Occidental Petroleum's CEO Discusses Q4 2013 Results - Earnings Call Transcript

Jan.30.14 | About: Occidental Petroleum (OXY)

Occidental Petroleum Corporation (NYSE:OXY)

Q4 2013 Earnings Call

January 30, 2014 10:00 a.m. ET

Executives

Christopher Stavros – VP, IR and Treasurer

Steve Chazen – President and CEO

Cynthia Walker – Chief Financial Officer

Willie Chiang – Vice President, Operations and Head, Midstream Business

Sandy Lowe – President, International Oil and Gas Operations

Bill Albrecht – President, Oxy Oil and Gas, Americas

Vicki Hollub – Executive Vice President, Oxy’s U.S. Oil and Gas Operations

Analysts

Doug Terreson – ISI

Doug Leggate – Bank of America Merrill Lynch

Faisel Khan – Citigroup

Ed Westlake – Credit Suisse

Arjun Murti – Goldman Sachs

Roger Read – Wells Fargo

Operator

Good morning. And welcome to the Occidental Petroleum Corporation Fourth Quarter 2013 Earnings Conference Call. (Operator Instructions) I would now like to turn the conference over to Mr. Chris Stavros. Please go ahead.

Christopher Stavros

Thank you, Emily and good morning, everyone. Thanks for participating in Occidental Petroleum’s fourth quarter 2013 earnings conference call. On the call with us this morning from Houston are Steve Chazen, Oxy’s President and Chief Executive Officer; Vicki Hollub, Executive Vice President of Oxy’s U.S. Oil and Gas Operations; Cynthia Walker, our Chief Financial Officer; Willie Chiang, Oxy’s Vice President of Operations and Head of our Midstream Business; Bill Albrecht, President of Oxy’s Oil and Gas in the Americas; and Sandy Lowe, President of our International Oil and Gas Operations.

We are going to change things up a bit this quarter and begin the call with comments from our CEO Steve Chazen who will review some of the achievements we realized last year with respect to the fundamentals of our business and our strategy and plan for 2014. Vicki Hollub will then provide a thorough discussion on the strategy and outlook for our operations in both the Permian basin and California.

In order to provide a little more current for discussion around our domestic oil and gas operations, we will not directly address our fourth quarter results on the call. However Cynthia Walker’s detailed commentary on the fourth quarter as well as forward looking guidance items can be found in the conference call slides sent to you following Vicki’s remarks and beginning with Slide 46.

As a reminder, today’s conference call contains projections and other forward-looking statements within the meaning of the federal securities laws. These statements are subject to the risks and uncertainties that may cause actual results to differ from those expressed or implied in these statements and our filings.

Our fourth quarter 2013 earnings press release, the Investor Relations supplemental schedules, conference call presentation slides, as well as Cynthia’s detailed commentary on the fourth quarter results have been posted and can be downloaded off of 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 just finished a successful year meeting or exceeding many of the goals we set out for ourselves and are looking to continue our performance into 2014. Let me give you a brief overview of the key 2013 highlights.

We grew our domestic oil production by 11,000 barrels per day over 2012 to 266,000 a day. We exceeded our capital efficiency goals reducing our drilling costs by 24% from the 2012 levels, reduced domestic operating costs by 17%. We added about 470 million barrels of reserves equivalents achieving overall replacement ratio of 169%.

Our total costs incurred associated with those reserve adds were about $7.7 billion, resulting in repair and finding and development costs of under $17. We increased our return on capital employed from 10.3% in 2012 to 12.2% in 2013.

Turning now to some of the specifics of the key accomplishments of last year. As a result of our development program, we improved our capital efficiency by 24% domestically over 2012, which translates to about a $900 million reduction in capital for the wells drilled in 2013. Of this improvement, 50% came from the Permian basin, 25% from California and 25% from the rest of domestic assets. We accomplished these improvements while successfully completing our program by drilling approximately what we had planned.

We also reduced our domestic operating costs by 17%, or about $470 million compared to 2012. About 48% of this improvement was in the Permian basin, 46% was in California and the remainder was in their other domestic assets. While we focused on these efficiencies, we also grew our domestic oil production by 11,000 barrels a day.

With respect to reserves, we had a very successful year in growing the company’s reserve base by adding substantially more reserves than we produced. Over 90% of which was added to our organic development program. We ended the year based on preliminary estimate with about 3.5 billion barrels of reserves which represent an all-time high for the company.

Our total company reserve replacement ratio from all categories before dispositions was about 169% or about 470 million barrels of new reserves, further [ph] 278 million barrels we produced during the year. In the United States, our reserve replacement ratio was 190%. Replacement ratios to California properties and the Permian non-CO2 properties were similar to the overall ratio.

Our reserve replacement ratio for liquids from all categories was 195% for the total company and 228% domestically. This reflects our emphasis on oil drilling instead of gas. Our total costs incurred related total reserve additions for the year on preliminary basis of about $7.7 billion. Over the last several years we have built a large portfolio of growth oriented assets in United States. In 2013 we spent larger than normal portion of our investment dollars in development of these assets. Our GReNeC reserve replacement for the year reflects the positive results of these development efforts. Our 2013 program, excluding acquisition, replaced 168% of our domestic production with about 291 million barrels of reserve adds. In addition we transferred a 115 million barrels of proved undeveloped reserves to proved developed category domestically as a result of the program. Our acquisitions were at a multiyear low of $550 million, providing reserve adds of 32 million barrels.

At the end of the year we estimate that 73% of our total proved reserves were liquids, increasing from 72% in 2012. Of the other total reserves about 70% were proved developed compared to 73% last year; 2012, that is. Increasing the share of the proved undeveloped reserves compared to last year with all the reserves added of the Al Hosn Gas Project. We expect to move these reserves to proved developed category at the end of this year, once the initial production starts in the fourth quarter.

Through the success of our drilling program and capital efficiency initiative we lowered our finding and development cost over recent years, as a result we expect our DD&A expense to be around $17.40 a barrel only a small increase from the $17.10 in 2013. This is consistent with our expectation that DD&A rate of growth should flatten out as recent investment come online and finding and development cost come down. Because of our organic reserve additions and the efficiency we’ve achieved in our operations demonstrates the significant progress we’ve made in turning the company in a competitive domestic productive.

One of our long-term goals domestically has been achieved, a 50% pre-tax margin after finding and development and cash operating cost, so as to generate solid returns. We believe we’re achieving that now and expect to continue to do so in the future.

Consistent with what we’ve said, our focus in 2013 was to enhance the shareholder value through our results. For this goal, our program was heavily focused on growing our domestic oil production, improving our capital efficiency, that is, improving our finding and development cost and lowering our operating cost. We met or exceeded these goals in result have increased our return on capital to 12.2%, a significant improvement from the 10.3% of last year and a testament to the hard work and dedication of all of our employees. We expect to see further improvements in our returns in coming years as a result of the recent investments.

Turning to this year, our 2014 program is designed to improve on last year’s strong performance. Let me highlight the key elements of the 2014 program, which I will discuss without reflecting any of the effects of our strategic review initiatives. We expect our 2014 program to be about $10.2 billion compared to the $8.8 billion we spent in 2013. The increase includes about $400 million of additional capital allocated to each of our Californian Permian operations largely for additional drilling, to accelerate their development plans and production growth. An additional $100 million will be spent in these and other domestic assets for facilities projects that were deferred from 2013. The domestic oil and gas capital program will continue to focus on growing oil production and the entire increase in capital will go to oil productions in California and in Permian Basin. We also expect to continue to find growth opportunities in our key international assets, mainly in Oman and Qatar and complete the Al Hosn Gas Project.

Our capital for 2014 for Oman and Qatar will increase by about $300 million over last year. Our exploration capital will increase by about $100 million; in part, due to spending that was deferred from last year. Our midstream capital increased by about $100 million as a result of spending on the BridgeTex Pipeline and two new terminals at Ingleside. Our chemical capital increased also by about $100 million; the Mexican joint venture we announced last year and we complete the new Johnsonville chlor-alkali facility.

Our success in improving our capital efficiency and operating cost structure has provided us with the ability to expand our development opportunities that met our financial return targets. The capital program production growth that I outlined, it reflects the benefit of our streamlined structure and our commitment to continue fuel growth by exploiting our large portfolio, primarily in California and in Permian Basin. We expect to our 2014, we expect our Company-wide production volumes to grow to between 780,000 and 790,000 barrel equivalents a day compared to 763,000 in 2013, with the fourth quarter exit rate of over 800,000 barrels a day excluding the planned Al Hosn production. This increase will come almost entirely from domestic oil production while we expect to see a continued modest drop in our domestic gas volumes. Our domestic oil production is expected to grow from 266,000 barrels a day in 2013 to between 280,000 and 295,000 barrels a day in 2014 or about a 9% increase. This growth will come fairly evenly from our California and Permian operations. Internationally, excluding Al Hosn, we expect production to grow slightly.

While the elements of the 2014 program that I discussed assumes no changes to Company structure or its mixed of assets. We do expect the Company will look significantly different by the end of the year. Strategic view we are undertaking will result in large changes to the Company’s asset mix. Our capital program production expectation and other elements of 2014 program will be adjusted as the related transactions are concluded.

Finally, some of our longer lead investments we have been making over last couple of years will start contributing to our results this year, specifically the Al Hosn Gas Project we expect to start its initial production in the fourth quarter and start contributing to our cash flow. We expect the BridgeTex Pipeline to come online around the third quarter and to start contributing to our midstream earnings and cash flow. The new Johnsonville chlor-alkali plant is expected to come online early this year and will make a positive contribution to the operations for our chemical business.

With respect to the initiatives outlined in the first phase of the Company’s strategic review announced last year, we completed a sale of a portion of Company’s investment in the General Partner of Plains All-American Pipeline in October, resulting in pre-tax proceeds of about $1.4 billion. After this sale, we continue to own about a 25% interest in the Plains General Partner, which at current price should be valued at about $4 billion. We have made steady progress in our discussions with key partners in the countries where we operate, in the MENA region for the sale of our minority interest in our operations there. Due to the scale and complexities of potential transaction, we expect these discussions to continue through the first half of this year. We have made good progress in our pursuit of strategic alternatives to the select Midcon assets, we expect to provide further information on any transactions as they conclude, some around the end of the second quarter and we’ll announce material developments as they occur.

In the fourth quarter, we used the Plains proceed to retire $625 million of debt, reducing our debt load by about 9% and to purchase almost $10 million shares of the Company stock of a cash outlay of $880 million. We ended the year with a debt-to-capitalization ratio of 14%. At the February’s Board Meeting we will review the Company’s dividend policy, status of strategic alternatives and share repurchase authority.

Many of the steps we’ve taken in 2013, including our success in improving our efficiency and the action that our board has authorized lay a ground work for stronger results for this year and beyond. The operational improvement we expect to achieve in 2014 coupled with the strategic action we expect to executive this year, should place the Company in a position to improve its returns while continue to grow and increase its dividends to maximize shareholder value.

Vicki Hollub will now provide a more detailed discussion of our California and Permian operations.

Vicki Hollub

Thank you, Steve. This morning I’ll review two of our largest domestic operations: our Permian and California businesses – describing our 2014 plans as well as longer term growth opportunities.

In 2013, we implemented an important transition plan in both of these businesses. And the success we achieved built a solid foundation for long-term growth. In 2014, the specific goals of our operations are continue the development of our large anchor projects in each of our operating areas. Which will enable us to allocate a significant portion of our capital to projects with solid returns, low execution risk and long-term growth, further reduce our drilling and completion cost to improve our finding and development cost and our project economics.

Continue to optimize operating cost without affecting production to improve our current earnings and free cash flow. Build on our successful exploration efforts in each of our core areas. Evaluate data and test various new concepts in our pilot areas which will setup the anchor projects of the future.

We manage our Permian Basin operations through two business units. The Permian EOR business which combines CO2 and water floods and the Permian Resources business which is where our growth-oriented and unconventional opportunities are managed. I will refer to the CO2 water flood business as Permian EOR and the other business as Permian Resources. The Permian Basin designation will be for the combined operations.

In the Permian Basin we spent over $1.7 billion of capital in 2013 with 64% focused on our Permian Resources assets. In 2014, we plan to spend just under $2.2 billion overall in the basin. The entire $450 million increase will be spent on our Permian Resources assets representing about 70% of our total capital spend in the basin. We expect the Permian EOR business to offset this decline in 2014 and to actually grow 1.4%. The Permian Resources oil production is expected to grow faster in the range of 20% to 25% and its total production by 13% to 16%. On a combined basis for the Permian Basin, this should translate to oil production growth of over 6% in 2014 and total overall production growth of over 5% while generating $1.8 billion of cash flow after capital.

2013 was a pivotal year for our Permian Basin operations. First, we improved our capital efficiency by 25% and reduced our operating expenses by $3.22 a barrel or 17%. We also began transitioning to a horizontal drilling program. We drilled 49 horizontal wells with 47 completing and producing. The combination of improvements in well cost, our own results and those of neighboring operators have given us the opportunity to dramatically shift our program to more horizontal drilling in 2014. Our Permian Resources team will average running about 21 rigs of which 17 will be drilling horizontal wells. We plan to drill approximately 345 total wells or about 50% of which will be horizontal. This compares to 330 total wells drilled in 2013 around only 15% were horizontal.

We have two main goals for our Permian Resources business in 2014. First, we intend to continue the evaluation of the potential across our full acreage position and second, we plan to pilot various development strategies, including optimal lateral link, frac design and well spacing, both, laterally and vertically. We believe this will position us for accelerated development as we exit 2014 and go into 2015.

We believe we have one of the most promising and underexploited unconventional portfolios in the Basin. In 2013 we added 200,000 net prospective acres to our unconventional portfolio and now have about 1.9 million prospective acres. This is a prime position in the Permian Basin. Our acreage in the Midland Basin, Texas Delaware Basin and New Mexico give us exposure to all the unconventional plays, which is unique. This will give us flexibility to develop our most attractive opportunities first and to mitigate risk.

Based on the work we’ve done to-date, we have identified approximately 4,500 drilling locations across our portfolio representing 1.2 billion net barrels of resource potential. We believe we’ve made conservative assumptions regarding prospective acres, well spacing and expected ultimate recoveries, but expect these numbers will grow as we learn more. We see the largest near-term growth in the Midland Basin which represents about two-thirds of our currently assessed resource potential. However, our Delaware Basin prospective acreage is significantly larger and potentially there should be room to grow.

We believe our measured approach to our unconventional portfolio has worked to our advantage. Our Permian Resources production comes from about 9,500 gross wells of which 54% are operated by the producers. On a net basis we have approximately 4,400 wells of which 15% are non-operated. This has given us the opportunity to observe the results achieved by other operators in the basin, learn from those results and optimize our approach to maximize the opportunities on our acreage. The success of our capital and operating cost efficiency efforts in 2013 has enabled us to significantly improve our cost structure which has increased our opportunities there.

For example, a typical well in the coli [ph] area that had an IRR of 24% before our capital and operating cost reductions now yields IRR of 48% using the same product prices to achieve similar success in all of our most active areas across the business unit. Finally, we have established a multi-step methodical process for our unconventional acreage in the Permian Resources business that includes, step one, exploration to establish the presence of a commercial resource; step two, testing and data gathering to optimize well completion design; step three, pilot programs to assess variability of well performance to design and full field development plans; and step four, transition to manufacturing mode for full field development. This process is helping us prudently develop our acreage, maximizing cash flow and returns. As a result we are now prepared to accelerate our activities in the Permian Resources business where we believe the opportunity in front of us is one of the biggest in the basin.

Now, I’ll review our program in more detail beginning with the Midland Basin. We’ve been most active with our horizontal activity to-date in the Midland Basin where we’ve drilled 16 wells. In 2014, we plan to spend $790 million to drill 147 wells, including 74 horizontals. We expect the average eight rigs in the area during this year. Our largest opportunity here is in the Wolfcamp Shale, where we have tested Wolfcamp A and B benches and plan to target our activity to test the remaining benches.

One of our most successful pilot projects in this basin is South Curtis Ranch which has now gone into full field development mode. This is the property that we acquired in 2010. We have drilled 63 vertical and 6 horizontal wells to date and plan to drill over 200 additional wells on this acreage. Results so far have been as expected with initial 30-day production rates where the horizontal wells averaging approximately 800 boe per day.

In the Midland basin, we also believe there is substantial potential in the Cline which is currently under evaluation. We have drilled 6 horizontal Cline wells so far and plan to drill another 5 to 10 in 2014. Preliminary results indicate we may have the opportunity to drill up to 450 Cline wells in the basin.

Another pilot project is horizontal drilling in the Sprayberry where we plan to drill our first horizontal well in the first quarter and we will evaluate next steps with the results. In addition to the horizontal activity we also plan to continue our legacy vertical Wolfberry development. In the Texas Delaware basin, we plan to spend approximately $370 million in 2014 to drill 91 wells including 48 horizontals. We expect the average five rigs during the year. And our horizontal activity will be focused in the Wolfcamp where we believe the A, B, and C benches will prove to be the most prospective.

We drilled and participated in three horizontal Wolfcamp wells in 2013 and we will increase that to 45 in 2014. Our activity is centered in Reeves County where we historically have drilled vertical Wolfbone Wells. Early horizontal results are proving to have better economics, but there are some plays where vertical development is still more efficient.

In our Coli [ph] area, we plan to drill 43 vertical wells targeting the Bell and Cherry Canyon formation. This represents the continuation of the one-rig program we executed in 2013. And in Mexico, we plan to spend approximately $370 million to drill 97 wells including 50 horizontals. We expect the average four rigs during a year. The Bone Spring Formation in New Mexico is the second largest opportunity in our portfolio behind the Wolfcamp Shale. In 2013, we drilled 16 horizontal wells testing the first, second and third Bone Spring sand intervals. Our results were very encouraging and we expect to increase the program to drill 30 horizontal Bone Spring sand wells in 2014.

Of the $2.2 billion to be spent in the Permian basin in 2014, $660 million will be allocated to our Permian EOR business. As I previously mentioned this business unit is a combination of CO2 and water floods. It is symbiotic to manage these assets together as they have similar development characteristics and ongoing monitoring and maintenance requirements. For the last couple of years we have actually spent more capital on water floods as we mature the next CO2 developments. In 2014, 25% of the $660 million will be spent on current water flood development and the remainder on CO2 floods. Further, we have 1.4 billion net barrels of oil equivalent and reserves and potential resources remaining to be developed in the Permian EOR business.

We believe we are the efficiency leader in the basin in applying CO2 flood technology to develop this potential. We have the ability to accelerate growth in our EOR projects as more CO2 becomes available. As a result of our efficiency advantage, many projects that don’t work for others work for us. Over the last several year, the focus of our Permian exploration program has been to identify unconventional opportunities which are then transitioned to full field development through the process I explained earlier. Our approach has been very successful giving us a large opportunity set that we are now working to fully develop. We continue to see the addition of new plays in the basin and see years of exploration drilling opportunities ahead in our 2 million prospective acre position.

Now that I have gone through some of the specifics of the program for the Permian basin, I will explain our overall business strategy. We are approaching our development program with the multi-pronged strategy that first maximizes the field resource potential. Second, controls cost to optimize returns. Third, gives us a strategic advantage to improve our realizations. We are using targeted horizontal and vertical drilling as appropriate optimizing development completion plans from lateral length to frac efficiency, as well as lift strategies to maximize recovery. We are making heavier infrastructure investments like power, water handling and gas processing to pre-plan for field success. These strategies coupled with our successful exploration program accomplished the first of our objectives.

We will continue to manage costs and take advantage of our progress along the learning curve with leading technologies and execution efficiencies to accomplish our second objective. And we are also investing in additional takeaway capacity including the completion of the BridgeTex Pipeline and build out of our gathering systems which will give our crude the strategic advantage to reach either the Houston Ship Channel or Corpus Christi Markets.

Finally, I would like to comment on our plans for the Permian basin over the next several years. With the combined businesses, we have more than 2.5 billion barrels oil equivalent and reserves and potential resources.

Within each business, we have the flexibility to shift capital among projects within that business, as well as, the flexibility to shift capital between the two businesses as needed. Our large and diverse portfolio creates opportunities for a variety of growth options. In the Permian resources business at our current pace, we believe we have over 15 years of development and growth opportunities.

Given that the Permian EOR business is generating significant cash flow and we expect our opportunity set to continue to grow, we plan to double our rigs for the next three years to accelerate the development of the Permian resources units, growth opportunities. We expect this to result in the doubling of our resources units production from approximately 64,000 boe per day in 2013 to more than 1,20,000 in 2016.

In Permian EOR while it is large with a somewhat slower growth curve, we have significant opportunities going forward with continued positive cash flow to fuel the growth of the resources unit. Combined with EOR growth opportunities, we expect our overall Permian basin production to grow by roughly 10% compounded annually growth rate through 2016.

Now, we will shift to California. In 2013, we spent $1.5 billion of capital. Our main goals were to deliver a predictable outcome, advanced low-risk projects that contribute to long-term growth, reduce the cost structure, lower our base decline, create a more balanced portfolio and test exploration and development concepts. We achieved every one of these objectives.

We produced 154,000 barrels oil equivalent per day, generated $1.3 billion of free cash flow after capital. We progressed the development of our steam floods and current front low field and started the redevelopment of our Huntington Beach Field.

We improved our capital efficiency by 20% versus 2012 and also reduced the operating costs by $4.70 per BOE or 20%. Overall, in 2014, we intend to continue the capital strategy shift initiated last year, which was to focus the majority of our capital on low decline projects. Our goals for this year are to accelerate the rate of production growth and maintain our lower cost structure. We have also continued to advance several low risk, high return long-term growth projects and capitalize on our exploration successes.

In 2014, we plan to spend $1.9 billion of capital of which 40% will be spent on water floods, 20% on steam flood and 40% and non-conventional and other developing plays. We expect to average about 27 rigs in California in 2014 compared to an average of 20 rigs in 2013. We plan to drill around 1,050 wells in 2014 compared to 770 in 2013. We expect this program to deliver around 11% oil production growth or over 4% total production growth while generating $1 billion of free cash flow after capital at current prices.

We believe the rate of growth will further accelerate in 2015 and beyond as the number of the steam and water flood projects reach full production and the base decline is lower due to relatively less natural gas development, higher investment and lower decline in oil projects and a larger share of higher growth, lower decline projects in the asset mix.

Let me now share some of the highlights of the program for this year beginning with the water floods. In the L.A. basin we plan to spend $500 million in the Wilmington and Huntington Beach Fields. Our Wilmington Field development in 2013 exceeded expectations. We drilled 135 wells and we will increase that by 7% to 145 wells in 2014.

Our horizontal program was particularly strong and horizontal wells will represent an even greater percentage of wells in 2014. In our Huntington Beach redevelopment, we have successfully brought online our two new [indiscernible] for purpose drilling rigs and drilling completed our two wells in the project. In 2014, we plan to drill 30 wells and we will ultimately drill at least 128 wells.

Our Heavy Oil business was the key focus area in 2013, it will be again in 2014. We plan to spend $315 million to drill about 420 wells compared to 324 wells in 2013. We will also continue a multiyear development of current front and loss field [ph] steam floods and we will pilot some new projects.

I would also like to highlight that the business achieved record production in the fourth quarter producing 19,000 BOE per day which is an increase of 4000 barrels per day from the first quarter of 2013.

In Elk Hills, our key objective is to lower the high decline rate and we’ve made significant progress toward this goal. In 2014 we plan to spend $600 million in capital to drill 325 wells which is an increase of $170 million over 2013. About 55% of Elk Hills capital would be targeting our shale reservoirs for our capital efficacy efforts in 2013 had a significant impact, we experienced an average of 23% decline in oil cost for these programs and 21% decline in operating costs, which dramatically improved the economics and increase the opportunity set.

For example a typical well that generated 30% IRR prior to our efficiency initiatives now delivers 50% IRR using the same product prices. In 2014, we will drill around 130 shale wells at Elk Hills, an increase from 80 in 2013. The remaining Elk Hills capital will target continued development in the shallow oil zone in Stephen [ph] sand.

Our California exploration program has delivered solid results for over five years. The 2014 California program will continue to explore both unconventional and conventional targets. The unconventional program target several prospects similar to the 2013 discovery. The conventional program will target prospects in and around our existing production in both the San Joaquin Valley and Ventura County. Our extensive proprietary 3D seismic surveys are yielding an exciting inventory of leads and prospects which will provide years of drilling opportunities.

Lastly I would like to give you some perspectives on our development plans over the next several years in California. We expect to continue the capital strategy we initiated in 2013 to shift the lower decline and lower risk steam and water flood projects. We believe we can grow our California production from 154,000 barrels of oil equivalent per day currently to 190,000 in 2016 or roughly a 7.5% compounded annual growth rate.

Our steam and water flood projects will contribute 80% of that growth. In fact, 90% will come from projects that are already online. We think this positions California as one of the lowest risk growth profiles in the industry. Further we are targeting primarily oil drilling which will make our portfolio more oily contributing to the solid margin expansion going forward. We expect to grow our oil volumes by roughly 15% compounded annual growth rate through 2016. Over the long term we expect our California growth prospects to benefit from changes in our asset mix. Elk Hills and THUMS while having the potential for years of continued production have lower growth prospects due to the mature state of both of these fields.

On the other hand our water and steam floods as well as our unconventional opportunities should continue to give us double digit growth for years to come. The share of our production from Elk Hills and THUMS has shrunk from 64% in 2009 to 44% in 2013. This shift will continue going forward and the largest share of higher growth projects will further accelerate the growth rate in coming years. Other than the Permian basin, we are continuing to test new ideas and to further improve our drilling completion and development efficiency in all of our projects.

We’re also working diligently to comply with the new regulatory requirements created as the result of the passage of Senate Bill 4 in California. We have a dedicated team addressing the associated issues and currently we don’t except significant delays in our development plans.

As you can see, while the Permian basin and California stories are different, they are both very exciting. The hard work and dedication of our people have put both of these assets in a position for continued success and 2014 is the year that both of these businesses will begin to accelerate their growth as we have completed the transition to a focused growth oriented development program and we’re set for long-term growth.

I’ll now turn the call back to Chris Stavros.

Christopher Stavros

Emily, can you please open the line for questions, we’re ready to take questions thanks.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question from Doug Terreson of ISI, please go ahead.

Doug Terreson – ISI

Good morning to everybody. Steve, Oxy’s returns on capital rose last year by almost 20% which I think was the objective or the hope anyway but your capital spending looks like it's going to rise by another 16% or so this year. And so my question is how does management prevent capital misallocation and then retrenchment from occurring again as it did a couple of years ago? Meaning, have there been changes to the capital allocation process or in other areas of corporate planning that might enhance the result in the current scenario?

Steve Chazen

Yeah, sure. Thank you, first remember that this number is for unchanged business.

Doug Terreson – ISI

All right.

Steve Chazen

And that’s really not going to happen so the actual spending will be some other number, a lower number because some other businesses won’t be here by year-end.

Doug Terreson – ISI

Right.

Steve Chazen

We’re being – we’ve changed the process, I think Vicki has pointed out that the change in the domestic business and how we’re – what we’re focusing on returns are lot better and we’re not – I think it's basically a lower risk portfolio and will generate more certain returns. We expect the returns we’re not actually excited about the 12% return on capital employed. I think we need to be closer to in excess of 15% and so our goal is to make sure that’s right.

We’re -- it's like we’re very great caution on my part that I’ve allowed additional spending in Permian and California, they’ve had to convince me that they’re going to stay on the straight and narrow here. So I’m pretty sure we’re under control but if it turns out because we’re going to watch this monthly because that’s what we do now, we watch it monthly. It turns out and get off to the wagon and they’ll – the beer will be turned off.

Doug Terreson – ISI

Okay, one more questions you guys also were.

Steve Chazen

Or the fine wine whatever they’re drinking you know.

Doug Terreson – ISI

So you guys were obviously very successfully with your cost program that helped the result last year and so most of the complete is there more work to do there on the cost product program?

Steve Chazen

For sure, while I’m – I think we exceeded our goals.

Doug Terreson – ISI

Right.

Steve Chazen

We’ll set new goals. I think my main focus just so we were real clear, the long-term business depends on low F&D, operating costs are fine but they affect the current year but we have to develop a long-term low F&D rate and go back to what we said forever. If we have the F&D and the operating cost and local taxes we need to be below the 50% of the selling price of the product. And if you’re going to do that you have pre-tax margins of 50% and you’ll generate good returns and that’s really the objective and so we need to continue to drive as the reservoirs become more challenging, need to cost or cost need to be watched very carefully. I think you know we’ve used this year 2013 at this to really horn our ability to control costs and I think we’re there.

We’ve gone through a multiyear transition of the company from you know from a very good international producer and you know an okay domestic one to a much stronger domestic business and this has been a not an easy or quick transition but I think at this point we have the people in place to accomplish those goals going forward. We’re giving them more money this year but I hold myself and them responsible, unlike football teams the coach gets fired not the assistant coaches in this.

Doug Terreson – ISI

Well if you guys can make 15% returns on capital that’d be fantastic. Thanks a lot.

Steve Chazen

I think we’ll be there.

Doug Terreson – ISI

Nice thanks.

Operator

Our next question is from Doug Leggate of Bank of America Merrill Lynch, please go ahead.

Doug Leggate – Bank of America Merrill Lynch

I have a couple also if I may. Telefonia [ph] has I guess been judged to some extent as not been able to execute because of lack of visibility, so do you believe that’s in targets this morning obviously that suggests the step–up in activity but what comfort can you give that you have got the permitting, you have got the rig count. And I’m just curious as to where you’re headed in terms of how – whether or not separating California still a viable option and one that you think would benefit the balance of the portfolio?

Steve Chazen

Yes, I’ll answer the last question first and then we’ll let Vicki, assistant coach here, get ready to answer, how certain she is. At California and the Permian and the rest of the company are quite in some ways different businesses. California can benefit a lot I think. My higher capital spending will generate more growth. We established a base with we might call boring if you want, steam flood and those kind of projects, so they will have enough cash flow to go ahead.

I think it could be managed differently than we would and I think it has good prospects, I think the issue that we need to have a team together that is more aggressive growers, maybe less concerned about dividends and more like E&P, small E&P. No one will lever -- three producers or 85% of the production in California and that isn’t going to change. And so, there is never going to be a comp and make people to believe and for the management of that business to deliver, it's probable, but they should be separate. Is that clear enough?

Doug Leggate – Bank of America Merrill Lynch

Yeah. That is clear enough.

Vicki Hollub

With respect to our efficiencies, I feel like in California certainly we have a lot of potential as we outlined in detail in the earnings call a couple times ago. So we have the resources available. We have now put together a team out there that's structured in a way, that gives them the best opportunity of success. We have great people, we have very experienced people who are -- who know a lot about operating in California, who know a lot about the types of projects that we're developing, that's our core business. We know water floods, we know steam floods and that's the bulk of what we're doing.

So our team understands quite clearly how to do that and they are among the best in the industry. And so, we're accomplishing what we've said we would do and what we're doing going forward that with this increase in capital is we're being very disciplined about how we evaluate and design our projects and implement our projects. So I'm quite certain that we're not going to lose our efficiency around execution and with the resources that we have, I feel confident that we're going to continue to see the same results that achieved in 2013 going forward.

Doug Leggate – Bank of America Merrill Lynch

Given that you have been fairly clear about how this could play out, Telephone [ph] has not been spending its cash flow up until now. So as a standalone company would there be an intangible drilling cost uplift to the operating cash flow in your estimates? And I guess if I could lay on it, very quickly, latest stuff thoughts on the scale of a potential Dutch tender buyback if that's still in your thinking and I'll leave it here. Thanks.

Steve Chazen

Obviously, California would spend more money and drill more wells until they could generate a lot of tax shelter, if that's the question.

Doug Leggate – Bank of America Merrill Lynch

Yeah.

Steve Chazen

A separate business who competes with – a separate oil company that competes with other medium size or whatever you want to call on producers, obviously is a business that would generate, you basically burn, you use its cash flow. California has the flexibility however so that it could cut back its capital and use money to repurchase shares or something like that, if the right sort of environment came down.

Unlike some other things, it's a pretty complete business that has -- fair amount of gas opportunity when that's available. It has all saves [ph], long term oil and has some exciting oil things to do too. So I think it's a fairly complete business and it’s a business where, if things get bad for regulator regions or price or whatever, it can cut its capital back, still do well, doesn't get caught on a cred mill of higher decline, could even buy back shares. I don't think it's going to be a big dividend producer but I think I think on share repurchase, it could do that if conditions warrant, but if conditions don’t warrant, I am sure they will spend all that money.

The process of repurchasing the shares from whatever we do, it just depends on the situation at the time. When we have the money we'll figure it out, when we have the money in the hand, we'll figure out exactly what the process will be. But I’d point out that we repurchased around 10 million shares in the fourth quarter, we wouldn't have done that with the shareholders’ money if we thought that, all this wasn't going to happen. So I think the process of doing it remains to be seen, because you might have -- one oil, one stock price you might do one thing and another you might do something else. But, there’s no other place to put it. I mean, it’s either some kind of share repurchase or – you know, there isn’t really any debt that we can do much with. So, I think we’ve taken down the debt. I think the next maturity is in 2016 and I’m not up for, you know, some kind of windfall for bond holders.

Doug Leggate – Bank of America Merrill Lynch

I’ll let someone else jump on. Thank you.

Steve Chazen

Thank you.

Operator

Our next question is from Ed Westlake of Credit Suisse. Please go ahead.

Ed Westlake – Credit Suisse

Yeah. I mean, I guess I got a bigger picture question just on Permian and then some follow-ups on California. So, those two question and just on your Permian, I mean how do you think you’re going to get a fair price for the light oil that you’re producing in Permian? What is Oxy going to do about it over and above what you’ve already announced, you know, with the BridgeTex Pipeline extension? Thanks.

Steve Chazen

We’re going to let Willy answer that since he’s the expert in oil.

Willie Chiang

Yeah, Ed. Obviously, we’ve seen a lot of disruptions in pricing between regions and we’re seeing a lot of infrastructure getting built in and when we look at our production of roughly 15 million barrels a year or 150,000 barrels a day out of the Permian, between the BridgeTex Pipeline which goes from essentially Midland or Permian directly to the Gulf Coast as well as taking capacity on other pipelines down to Corpus we essentially go from a two market business, Midland and Cushing to ultimately getting to Houston Ship Channel as well Corpus and then we also get the ability to go to U.S. East Coast and lots of different places. So, I think the infrastructure is going to help us tremendously in that area.

Ed Westlake – Credit Suisse

As a follow-on. I guess, people are concerned that when the crude goes down to the Gulf it’s still going to be impact. Any thoughts around that, what work you’ve done on that?

Willie Chiang

Well, the thing everyone looks at is the Brent/TI. And as I think about it, Brent’s really tied to world prices and I think what you’re going to see is all the grade as well TI kind of come to transportation parity.

Ed Westlake – Credit Suisse

Okay. So, no major discounts in your thoughts for the crude once it gets down to the Gulf other than quality and logistics?

Willie Chiang

No, I think prices fix the price issues.

Ed Westlake – Credit Suisse

Okay. So, just –

Steve Chazen

I’ll also point out that

Ed Westlake – Credit Suisse

I thought you might.

Steve Chazen

Yeah. That, you know, $97 is probably okay for us. I mean, this isn’t some bargain basement price. So, yeah, we feel pretty comfortable that we could be reasonably profitable at $97 and much lower, so. You know, sometimes you lose sight of the absolute price in all this talk about differential.

Ed Westlake – Credit Suisse

Yeah, it’s a good point. Just on California then. I mean, you gave us sort of some initial resource estimates for the Permian, would you be willing to give us the resource estimates for California? I know people are obviously trying to have confidence and resource numbers from yourselves would obviously help their confidence.

Steve Chazen

I think what I prefer to do is leave that for another day and another kind of announcement.

Ed Westlake – Credit Suisse

Okay. Well, thanks very much.

Operator

Our next question is from Arjun Murti of Goldman Sachs. Please go ahead.

Arjun Murti – Goldman Sachs

Thank you. Just another follow-up on California where you have a nice growth trajectory here. It sounds like the greater confidence and it is there is a bit of a mix here where some of the stuff that’s declined is now smaller and you’re shifting more to water and steam floods which you’ve historically been very good at and maybe less reliance on the unconventional, at least in the scope of the years presented here, is that accurate? And, I guess, if so where are you on the unconventional from the confidence standpoint? Thank you.

Steve Chazen

I’ll let Vicky answer about the unconventional but just so you understand, I think you’ve got it but, you know, we have the high decline and really no decline – high decline at Elk Hills and really no decline at THUMS, which was the bulk of the production of the Company and originally was nearly 100%. And so what’s happened is that the little wedge has grown and we’ve made a lot of progress in improving the decline rate in Elk Hills, so we’re not fighting as big a decline curve. And so what we’re doing is we’re filling it in with things that are real certain so that the business has sufficient cash without being on a treadmill with the go forward. And I’ll let Vicki talk about the unconventional here, since she’s more knowledgeable than I am for sure.

Vicki Hollub

This year we’re drilling 170 unconventional shale wells versus 111 that we drilled last year. So we increased the number that we are drilling this year and actually we had hoped to drill even more than we currently have on the schedule. But we felt like that from a regulatory standpoint, it was best to take a more conservative approach this year and be our best before. We do have some exciting unconventional projects that are in the permitting process and we expect to bring those on in 2015. So basically part of its permitting, just trying to get the permits in line and ready to go. The other part of it is that we are continuing with the strategy that we developed and that is to as we’ve said lower our decline and build up a larger solid base of those types of projects. And that really helps prop us up for the unconventional development.

Arjun Murti – Goldman Sachs

Is it a question Vicky of the scope of what you have there? You aren’t sure you have enough running room between confidence in the resource and the ability to get permits, or are there still questions on all those points?

Vicki Hollub

Yeah there are questions on all of them. We do have, as I said, unconventional plays that we feel very comfortable with the development of because there are things that we understand that we’ve already started the process of development. So there is a portfolio that we feel like we could move forward at a fairly fast pace if we had the permitting in place. There is still some shales that we haven’t really tested and evaluated yet and we’re taking the same approach in California as we are in the Permian where we are doing a more measured approach to go out, drill a few wells, do some evaluation, then start some pilot projects and then from there progress to full field development. So we are trying to be very prudent in the way that we approach our shale plays that are outside where we’re currently drilling.

Arjun Murti – Goldman Sachs

Steve, maybe just a follow up on the MENA comments. I certainly appreciate the scale and complexity here and that’s going to take some time. Can you comment that you have identified maybe a partner group which is a key group you are negotiating with and these things can still take time or is it earlier stage than that where there is still multiple parties that are involved here?

Steve Chazen

No, there is a partner group.

Arjun Murti – Goldman Sachs

That’s great. And then just a final one on the stock buyback. Should we think about this primarily as asset sale proceeds are used for stock buyback or your balance sheet is strong that it can be an ongoing program even without proceeds?

Steve Chazen

The business fundamentally, the overall business or whatever remains in the company is able to generate free cash. And so we should see a part – I think I said it at your conference, part of the program will continue to grow the dividends at a healthy pace. We’ll have a little more share repurchase than we’ve done historically. You will see share reductions from whatever happens in the asset sales or whatever dividends we might take from anything we separated from company. So I think you’ll see the share count come down and therefore the dividend requirement, the dollar amount of dividend requirement come down. So I think you’ll see a mix, but we’re very – I’m very focused on the value of the stock we’re buying. It isn’t just about buying shares for fun, certainly easier than drilling wells. But I think that we’re – and you’ll see us come and go as the stock price changes and of course there are periods when we can’t buy where we have material information. So there may be periods when we can’t buy. But generally you should expect to see a regular program at some level but also some fairly sizeable reductions over the next year I would expect.

Arjun Murti – Goldman Sachs

Great. Thank you so much.

Steve Chazen

Thanks.

Operator

Our next question is from Faisel Khan of Citigroup. Please go ahead.

Faisel Khan – Citigroup

Thank you. Good morning. Steve, I was wondering if you could clarify some of the comments you had around return on capital employed. So are you saying that – and you guys have made a tremendous effort in getting return on capital employed up over the last 12 to 24 months. But I want to make sure I understand. So are you saying that with CapEx going up next year and with sort of the double end of the rig count in the Permian over the next few years and adding seven rigs on California, overall, you’re seeing ROC should trend up over the next one to two years, all else being equal?

Steve Chazen

Product prices aside, yes.

Faisel Khan – Citigroup

Okay, okay, fair enough. And then in terms of your comments on California, given that most of your growth in California is sort of longer life production and some of your growth in the Permian has sort of a higher decline rate, I mean doesn’t it make more sense to kind of keep those assets together as a portfolio? What’s the – I’m just trying to understand like how you balance the cash flow and decline rate over the two portfolios over time.

Steve Chazen

Remember the Permian is respectively two businesses, there is the EOR business which generates large amounts of free cash flow. So the question really is how do you – and it has a potential to add this high growth stuff but still generate large amounts of free cash flow as a business, we can manage that reasonably well.

California, the potential is currently managed to generate free cash flow and it will generate a base ultimately of these long lived projects, which basically the way answers to some extent your question about the returns because you could turn on a long live project your D&A rate will be relatively low and so your earnings will be better because you got a lot of reserves over long period. But – and so every business, a standalone business has to have a base of money to pay for itself, now I understand there is a whole bunch of companies out there that don’t. But that’s not the way to build the long term oil business. So California can spend more fairly I think easily and continue to grow. And in the Permian there is a lot of competition for rigs and people and so I think it’s a little more challenging in the Permian. I think California, I have a map in my office from 1679 which shows California as an island and there is some proof to that.

Faisel Khan – Citigroup

Do you guys have an estimate for the return on capital employed for California at the end of the year?

Steve Chazen

I don’t think so. I think we will leave those kinds of questions for some other announcement.

Operator

Our final question will come from Roger Read of Wells Fargo.

Roger Read – Wells Fargo

You mentioned in the preview part the costs and the learning curve issues, have you done anything in particular to hire people out there or has it been learning by watching, learning by sharing info and data with some of your partners out there.

Steve Chazen

I think Vicki went through a long – we have got a lot of gross wells that – bulk of the production and outcome comes from our own net wells. So we see enormous exposure what other people are doing. We don’t actually have to experiment or hire other people, we can actually see what they are going. We hire people all the time but we are not hiring people from radically different cultures. We need people who are trained in a return driven free cash flow kind of culture. And to hire somebody from some small company they really have a different kind of culture, they’re more an IRR getting their money back quick and drilling more wells culture. So we don’t want to destroy the notion that this is a business by generating money and generating returns and we are not going to spoil – we’re not going to spoil the stew with a bunch of others [ph].

Roger Read – Wells Fargo

I guess as a follow up, even to those comments, if I remember correctly, we are in a new CEO search mode here. Is there any update you can provide on that front?

Steve Chazen

I think the board will have something to say about that next month. But I expect that I’ll be doing significantly more earnings calls than I had planned.

Operator

In the interest of time this concludes our question and answer session, I would like to turn the conference back over to Mr. Stavros for any closing remarks.

Christopher Stavros

Thanks everyone for joining us today and please call us with any follow up questions in New York. Thanks again.

Operator

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.

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