit in 4Q, so no real impact yet, what's going on down there?

Steve Chazen

If you look at the maps, it's a long way between Buenos Aires and [Antarctica]. And so the noise really doesn't have any effect. We can tell you to be optimistic about improving results in Argentina.

Michael LaMotte - JPMorgan

Okay, great. Thanks.

Steve Chazen

Thanks.

Operator

Our next question comes from the line of Michael Jacobs with Tudor Pickering, Holt.

Michael Jacobs - Tudor Pickering, Holt

Thank you and good morning.

Steve Chazen

Good morning.

Michael Jacobs - Tudor Pickering, Holt

Just going back to CapEx and thinking about how to overlay your comments on '09 CapEx with your high graded assets that generate more cash flow per barrel production today than similar assets generated in '05. When we think about that cash flow and compare it to capital spending from '05 to '06, on oil averaged roughly $60 a barrel, if oil prices average $60 a barrel in '09, should we infer that Oxy would spend somewhere between $2.25 billion and $3 billion in capital, or how high could that number go up?

Steve Chazen

I think you should expect that we'll spend about the same next year that we spent this year, which is 4.5 or so. So what we just show you here on this table, what we actually spent that year. But we've got a significantly bigger company, and some commitments to stuff. So, we'll probably spend closer to the 4, 4.5 area. But at that price, there is still a lot of room I think.

Michael Jacobs - Tudor Pickering, Holt

If you were forced to cut capital, could you point us towards where the first cuts would come out of within the overall?

Steve Chazen

If you're stuck with the current environment, which I don't know what that means exactly, but let's say if it were to freeze for a nanosecond before it changed, your gas drilling at $6 an mcf is probably something we would [defer]. Our leases are long lives, so we're not really doing anything to our inventory, we're just slowing that up a little bit. Some work over's or re-completions that might have worked in an $80 or $90 environment, we'd probably slow that up. We expect also that the oil field service costs are going to come down nicely here, and we hope to contribute to that decline.

Michael Jacobs - Tudor Pickering, Holt

Great. A final question. We would appreciate hearing your thoughts on what oil price you think the Middle East needs to maintain its social programs? And whether your outlook for securing additional development projects has become more positive in light of the rapid drop in oil prices?

Ray Irani

This is Ray Irani. I just read that the Prime Minister of Qatar, which is one of the richest countries in the region that they needed $55 million to balance their budget for spending plans and he thought that the current oil prices were too low, that's what he says. Clearly, they are suffering also. As you have probably read, the stock market in Saudi Arabia is down 50% this year today. Others in the region are down 20% or so. Some of their banks are struggling which proves again when the US has a flu, the rest of the world can struggle, some have pneumonia.

So the economy of the world is being affected, including the Middle East. How bad this recession is deep, worldwide, will affect clearly demand and the psychology of the market. But as Steve said, we feel quite comfortable that $57 a barrel we'll still have free cash flow going through the numbers here. So, from there, you can draw any conclusions you want.

Michael Jacobs - Tudor Pickering, Holt

Great. Thank you very much.

Operator

Your next question comes from the line of Ryan Todd with Deutsche Bank.

Paul Sankey - Deutsche Bank

Yes, hi everyone. It's actually Paul Sankey here.

Steve Chazen

Good morning.

Paul Sankey - Deutsche Bank

Hi. Good morning, Steve. Steve, could you help us a little bit with OpEx and how that will be affected by the downturn? I guess DD&A is going to be sticky, but then obviously the cash issues, I wondered if you could just walk us through some of those, how those will change? Thanks.

Steve Chazen

DD&A is going to be sticky, although it remains to be seen when we redo year end reserves how that turns out. But that's money already spent. So I mean that's part of the cash flow. Operating costs, obviously production taxes are going to fall sharply and electricity costs and CO2 costs for the third-party CO2 which is tied directly to oil prices. I know our workover costs are probably going to decline sizably. And you'll start to see that in the fourth quarter.

So, I would guess there would be a fairly sizable reduction over the next two quarters in operating costs, even if we do nothing. I'd like to remind you that about a year ago, we engaged on a G&A reduction program which is we're starting to see some of the positive effects of that and some other things that we've done in anticipation of some kind of a downturn, I can't say predicted exactly this.

Paul Sankey - Deutsche Bank

Can you give us a sense for the shares of various costs that you have mentioned? You didn't mention --?

Steve Chazen

It's around a couple of bucks a barrel equivalent, I would guess. The other part that's a little tricky; in our production sharing contracts, we pay all the operating costs and recover it through cost recovery. And so, as the volume goes up, as the production sharing contracts generate more barrels, the cost per barrel will decline from that too, because you have more barrels to spread your operating costs over.

That may be a little hard to see. Maybe added $0.30 in last year to our operating cost per barrel. It's that change from last year's average price of 72 to this year's 113, you know, you've got about $0.30 just from that pool around the production sharing contracts. So, I mean there is a lot of moving parts, and it's hard for us to get an exact number.

Paul Sankey - Deutsche Bank

Yes, but you're better than we are.

Steve Chazen

Yes.

Paul Sankey - Deutsche Bank

What about labor claim? I mean I guess we'd expect labor costs to be pretty sticky, right?

Steve Chazen

Certainly, our labor costs will be sticky, but they probably are not going to go up either.

Paul Sankey - Deutsche Bank

And what kind of proportion would they be of the overall cost?

Steve Chazen

Not very much of the total. I would guess it's no more than a third of the operating costs, maybe less.

Paul Sankey - Deutsche Bank

You mentioned that there was activity at 90 that you're not going to continue obviously at 65. How much like 1,000 a day or something?

Steve Chazen

Certainly below 5,000. Whether it's 1,000 or 1,500 or 2,000, I don't really know, but it's certainly within our error band.

Ray Irani

Yes, we want to remind you that Steve mentioned our volume next year we expect to be up significantly. In spite of controlling capital spending, we expect that to continue at current oil prices.

Paul Sankey - Deutsche Bank

That's the 650,000 a day that you had just mentioned.

Ray Irani

That's correct.

Paul Sankey - Deutsche Bank

So, effectively, you've cut your CapEx, but you've maintained your volume guidance as such.

Steve Chazen

Ultimately cutting the capital if it has any effect would be beyond the forecast period.

Ray Irani

If oil prices continue at this level, I would expect tightening of supply and demand in a few years to take place, because we're not the only ones in the universe, and capital spending by foreign governments will be affected. And then they are the bulk of the production in this world.

Steve Chazen

Yes. If I could ask you Dr. Irani what was your perspective on the OPEC meeting? I thought some of the language was interesting, from the Saudis particularly. What was your interpretation of what happened?

Ray Irani

Well, the Saudis have a difficult decision to make. We're between Presidents, and they don't want to appear to be contributing to the economic downturn in the United States. So, they were very careful in agreeing to the production cut, because the last thing they needed was to announce the production cut and the price of oil jumps up to high numbers and then people start throwing stones again.

My interpretation is a 1.5 barrels a day was announced. Clearly for that to happen, the bulk of that reduction has to come from Saudi Arabia, Kuwait and UAE. Because the other countries, which were looking for much higher cuts at this point in time, probably won't contribute to that cut materially.

So looking at the end result, the announced cut did not raise prices significantly, as a matter of fact, pricing went down. So specifically, my interpretation of the Saudi's feel that what was announced was appropriate in today's political environment.

Paul Sankey - Deutsche Bank

Do you think that will be a re-opening of opportunities in the Middle East? And now, we seem to change our view of this every six months but, do you think --

Ray Irani

I think it's too early to make a conclusion. I'm leaving for the Middle East in a week to pursue our business there and other opportunities we are working on.

Paul Sankey - Deutsche Bank

Great. Thank you, gentlemen.

Operator

Your next question comes from the line of Jason Gammel with Macquarie.

Jason Gammel - Macquarie Research Equities

Thank you. I just had a quick question on the 2009 debt maturities first of all. My understanding was that the bulk of those maturities are actually consolidated subsidiary debt. So is there an actual cash outflow for Oxy when that debt actually becomes due?

Steve Chazen

The answer is, it depends. The debt is Dolphin debt. And it will either be refinanced by Dolphin, in which case there would be no outflow, or we would pay our share, which is what we've currently planned for.

Jason Gammel - Macquarie Research Equities

Okay, excellent. So the 714 is not necessarily the full cash outflow, I just wanted to check on the liquidity portion there. One more, please. In the second quarter, you had announced the plan with SandRidge to go forward with a CO2 extraction plant in the Permian Basin work, where you would be the up taker of the CO2 for EOR purposes.

SandRidge has [since] announced some pretty significant cuts for their capital budget, would you be willing to actually fund the Century Plant in order to open up the incremental EOR activity that would represent, or would you just defer those EOR projects until such time as you could get another source of CO2?

Steve Chazen

We are funding the Century Plant. That's all Oxy money, there is no SandRidge money at all. So the plant itself is being built with Oxy money. SandRidge is building it, but they are building it with our money. So I don't think there is any real risk to the plant. I think your question really is about their well drilling program? They have a deliver or pay commitment for the gas. They have to deliver the gas when it's ready to the plant. If you don't deliver, bad things happen.

Jason Gammel - Macquarie Research Equities

Okay. Thanks for the clarification on that, Steve.

Steve Chazen

Sure.

Operator

Your next question comes from Pavel with Raymond James.

Pavel Molchanov - Raymond James

Hi, could you guys give us a quick update on the level of CapEx you anticipate in Libya next year? And similarly, what oil price you think supports continued activity in your properties there?

Steve Chazen

We don't know. It's subject to approval of the Libyan Government for the capital level. It's a negotiation. Remember, Libyans have to put up half the money, and so it's a little more complicated than just what we want to do. Libyan production is fairly low cost, so I don't really know what the number would be, but $25, $20 somewhere. It might be lower than that because the lifting cost is quite low. The capital is really for growth rather than maintenance. It's really hard for us to come up with a firm number.

All of these estimates about what something might be that might be economical at some oil price or gas price. You have to make some assumption about oil field service and steel costs and that sort of thing. You can't really make the assumption that gas is going to be $5 an mcf and oil is going to be $25 a barrel, and steel is going to be $2,200 a ton. I mean, those numbers just don't go together. And so it's very difficult for companies to come to grips with what the breakeven price of anything is with radically changed product prices.

Ray Irani

I think the accurate thing is what Steve said earlier, at current oil prices of $57 even a barrel, Oxy will have free cash flow next year. Our capital spending will be at or below what we're going to spend this year, which about $4.5 billion. And we'll have significant growth in volume which we estimate currently at 650,000 barrels a day in 2009. I think those numbers are much more accurate than if you start digging into the pieces. We've been looking at the pieces and we've given you our best estimates for the overall picture.

Pavel Molchanov - Raymond James

That helps. Just a quick follow-up on Libya. If the numbers that you will propose to the Libyan Government, are they going to be for same level of spending or increased or decreased level of spending?

Ray Irani

Well,; our people are meeting in Libya to look at these things. And as far as what we are going to put together with them, it's the plan we had before. But as we said, it's not a one-man show here. They are partners of ours, and so they have to approve those programs.

Pavel Molchanov - Raymond James

Understood. Thank you very much.

Ray Irani

The financial ones are spending, because frankly, usually you have to prod those government entities to go along. So, we have some influence on the spending, but not totally in our hands.

Pavel Molchanov - Raymond James

Yes. Got it. Thank you.

Ray Irani

You have to fund half the money. The Libyan central government might decide that a road is more valuable than more drilling for all we know.

Pavel Molchanov - Raymond James

Got it.

Ray Irani

Thank you.

Operator

Your next question comes from the line of [Manuel Heim with CM Energy].

Manuel Heim - CM Energy

My question is for Steve.

Manuel Heim - CM Energy

You're probably the most [inaudible] CFO in the oil patch.

Steve Chazen

I like to see who is in second place.

Manuel Heim - CM Energy

A lot of people are in last place. But can you kind of give us your perspective on, I don't want to bury Q4 on this, but on the government's efforts to try to free up the banking system here, what implications that may have the willingness of the commercial banks still into the kind of the middle to smaller size E&P companies and whether or not problems they may be having in the banking system could be opportunistic for you guys to pick off assets at a lot cheaper price than you could have absent just declining oil and gas prices?

Steve Chazen

In the last month or two, we've made offers. People have come to say would you buy these small assets. We've made offers, and the offers have been rejected, by the way. But we were the only bidder, because there is no cash. And right now, the sellers are looking at six months ago prices and the buyers are looking at a lot lower than that, shall we say.

There is really not much going on now. I think there is a lack of reality. The small producers I think are going to have a very difficult time with the banks getting more capital at this point. And as I talked about earlier, there is enormous backlog in the BBB space for bond deals and never mind the BB space. So, it's hard for me to envision banks being enthusiastic lenders to companies that in my view are overleveraged already.

Manuel Heim - CM Energy

So, we could see some forced selling over some of these assets?

Steve Chazen

I think they believe that somehow on December 31st or January 1st, there is going to be incredible change.

Manuel Heim - CM Energy

Right. In the reporting of reserves?

Steve Chazen

No, I don't know what it is, some change that the world is going to get better and once again happy days will be here again. And I think the damage to banking system is so much greater than in my lifetime that I don't believe that. A lot of the buyers who competed for properties, I don't mean just the companies, but whatever they're called, leverage [myers] just are going to be out of the business.

So, I think it's going to be a very tough environment for someone who has got too much debt. The right amount of debt for this industry I have always felt is about zero.

Manuel Heim - CM Energy

Well, you're pretty close to it. So, you're right.

Steve Chazen

Pretty close to zero. Zero would be about right.

Manuel Heim - CM Energy

Do you think we'll see some of these bank lines being reduced to the point where some of these overleveraged companies will be forced to sell assets by the bank to get down to the roaring buzz.

Steve Chazen

Well, unfortunately for the banks, most of these people re-up their lines within the last few years

Manuel Heim - CM Energy

Right

Steve Chazen

It's really hard to reduce it. So, I think their lines will be there. But even with the reduced capital spending plans that some of these people have, I don't see where the free cash flow comes from to do what they're saying. And some of them are relying on asset sales to stupid buyers, and I'm sure there are some stupid buyers, but probably not an infinite number.

Manuel Heim - CM Energy

Okay. One follow-up, if I may. I believe you communicated to me your preference has been for North American oil and you see more opportunities in the North America as opposed to Middle East where people may be bid down the rates of returns on some of those big projects.

Given what's going on in the worldwide financial system, I know you certainly don't know about some of the projects in the Middle East. But is your preference still for North America? Is it still for oil? Or could we see you being more aggressive on the gas side, given some opportunities that might come up from weak sellers who have maybe assets and are merging unconventional resource plays where returns could be quite good once the gas price recovers. Is that something that could be of interest to you?

Steve Chazen

Well, as I told before, it's really not about oil and gas, but about money. So, if we see better returns in gas, that's where we'll spend what we have, and where we don't, we won't. We are interested in building inventory of drilling locations over that we can harvest over the next decade. So, that's probably says maybe more gas. But we have to manage what we know how to do. We can't do something that's out of character, because the learning curve is too steep.

Manuel Heim - CM Energy

Okay. Well, congrats on your results. And thanks for the great answers.

Steve Chazen

Thank you.

Operator

Your next question comes from the line of Erik Mielke with Merrill Lynch.

Erik Mielke - Merrill Lynch

I'd like just to stay with the theme of the earlier caller, on potential for asset deals or indeed corporate transactions. Are you surprised that we haven't seen corporate deals in these markets?

Steve Chazen

No. Let's say you're a small producer, medium sized producer, whatever you want to call, and your stock is $20 today, and six months ago it was $80. I think it's very difficult to go to the Board and say I'd like to take $20 of Joe Blow stock or $20 in cash or $25, whatever it is. And I think until the reality comes that this is sort of the way it is, I don't think you'll see much, I could be wrong, of course, unlikely to be wrong. But I really wouldn't expect to see much until next year. I think almost all of the medium, small producers think things are going to be back to something like normal in the first and second quarter of next year. And so they are stretching themselves to make it through then, in which same time things will be better they believe, maybe they will. I certainly hope they are better. But they might not be, and I think that's when the rubber will hit the road and that's when they'll be looking for deals.

Erik Mielke - Merrill Lynch

Okay. So almost a distressed seller scenario?

Steve Chazen

Yeah, a distressed seller scenario, and I don't think you'll see that until sometime next year.

Erik Mielke - Merrill Lynch

Great. And given the earlier discussion, do you have an update on Dolphin and the long-term growth plans there?

Steve Chazen

Dolphin is doing very, very well. It continues to produce above design capacity, and by production sharing contracts there, volume would be increasing next year because today's oil prices are lower than they were last year. As far as the additions go, that's really a negotiation between governments.

Erik Mielke - Merrill Lynch

And the current environment is not conducive for that?

Steve Chazen

We don't know. It's a negotiation between governments.

Erik Mielke - Merrill Lynch

Okay. Thank you.

Steve Chazen

Thanks.

Operator

(Operator Instructions). Your next question comes from [John Reardon with Crowell Weedon].

John Reardon - Crowell Weedon

Actually, my question has been answered. So, thank you very much. And have a good day.

Steve Chazen

Sure.

Operator

And there are no further questions at this time.

Christopher Stavros

Thank you everyone for dialing-in and listening this morning. And have a good day. And please call us in New York if you have any further questions. Thank you.

Operator

Thank you. This concludes today's conference call.

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