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Occidental Petroleum Corporation (NYSE:OXY)

Q1 2008 Earnings Call

April 24, 2008  11:30 am ET

Executives

Christopher Stavros - Vice President, Investor Relations

Steve Chazen - President, Chief Financial Officer

Ray Irani - Chairman, Chief Executive Officer

Analysts

Doug Terreson - Morgan Stanley

Michael LaMotte - J.P. Morgan

Ben Dell - Sanford Bernstein

Nicole Decker - Bear Stearns

Doug Leggate - Citigroup

Paul Sankey - Deutsche Bank

Eric Mielke - Merrill Lynch

Bernie Picchi - Wall Street Access

Pavel Mokhanov - Raymond James

Operator

Welcome to the Occidental Petroleum first quarter 2008 earnings conference call. (Operator Instructions) It is now my pleasure to turn the floor over to your host, Christopher Stavros.

Christopher Stavros

I'd like to welcome you to Occidental's first quarter 2008 earnings conference call. Joining us on the call from Los Angeles this morning are Dr. Ray Irani, Oxy's Chairman and CEO; and Steve Chazen, our President and CFO. In a moment I'll turn over the call to Steven, who will review the details of our first quarter results to be followed by a question-and-answer session.

Our press release, Investor Relations supplemental schedules and the conference call presentation slides, which refer to Steve's remarks, can be downloaded off of our website, www.Oxy.com.

I'll now pass the call over to Steve.

Steve Chazen

The net income for the quarter was a record $1.846 billion or $2.23 per diluted share compared to $1.212 billion or $1.43 per diluted share the first quarter of last year.

Core results for the first quarter of 2008 were $1.819 billion or $2.20 per diluted share compared to $788 million or $0.93 per diluted share for the same period last year.

Here's the breakdown for the first quarter: Oil and Gas first quarter 2008 segment earnings were $2.888 billion compared to $1.883 billion for the first quarter of 2007. Oil and Gas core results for the first quarter of 2007, $1.362 billion after excluding a $412 million gain from the sale of our Russian joint venture and a $109 million gain from the resolution of certain legal disputes.

The following accounted for the increase Oil and Gas earnings between these quarters:

A higher worldwide oil and gas price realization that resulted in an increase of $1.6 billion of earnings over the comparable period last year.

Oxy's average realized crude oil price in the 2008 first quarter was $86.75 per barrel, an increase of $35.08 over the comparable period in 2007.

Oxy's domestic average realized gas price for the quarter was $8.15 per MCF compared with $6.38 per MCF the first quarter of 2007.

Worldwide oil and gas production for the first quarter of 2008 averaged 607,000 barrels of oil equivalent per day, an increase of 8.4% compared with the 560,000 BOE of production in the first quarter of last year. The bulk of the production improvement was the result of 55,000 BOE a day from the Dolphin project, which began production in the third quarter of last year, partially offset by lower volumes from production sharing contracts due to higher prices.

Our guidance for the first quarter production was in the range of 600,000 to 615,000 BOE a day based on $90 oil, and our results were in the middle of the range. Dolphin contributed $102 million to after-tax income during the first quarter, which was ahead of our guidance.

The sales volumes were 55,000 BOE a day, slightly ahead of our guidance of 53,000 a day. Dolphin reached full operations in February and is currently producing approximately 2 BDF a day of natural gas and 200,000 barrels a day of liquids.

Exploration expense was $74 million in the quarter, which was in line with our guidance of $70 to $90 million.

The first quarter 2008 production costs per barrel are approximately $0.39 less than the fourth quarter of last year.

Oil and gas production costs for the first three months of 2008 were $12.94 a barrel compared to last year's cost of $12.36 for the whole year. These numbers were adjusted to remove the Midstream costs. The increases year-over-year reflected higher production ad valorem taxes and somewhat higher field operating costs.

Chemical segment earnings for the first quarter of 2008 were $179 million, which was higher than our guidance of $100 to $125 million. Chemicals earned $137 million in last year's first quarter. The improvement in earnings was due to higher prices and margin on caustic soda, along with higher PVC and VCM margins exported to nonU.S. dollar denominated economies.

We have reclassified our Midstream assets out of the Oil and Gas segment. Our Midstream assets are comprised of the following businesses:

Marketing. Occidental's marketing group markets our equity production and manages third-party transactions. The primary driver of these earnings are marketing and trading margins in oil and gas, transportation and storage programs. This element is probably the largest portion of the total.

Gas Processing Plants. Our domestic wet gas production and third-party production is processed through 13 Permian and two other gas plants to extract NGLs to deliver dry gas to the pipelines. The primary drivers for margins and cash flow are the difference between inlet costs of natural gas and market prices for NGLs and inlet volumes processed.

Pipelines. In the Permian Basin we own an oil gathering common carrier pipeline company with approximately 2,750 miles of pipeline and storage systems with 5 million barrels of active storage. The main margin and cash flow drivers are volume shipped. We also own a 24.5% equity interest in the Dolphin pipeline project, which carries gas to the United Arab Emirates.

Power Generation. Oxy owns two co-generation plants, one in Texas and one in Louisiana, an equity investment in a gas-fired power plant at our Elk Hills site. The three plants have a combined electricity capacity to product 1,760 megawatts per hour.

The final element is CO2 source fields and facilities. In the Permian Basin we process and transport CO2 for the use of the company's enhanced oil recovery program, and the earnings represent the small volume sold to third parties.

The net book value of the Midstream properties was approximately $1.8 billion at the end of last year. As we disclosed earlier, we earned $123 million in the first quarter of 2008 from these assets.

Midstream capital spending and property acquisition costs were approximately $430 million last year and are expected to be about the same this year. These funds will be spent enhancing our CO2 production in the Permian and expanding our pipeline capacity.

The worldwide effective tax rate was 42% for the first quarter of 2008 compared with our guidance of 43%.

Capital spending was $868 million for the quarter. We currently expect total capital spending for 2008 to be about $4 billion, an increase from prior estimates as a result of capital for the Rockies, California and Midstream assets.

Cash flow from operations for the three months was approximately $2.7 billion. We used $870 million of the company's cash flow to fund the capital expenditures, $1.6 billion for acquisitions, $210 million to pay for dividends. We spent $435 million to repurchase 6.3 million common shares at an average price of $69.68 a share. These and our other net cash outflows decrease our $2 billion cash balance at the end of last year by $500 million to about $1.5 billion at the end of the quarter.

The first quarter U.S. income tax payments reflect true-ups of 2007 amounts due. The second quarter payments will increase since two quarterly estimated payments will be due.

Debt was $1.8 billion at the end of March, which was unchanged from the year end numbers.

The weighted average basic shares outstanding for the three months were 823.6 million shares and the weight average diluted shares outstanding were 828.2 million. At March 31, there were 821.5 million basic shares outstanding. The diluted share amount was approximately 126.1 million.

Our annualized return on equity for the quarter was 32%, with annualized return on capital employed of 29%.

As we look ahead to the current quarter, we expect oil and gas production to be in the range of 610,000 to 620,000 BOE a day during the second quarter at $100 oil prices. We expect second quarter production increases in Argentina, Colombia, the Rocky Mountains, Permian and Oman, partially offset by decreases due to high cost recovery levels in the first quarter.

With regard to prices, a $1 change in oil price impacts Oil and Gas quarterly earnings before income taxes by about $39 million. This $39 million sensitivity includes the impact of Dolphin. Also included in it is the production sharing contract price impact of approximately 500 barrels a day per dollar.

A swing of $0.50 per million BTUs in domestic gas prices has a $25 million impact on quarter earnings before income taxes.

Additionally, we expect exploration expenses to be about $80 to $100 million for seismic and drilling for our exploration programs.

As we've shown you, it is difficult to predict Chemical results in the current environment, however we reasonably expect Chemical segment earnings to be in the range of $120 to $140 million compared to $179 million in the first quarter. Higher feedstock costs are the primary driver of the reduced forecast. This outlook also is less than second quarter of 2007 earnings of $158 million due to weakness in domestic construction, which impacts industry demand although the continued weakness of the dollar is likely to push these numbers to the higher end.

We expect our combined worldwide tax rate in the second quarter to remain about 42%.

Copies of the release, as Chris has pointed out, are available on our website or the Edgar.

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

Questions-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Doug Terreson - Morgan Stanley.

Doug Terreson - Morgan Stanley

Steve, you talked about prices for crude oil and natural gas and the leverage that the company has, and obviously if they remain anywhere near current levels then free cash flow's going to be a lot greater than most envision, both for current period and for full year 2008. And so, in light of these circumstances, I wanted to see if we could get an update on the prioritization for such funds, that is, if they do materialize, meaning how might such surplus capital be allocated between investments, acquisitions, dividends, repurchases, et cetera. I mean, which way are you leaning as it relates to this outcome?

Steve Chazen

Well, of course, this is a slightly larger number than we were anticipating so if we can't put the money to work at attractive returns, we'll return it to shareholders one way or another. Annually the Board reviews the dividend the ongoing dividend policy - and given the current environment I would expect that they would be favorable to an increase.

Share repurchases, we purchased a little over 6 million shares in the first quarter. We would expect the share repurchase program to continue, depending on the exact product price. But if we look at it over the whole year, there's plenty of volatility in the stock and plenty of opportunity to buy the shares at attractive prices during the course of the year.

So we'll just see where the stock prices goes but we're not going to build cash, if that's the question.

Doug Terreson - Morgan Stanley

And also in the Middle East, obviously execution on the Dolphin project has been very positive, and you mentioned earlier that there was progress in Oman, too, and so I just wanted to get an update on Oman and specifically whether that development is following your expectation or is it really too early to know?

Ray Irani

Our projects in Oman specifically are moving along okay, and we expect to get a gas contract there. Timing is difficult to predict, especially as you approach the summer months. But we're positive about that and other projects in the region.

Operator

Your next question comes from Michael LaMotte - J.P. Morgan.

Michael LaMotte - J.P. Morgan

Steve, if I could follow up on the Capex comment on California and the Rockies, in particular, are we seeing actual number of planned wells this year going up, and maybe you could talk about the cost per well and I'm sure the mix of inflation-deflation versus volumes on that front?

Steve Chazen

Yes. We're talking about really physical increases in the number of wells. We don't see much in the way of inflation. Remember that our operating costs, which is the easiest way to compare inflation, were flat on an absolute basis even with higher production from the fourth to the first quarter.

So, you know, that's sort of an immediate measure of oilfield service inflation. So we don't see a lot of signs of inflation from the kind of things that we do. So we're talking about a physical increase in the activity, especially in the Rockies and California, this year. And if we could get - with a little luck, we might spend a little more than that even.

Michael LaMotte - J.P. Morgan

So domestic volume should be a little higher than perhaps we were looking for in this area?

Steve Chazen

Yes, I think as we go forward in the year, domestic volumes, I think, if I were looking for a surprise and praying for one that would be where I would hope and pray.

Michael LaMotte - J.P. Morgan

Quickly on Argentina, the exit rate in December was 40,000 barrels a day. Actually Latin American volumes overall ended up a little lower than I was looking for in the quarter. What's the latest there? I know there was some strikes in October and November.

Steve Chazen

It's exited 40,000, produced about 40,000 in Argentina in the first quarter. We expect to see more improvement in the second quarter in volumes. Colombia - some of the issues were in Colombia, I think, also - but we expect to see improvement for that. We shouldn't spend too much time looking at small changes there, the trend for Argentina especially will be up sharply all year.

Michael LaMotte - J.P. Morgan

Okay, even with the winter season approaching.

Steve Chazen

Yes.

Michael LaMotte - J.P. Morgan

And then the sensitivity on PSA impact last quarter, you said it was for every $5 change in oil, 4,000 barrels a day, as oil prices go higher, does that ratio change?

Steve Chazen

We're down I think we're 500 barrels a day per dollar now. The contracts weren't exactly designed for this environment. So I wouldn't extend any of those numbers too far, and that's really the problem when you try to do this. It works just fine for $5 change maybe, but when you have $10 and $15 changes, our ability to figure out what's exactly going to happen is difficult because, again, the contracts really weren't designed for this environment.

Michael LaMotte - J.P. Morgan

And then on the PVC exports, what's the mix between domestic and export sales? I mean, that was clearly a positive surprise here in the quarter.

Steve Chazen

We don't really break out the mix like that, but clearly what's happening, if you want to think about it intellectually, is that we're buying - the main feedstock is electricity, which is really natural gas - we're buying gas with U.S. dollars and exporting product into countries that have stronger currencies.

And so we're able to move a lot of our chlorine that way, and some other people don't have that flexibility. It cost a lot to build that flexibility, but in environments like this it's probably worth it. And so we're able to export a lot of our chlorine. And caustic prices have been extraordinarily strong for awhile and continue to be strong.

So it's hard to predict the number for any one quarter, so I wouldn't take my numbers that I gave for the next quarter as anything but the best guess we have now. We weren't very good last quarter. We missed it by 50% by the right way, but we still missed it.

Michael LaMotte - J.P. Morgan

Well, if I think about it just in terms of PVC as being construction oriented and, as you said, feedstock basically being natural gas, we were looking for a much worse Q1, but there's definitely an outlet?

Steve Chazen

That's what changed. We didn't anticipate how strong the outlet would be when we gave you last quarter's guidance. The outlet is still very strong into South America and Asia and so, you know, there's other factors, too. Competitors might have a downtime in their plant. There's a lot of other things that affect it but right now, given how weak the U.S. construction business is, we're doing very well.

Michael LaMotte - J.P. Morgan

Dr. Irani, it seems that oil ministers in the Gulf today are spending more time talking about spiraling E&C costs than they are project identification or sanctioning. How dependent is your outlook on projects sanctioned not yet disclosed to the Street? Are you concerned by the slowdown in sanctioning?

Ray Irani

Not really. I mean, it is a competitive world. Indeed, with $100 oil, oil exporting countries are looking more about how to spend their money than for new sources of energy, queer enough, but we're coming along fine. And, as you know, we had the Mukhaizna project, which is coming along extremely well, and we are looking at a Bahrain project, with the decision on who to select among three companies - we are one of them - by the end of the summer, and we have other programs. So we're moving along fine.

Steve Chazen

Our outlook that we give you doesn't depend on those projects. We haven't baked those in.

Michael LaMotte - J.P. Morgan

Clearly we see in the press the big headline ones like Shaw, but there's enough activity perhaps in the smaller end of the spectrum?

Ray Irani

Yes.

Michael LaMotte - J.P. Morgan

Is that fair to say?

Ray Irani

Yes.

Operator

Your next question comes from Ben Dell - Bernstein.

Ben Dell - Sanford Bernstein

A question on Dolphin. Obviously [inaudible] of submitted plans to build a nuke in the UAE. Does that change the supply-demand outlook for the UAE, and if so, does that put sort of an expansion of Dolphin further back in the queue?

Steve Chazen

The demand for energy is enormous, and I wouldn't think so. I wouldn't think that'd have anything to do with it at all.

Ray Irani

We are sold out on Dolphin, and it's going to be producing above capacity, so there's tremendous demand.

Steve Chazen

Yes. So another BCF a day of production, it would be gobbled up.

Ben Dell - Sanford Bernstein

I understand, from the Qataris that the price they're obviously selling the gas at is significantly lower than they'd really like in today's world. Do you have a feel for what sort of price they'd be looking for to an expansion?

Ray Irani

I think, you know, these are depending on negotiations. All I can tell you is our Dolphin project is doing extremely well. Steve said earlier that in the first quarter we made $102 million after tax, plus what we made in the pipeline. Our investment's slightly over $1 billion. And expansions in Dolphin are possible; to predict timing on them is difficult. The exact conditions depend on negotiations among us and two sovereign states, so I really can't predict what happens.

Ben Dell - Sanford Bernstein

Can you tell us what SG&A was in the quarter?

Steve Chazen

SG&A for what, for the whole company?

Ben Dell - Sanford Bernstein

The whole company and then the split between upstream and Chems?

Ray Irani

SG&A for the Oil and Gas division is down because we said at in an earlier meeting that we were cutting on SG&A in the Oil and Gas division. Steve is look at numbers right now. It's nothing for you to worry about. SG&A is under excellent control.

Steve Chazen

The G&A is - for the oil company is - it looks like about - it's down from the fourth quarter. I don't have the exact number here.

Operator

Your next question comes from Nicole Decker - Bear Stearns.

Nicole Decker - Bear Stearns

Steve, you recently made a comment regarding consolidation opportunities in Argentina. Would you talk about how you see the investment environment there and whether you'd be comfortable increasing activity there in the near term?

Steve Chazen

Actually I think what I said was that we wouldn't want to be the largest producer in Argentina under any circumstances. And there might be some small opportunities, but I don't think we want to raise our profile enormously there.

Argentina, you know there's been a slight increase in the realized oil price, and we're hopeful that with time there'll be more increases. It's not a - you have about a $10 a barrel finding cost and about $10 lifting cost, so we're in the high 30s on our oil price. So we're still a little below what we'd like to have, but progress is being made and production is coming up. Production will solve a lot of the problems.

Nicole Decker - Bear Stearns

The Latin America realization, the liquid realization, was below where we expected. What was behind that?

Steve Chazen

Probably just a differential change in Colombia. Yes, I think that's right. It's the differential change in Colombia.

Nicole Decker - Bear Stearns

I appreciate the segregation of the Midstream unit. I'm just curious as to how we should read into this. Is this a unit that might see some growth?

Steve Chazen

The unit might see some growth, for sure. We're putting a lot of capital into it, to expand the CO2 capability into the Permian and to bring the pipelines to more efficient standards, and we didn’t want to bury that in Oil and Gas capital. And when we were looking at our cost structure last year, some of the so-called lifting cost was really purchased gas for the gas plants. And so that's really adds a lot of clarity to both the lifting costs and our future capital plans.

Ray Irani

But I hope you noticed also that the return on this Midstream portion is excellent. As Steve mentioned, in the first quarter profits were over $100 million after tax. I think about $123. And assets were $1.8 billion, so if you annualize it - and we don't expect much change for the remainder of the year in Midstream - it's a good part of our business; new investments we expect to make excellent returns, as we have said repeatedly in the past.

Nicole Decker - Bear Stearns

Do you have figures on expenditures in the unit historically and what you might be expecting to spend this year?

Steve Chazen

We spent a little over $400 million last year, and we expect to spend about $400 million this year. It's fairly capital intensive. And I think some of it was distorting some of our capital numbers.

Nicole Decker - Bear Stearns

And just a final one, specifically on DD&A. The number was lower than we had expected. I guess we were basing our number on the full year guidance that you have. Just wanted to make sure that the full year guidance remained around 2.7 billion for the year.

Steve Chazen

It looks that way. Obviously if we, it could vary $100 million.

Operator

Your next question comes from Doug Leggate - Citigroup.

Doug Leggate - Citigroup

Steve, is the Libya contract effective yet?

Ray Irani

I expect to be in Libya on the 11th of May to sign it finally.

Doug Leggate - Citigroup

Production dropped off a little bit. Is there any other reason why that have been the case? Just under lifting probably?

Steve Chazen

That's lifting. Our actual production was slightly above the - we report sales not production, actually - and so the production for the company was slightly above the sales number.

Doug Leggate - Citigroup

So assuming that contract gets enacted some time this quarter, would you take the incremental earnings backdated to December 1 in the second quarter?

Steve Chazen

You can't backdate earnings. Basically it's an adjustment to the bonus or something like that.

Doug Leggate - Citigroup

So it wouldn't flow through the P&L?

Steve Chazen

No, it wouldn't flow through the full - you can't do that. It helps the cash flow, but you're not allowed to - think of opportunity for management if you were allowed to.

Doug Leggate - Citigroup

But the cash flow will be realized though?

Steve Chazen

Yes, we'll spend less.

Doug Leggate - Citigroup

Backing into Nikki's question a little bit on the Midstream. You've mentioned you've stripped this thing out. You're not showing as, you know, how this thing is going to perhaps grow over the longer term. How does that dovetail with your plans to perhaps tap into South Texas CO2, and maybe if you could give us some idea as to what we could expect in terms of both the cost impact and likely production impact longer term out of your Permian assets, if indeed you're able to make that happen?

Steve Chazen

Well, we've built in a notion of the South Texas into the capital plan that - the $400 million we've talked about. So we would expect to spend a fair amount of money in taking high CO2 methane and convert and stripping out the CO2 over the next couple of years.

A good reservoir will run maybe 7 MCF of CO2 to produce a barrel of oil, so if you assume that we put any excess into not the premiere reservoirs but less premier ones - and we've got lots of those - you're talking 10 or 12, maybe, MCF to produce a barrel of oil. We ought to be able to get 500 million a day, at least, maybe 600 million a day of more CO2 the next few years, so you could divide by 10, 12, whatever you want, to get some idea of the production increases over the next few years.

Doug Leggate - Citigroup

Are these already fields or CO2 assets that you have ownership of?

Steve Chazen

Yes. If you were able to look at our long-term backlog, we flood with the available CO2 obviously the best reservoirs. There are other reservoirs that are smaller that if we had cheap CO2 or a lot of it, a surplus, we could flood those and produce more oil. Right now CO2's tight in the Basin. If we can loosen up that tightness with a project where we can get some more CO2, we can boost our oil production - continue to boost our oil production  in the Permian nicely.

Doug Leggate - Citigroup

What size of reserves do you have CO2 in the South Texas area?

Steve Chazen

I don't really know. We don't think of CO2 as reserves. It's sort of a, I don't what you want to call it. It's hard to burn. It's a sizeable number, but this 500 - 600 million a day as a deliverability is probably a good guess.

Operator

Your next question comes from Paul Sankey - Deutsche Bank.

Paul Sankey - Deutsche Bank

Dr. Irini. the outlook for volumes this year, Steve, you said - 620 to 630, I think, is the existing guidance. You've talked about 610 to 620 for the next quarter. Should we still work on the 630 to 620?

Steve Chazen

Yes, you've got to adjust for the price, that's all.

Paul Sankey - Deutsche Bank

But that's basically the right range to think about?

Steve Chazen

Yes.

Paul Sankey - Deutsche Bank

And for '09 yes, you've talked about a long-term aspiration of 5% to 8%. Would we expect to see a relatively flat year given that you're above that rate of growth for '08 in '09, or do you think you'll be still in the 5% to 8% growth rate? And to the extent that you can, could you outline where the growth will come from? Thanks.

Steve Chazen

I think we'll have a good year next year. We don't predict the exact number. I just don't know. But if you looked at the projects that are there to do it, we ought to exit Argentina at 50,000, and are obviously going to average that this year. Mukhaizna will be much higher next year. Permian ought to be a little higher. California ought to be higher. So I can't tell you exactly what the number is, but it's certainly not going to be flat.

Paul Sankey - Deutsche Bank

Yes, I guess the point I was making was whether or not the above-range growth this year would lead you to have a kind of flat spot next year, but you're telling me that's not the case, basically.

Steve Chazen

That's not the case.

Ray Irani

It's not going to be flat. It will be up next year.

Steve Chazen

Yes, we just don't - our ability to predict isn't all that great, so we - but we do know it will be up, but I can't tell you whether it's going to be up 4% or 8%.

Operator

Your next question comes from Eric Mielke - Merrill Lynch.

Eric Mielke - Merrill Lynch

I have a follow on on the Midstream segment on whether you see opportunities in the Middle East or you've been asked to do projects in the Middle East and if that will be part of the Midstream segment going forward, and if so, if those projects would meet your return requirements on a stand-alone basis or should be seen as part of a broader opportunity across Midstream approach for the Middle East?

Steve Chazen

The answer is yes and yes. We see the projects, and they'll meet our hurdle rates on a stand-alone basis.

Eric Mielke - Merrill Lynch

Is that an additional reason for having split out the Midstream?

Steve Chazen

Yes. It's a growth area, and we didn't want to obscure it buried in the Oil and Gas numbers. And so we think over a five-year period you'll see some nice earnings growth there, cash flow growth, and we just didn't want to bury it in the numbers.

Ray Irani

And it's to bring additional management attention to the segment and to focus the Oil and Gas E&P people on producing more oil and gas at attractive costs. It's to get management attention across our projects and product lines.

Eric Mielke - Merrill Lynch

An additional question for you on acquisition of assets or asset deals in the North American market. Given where prices have moved in the last three to four months and your general intention to make small addon deals, is the impact of the strong commodity price environment, is that causing people to ask for unrealistic prices or are you still able to do the small addon deals that has been an important part of your strategy thus far?

Steve Chazen

We haven't seen any increase in acquisition costs, so the product prices have not flowed through into the acquisition cost of the things we're looking at. Remember, it's a narrow scope and just two areas, really, maybe three. And so we really haven't seen that yet, but if it gets out of hand we can stop.

Ray Irani

Remember, the credit crunch goes the other way.

Steve Chazen

The competitors for buying the smaller properties have to borrow the money, so the continued Wall Street great depression is probably helpful in that. And I think I mentioned earlier what people view as a change in tax law in a couple years or a year or whatever it is is motivating buyers - sellers, I mean.

Operator

Your next question comes from Bernie Picchi - Wall Street Access.

Bernie Picchi - Wall Street Access

Steve, in your discussion of the investment opportunities in the Midstream, you didn't discuss CO2 opportunities at Elk Hills, and I'm just wondering if that's part of your longer-range investment opportunity set that you see within this Midstream sector?

And am I right also in surmising from your comments that of the five different areas you list within the Midstream and Marketing that the CO2 source fields and facilities is your big growth area?

Ray Irani

Well, it's a big growth area because we can make a lot more oil and gas. So we're not growing additional volume in CO2 to be a marketer, major marketer, of CO2. We do buy and sell CO2. However, it can give us additional growth in both the Permian and potentially in Elk Hills.

Steve Chazen

Yes. In the segment, the CO2 plants are focused on the third-party business not our own. So what you're seeing is the third-party piece. The segment itself is currently constructed as a small amount of CO2 relatively in it and has large amounts of gas storage activities and natural gas liquids plants. So the CO2 in the Permian will grow because there's probably some more third-party business there, but Elk Hills would not be a third-party business. We would use all the CO2 ourselves.

Bernie Picchi - Wall Street Access

So that would remain within the E&P segment?

Steve Chazen

That would stay in the E&P. If the CO2 is dedicated to our facilities, it stays in the E&P segment. This is the part that's related to what we sell to other people. For example, if we operate a field, we have a 50% interest, we may sell gas to the other 50% so they have it And so that's sort of the nature of it. But if it's embedded as part of our production, our own production, it's remained in the segment.

Bernie Picchi - Wall Street Access

So merchant sales, basically, as you were talking about?

Steve Chazen

That's right, merchant sales and plants and parts of plants that are dedicated to merchant. But you should look at it as a fairly traditional at this point Midstream business with natural gas liquids and gas storage activities.

Bernie Picchi - Wall Street Access

On the fourth quarter you made a passing comment about your emphasis on cost reductions, particularly from your contractors, and it looks as if we're beginning to see that here in the first quarter results. Can you talk about what we might expect to see in the way of benefits from that cost reduction program for the remainder of the year?

Steve Chazen

It's hard to lay it out exactly as to quarter to quarter, but we are seeing some real effects. We're focusing the organization on costs, so we would expect over the year to exit at sort of a $300 billion cost run rate savings. But whether you'll see it - what exactly you'll see in the second or third quarter, hard to say. And it's also obscured by some other things that go on. So I can't tell you exactly what each quarter is but, as Ray pointed out earlier, we're focusing the E&P business on increasing margins even in this incredible environment.

Ray Irani

And we've had manpower reduction both to improve efficiency and reduce G&A.

Steve Chazen

So I think we're focused on that. Our G&A per barrel has declined this quarter in the Oil segment. So I think we're doing the right things here and you'll see more progress, but it's probably lumpy.

Operator

Your next question comes from Pavel Mokhanov - Raymond James.

Pavel Mokhanov - Raymond James

How many wells will you be drilling in Libya this year?

Steve Chazen

Exploration wells, I don't actually know. It's somewhere in the range of half a dozen.

Pavel Mokhanov - Raymond James

Half a dozen? And do you have any sense for the prospect sizes that you're targeting?

Steve Chazen

They're 100 million to 150 million barrel prospects.

Pavel Mokhanov - Raymond James

Got it. And of the half a dozen you mentioned, do you know roughly the split between offshore and onshore?

Steve Chazen

No offshore.

Ray Irani

But we're drilling additional wells in Libya for production increases.

Pavel Mokhanov - Raymond James

Is that on your legacy assets?

Ray Irani

Yes.

Pavel Mokhanov - Raymond James

Would you, in addition to boosting the dividend - which, as you mentioned, the Board should be supportive of - would you consider a special dividend under this commodity environment?

Steve Chazen

It's just hard to say. It depends on the stock price. It depends on our view of the stock price. If the stock price, we view, as buying in the shares is better for the long-term investors, we would do that. If the stock ever got to fair value, that's when a special dividend would be considered.

Operator

There are no further questions at this time.

Christopher Stavros

Thank you, everyone, for joining us on the call, and please, if you have any follow-up questions, call us here in New York. Thank you very much. Have a good day.

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