[OXY stock] Occidental Petroleum Q1 2022 Earnings Call (5/10/22)

Welcome to Occidental's first quarter 2022 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then 1 on your touch-tone phone. To withdraw your question, please press star then 2. Please note this event is being recorded.

I would now like to turn the conference over to Jeff Alvarez, Vice President of Investor Relations. Please go ahead.

Thank you. Good afternoon everyone and thank you for participating in Occidental's first quarter 2022 conference call. On the call with us today are Vicki Hollub, President and Chief Executive Officer; Rob Peterson, Senior Vice President and Chief Financial Officer; and Richard Jackson, President of Operations, U.S. Onshore Resources and Carbon Management. This afternoon we will refer to slides available on the Investors section of our website. The presentation includes a cautionary statement on slide two regarding forward-looking statements that will be made on the call this afternoon. I will now turn the call over to Vicki. Vicki, please go ahead.

Thank you, Vicki, and good afternoon. Our cash flow priorities continue to direct free cash flow allocation in the first quarter as we repaid an additional debt in April and paid the first distribution of our increased common dividend. On our last call, we detailed our near-term debt reduction targets, including repaying $5 billion of debt and reducing net debt to $20 billion. Our progress towards meeting these targets advanced significantly in the first quarter. We repaid approximately $3.3 billion of debt and ended the quarter with net debt of $23.3 billion, reflecting the face value of our debt of $25.2 billion and the unretired cash balance of $1.9 billion.

Repaying $3.3 billion of debt in the first quarter was accomplished through a combination of a $2.9 billion tender offer, exercising the call provision on a note, and open market repurchases. Following quarter end, we retired approximately $300 million in additional debt using open market repurchases, lowering gross debt to approximately $24.9 billion, which is the balance today. It is reasonable to expect that we could meet our near-term debt targets and then initiate our share repurchase program during the second quarter.

Once we complete our near-term debt reduction target and we purchase $3 billion of shares, we will continue to allocate free cash flow to repaying debt as we lower gross debt to the high teens. We believe reducing debt to this level will speed our return to investment grade and better position us to sustain a greater dividend at lower prices. When we reach this stage, we intend to transition from proactively reducing debt to primarily addressing maturities as they come due.

Our debt reduction efforts continue to receive positive recognition. Since our last earnings call, Moody's upgraded our credit ratings to Ba1 with a positive outlook. All three of the major credit rating agencies now rate our debt as one notch below investment grade, which we view as recognition of the pronounced and ongoing improvement in our credit profile.

Our consistently strong operational results, in combination with the current commodity price environment, are driving improved profitability on top of our already robust free cash flow generation. In the first quarter, we announced an adjusted profit of $2.12 per diluted share, our highest adjusted earnings per share in over a decade, and a reported profit of $4.65 per diluted share. The difference between our adjusted and reported profit for the quarter was mainly driven by the legal entity reorganization described in our most recent 10-K and 10-Q filings.

Following the completion of our large-scale post-acquisition divestiture program, a portion of the existing tax basis was reallocated to operating assets, thus reducing our deferred tax liabilities by approximately $2.6 billion, which was recognized in our reported earnings for the quarter. We resumed paying U.S. federal cash taxes in the quarter ahead of our earlier expectation. This was due in part to the strong earnings generated in the first quarter, combined with expectations for commodity prices and earnings over the remainder of the year.

Given current commodity price expectations, we now expect to exhaust our U.S. net operating losses and most of our general business credit carryforwards this year. However, the NOLs and credits that we currently have remaining are expected to limit the amount of cash taxes paid this year. For example, we would expect to pay approximately $600 million in U.S. federal cash taxes if WTI averaged $90 per barrel in 2022.

The increase in commodity prices benefited us during the quarter, as demonstrated by our strong earnings and free cash flow generation. The commodity price environment improvement compared to the previous quarter also resulted in higher accounts receivable balances, which contributed to a negative working capital change. The negative working capital change was also driven by typical first quarter payments, such as semi-annual interest payments, annual property tax payments, and payments under compensation plans.

As was the case in 2021, we see the potential for the working capital change to partially reverse over the remainder of the year if commodity prices are stable, and due to payments accrued during the year being made in subsequent first quarters. We are pleased to be able to update our full year guidance from OxyChem, reflecting strong first quarter performance and improved market conditions. Our revised full year guidance for OxyChem now includes the expectation of a fourth consecutive record for quarterly earnings in the second quarter.

We recognize the possibility of softer product prices later in the year, but still expect the third and fourth quarters to be exceptionally strong by historical standards. As Vicki mentioned, our Rockies business continues to perform well. Our expectation of continuing strong well performance over the remainder of the year provides us with confidence to raise full year guidance for the Rockies by 5,000 BOE per day.

On previous calls, we've discussed how we've been working closely with Colorado communities and regulators in implementing the state's new permitting process. The drilling permits we have in hand are sufficient to run a single rig for the remainder of 2022. It is no longer feasible for us to run a multi-rig program for Colorado this year given the current pace of state approvals. As a result, we plan to reallocate activity from the Rockies to the Permian in the second half of the year.

This activity change will not impact our 2022 production and is included in the domestic onshore activity slides in the appendix of our earnings presentation. We plan to submit development plans in the coming months that will cover over 1,100 rig days. We are hopeful that as Colorado's new permitting process matures, it will continue to become more efficient. Regulatory certainty early in the process would provide us with the option to add activity back to the Rockies in future years, given the oil and gas development plans we expect to submit for this year.

While our company-wide full year guidance is unchanged, as Vicki mentioned, we have included a 6,000 BOE per day downward adjustment to our full year international guidance, reflecting the impact of higher oil prices in our production sharing contracts. Our original budget included a forecast of $73 for Brent, while revised guidance reflects a Brent average price of $95 for 2022.

Including these activity changes, our 2022 capital guidance remains at $3.9 to $4.3 billion. We mentioned on our last call that our 2022 capital guidance incorporates approximately $250 million of inflation compared to 2021. The cost of materials and services necessary for operations, especially onshore in the United States, has continued to increase. We are working to offset inflationary pressures with additional efficiencies, but if price increases continue, we may spend near the top end of our capital guidance this year.

Certain pricing pressures, such as labor and our WTI-indexed CO2 purchase contracts in the EOR business, have become pressing, leading to a slight upward adjustment in our full year guidance for domestic opex. We are pleased with our strong start to 2022. With one full quarter behind us, we have completed scheduled turnarounds, continued to pay down debt, established a shareholder return framework, provided a comprehensive update on our low-carbon strategy, and set new quarterly records for earnings and cash flow.

We will continue to focus on delivering value for shareholders this year and beyond. I will now turn the call back over to Vicki.

We will now begin the question and answer session. To ask a question, you may press star then 1 on your touch-tone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. Please limit questions to one primary question and one follow-up. If you have further questions, you may re-enter the question queue. At this time, we will pause momentarily to assemble our roster.

The first question comes from Michael Scala with Stifel. Please go ahead.

Hey, good afternoon everybody. Rob, you mentioned that you could potentially commence the buyback this quarter. Wanted to see, as you look beyond this year based on where the strip prices are right now, can you give any indication of what you're thinking in terms of free cash flow priorities for the longer term?

Yeah, Michael, thanks for the question. We haven't provided any guidance for 2023 and beyond at this point. I think what we've indicated in the notes was that as we complete the $5 billion and the $3 billion this year, and then apply the balance of any additional cash to driving gross debt down into the high teens, we would anticipate that less of the debt reductions would be the priority and more would be to address debt on a maturity basis. That would imply in 2023 and beyond a shifting of our priorities such that shareholder returns and other priorities will move towards the higher end of the scale.

Okay, I understood. And I know your hedges have rolled off at this point. Do you see any need to protect any of the debt reduction targets or the buyback program? Or, I guess over the longer term, if the dividend becomes part of the free cash flow return to shareholders, any need to reinstitute a hedging program to protect any of those things?

Michael, our history as a company has been fairly hedge-averse. Our belief is that our shareholders will ultimately receive, and the company will receive, the best value for the commodities we produce and sell if we just move with the cycle throughout the entire cycle. We did deviate from that in 2020 due to the amount of maturities we had coming due at the time. Since then, the combination of the cost of driving out certain maturities, paying off and reducing debt we've talked about, and creating a sustainable business at a much lower price has removed some of that need. Also, our chemical business, midstream business, and international business operate a little differently in some of those price environments, creating other built-in hedges. So I don't see us going towards hedging to try to mitigate any of those risks. We have a pretty manageable debt profile now, particularly for the balance of the decade. With the work we did in the first quarter, we only have two years, 2025 and 2026, that have any maturity towers that exceed $2 billion, and that will certainly be a focus as we move forward. So I don't really see the need for hedges to mitigate any other risk moving forward. And as Vicki outlined in our last call, the dividend approach is meant to be sustainable at low prices. The share purchases will make that dividend much cheaper at low prices for us. So I think we're doing the right things to protect from low price environments in the business without having to artificially try to protect it with hedges.

The next question comes from Janine with Barclays. Please go ahead.

Hi, good afternoon everyone. Thanks for taking our questions. Maybe we can just start back with either Rob or Vicki on your prepared remarks about what's going on next. We just wanted to clarify the sequencing of further debt reduction and incremental shareholder returns. It sounds like from your commentary that further gross debt reduction beyond the first $5 billion will be ahead of additional cash returns beyond the $3 billion buyback, and not in parallel. So reducing gross debt versus net debt is pretty different logistically. That's pretty easy given your free cash flow. So do you have any color on how long you think it'll take to achieve the high teens gross debt target given what you see in the market for tenders and open purchases?

Yes, it's a good question, Janine. I think that as we laid out last quarter and when I tried to convey my remarks, we would complete the $5 billion of debt reduction and then initiate share purchases. I think based on being at $3.6 where we are today, and as we demonstrated, we have a combination of open market purchases, tenders, make-whole provisions, etc., all of which are attractive in the current environment simply because of the rise in treasuries. Achieving that is not going to be a heavy lift in the quarter, and we anticipate that proceeding with share purchases during the quarter is reasonable to expect during Q2. The timing of how long it takes to complete the share purchases is going to be really dictated by the pace at which we're able to retire and bring those shares in. The stock's obviously very liquid. We have at our disposal lots of different mechanisms to actually acquire the shares. We're going to do it in a way that is most constructive and brings the most value to the shareholders in the process. And if we do have cash available beyond that, which the current pricing environment would certainly suggest we would have cash well above those two pieces of $8 billion between the two programs, we wouldn't resume applying that back to the balance sheet in the process for the balance of the year.

Okay, I apologize. I was referring to getting to the high teens gross debt, but we can take it offline. That's okay. Thank you for that clarity. Our second question may be just on growth. How are you thinking about production growth beyond 2022 given the medium-term gross debt reduction target? Is it kind of like an either-or on growth and paying down debt, or is the price environment constructive enough and the balance sheet improved enough that you can do both? Thank you.

The next question comes from David Deckelbaum with Collins. Please go ahead.

Thanks for taking my questions, Vicki. I appreciate the time. I wanted to ask an additional question around growth into next year, specifically to the Permian. Your guide obviously implies that you'd be ramping towards almost 600,000 barrel equivalent a day there by the end of the year. Should we think about 16 gross rigs being sufficient to continue growing that profile into 2023?

Hi David, this is Richard. Let me start with that. I think I'll try to answer that by talking through the cadence of how we entered the year and maybe how that translates to the second quarter into the second half of the year. Very pleased with where we landed in the first quarter. We had a beat for the onshore U.S., specifically in the Rockies and also part of the Permian. That was on a bit of uncertainty at the time we provided that guidance around final recovery of the weather event and then contemplating some of the supply chain challenges that the industry saw. So we were very pleased where we landed in the first quarter. From an activity ramp-up plan, we were able to add the rigs that we started in the fourth quarter into the first quarter. So we are at a near activity level for the rest of the year, at about 17 rigs and five frac crews in the first quarter.

I think importantly, as we think about this, at the time the market was on pace, we actually finished two wells online better in the first quarter and increased our total year outlook by 10%. That was very important for us to continue to deliver that time to market on pace. But as you think about this inflection of growth going into the second quarter and then the back half of the year, March was 24,000 barrels a day better than February. And I think below that, 62% of the first quarter wells were online in March and really late March. So again, very pleased with that ramp-up and transition.

If you go back to last year, it was really a lot of transition from DUCs in the Rockies, which carried a lot of production, into what I would consider a much more steady state drilling and completion cadence in the second quarter this year into the back half of the year. So we expect to really benefit from that. When we think about the second quarter, we hit this, add a couple rigs as you mentioned in the Permian to hit the 16, and really 18 overall or net rigs is not a big change because the net rigs stay about the same with the drop of the Rockies in the back half of the year. But you can start looking at the Delaware as a really important area for us to deliver this growth. We have 30 wells that were online in the first quarter. The second quarter goes to about 40, and the back half of the year increases to about 50 per quarter. So we feel good about that delivery schedule in the Delaware.

Going back to last year, we had about seven and a half rigs in the second half of last year in the Delaware. In the first half of this year, we'll be at 12. So as we went from DUCs to drilling, that was really the next stage of this steady state recovery, and then we'll enter the full completion online schedule for the back half of the year. The good news is those wells are coming online very well. Of all the wells I pulled out this morning in the Texas Delaware, we had 23 wells online in the first quarter that averaged over 4,000 barrels a day on a 24-hour IP. So time to market is in line, production is in line. The final thing I would say as we think about the back half of the year is really protecting that base. We were real pleased with the Rockies beat; they're about 2% better on base than what we had in the plan. So being able to protect that base production makes it a lot better. When you look at time to market, well performance, our takeaway position and flexibility in the portfolio, we feel really good. We continue to work with strong uptime and operability, and we've been able to look beyond 2022. So that final component of de-risking what we're trying to do is very important. I think we feel really good about where we are this year. We've got flexibility in the back half of the year, as Vicki said, to adjust activities and really hit what is the right capital and development program for next year to meet the plan needs given the macro conditions and what we're trying to do as a company.

Thanks, Richard. I got my value's worth with that question. I appreciate it. Rob, just my follow-up would be, and I'm sorry to belabor the point, but I want to ask another question around the timing of return to capital and debt pay down. If we understand the sequence correct, once you get to another tranche beyond the buybacks where you're looking to get debt down into the teens, would that then preclude any...

Yeah, so the preferred... obviously, if you look at the three billion dollars of share purchases and add into that the dividend at 13 cents and assume that those are flat for the course of four consecutive quarters or three consecutive quarters, you're still not going to quite be at the level of triggering the four dollar per share Berkshire trigger. And so, as we've indicated, once we go beyond the eight billion dollars we've laid out for debt and share purchases, we would intend to continue reducing debt, again with the goal being to get that gross debt down into the high teens. Based on our conversations with the three rating agencies, it's one of the key waypoints we need to do to achieve investment grade. There are several other metrics they provide to us that we're doing very well on relative to... we certainly know that a lot of metrics are inflated today based on commodity prices, and so continuing to make that progress will help those metrics further to be constructive even in a more moderate price environment. So that's the reason why we're talking about going back to the debt beyond the share purchases. We do think it's very important for us to achieve that investment grade status or get to these investment grade type metrics. And so I would look at the Berkshire as more of the potential that Berkshire is more a product of the strategy we're coming into this year as a potential more than being a driver of the strategy this year. And so we find ourselves in a constructive commodity price environment. We've achieved those debt targets we've talked about, we've got those investment grade type metrics, and we're having constructive discussions with those agencies about being an investment grade. Then I think you are in a position, as both Vicki and I laid out in our comments, that you can see a transition for us away from debt being the predominant consumer of cash that we're generating beyond maintenance of the business into being something more targeted towards shareholder returns. And for us, as we discussed, we laid it out before that the favorite way of returning value to shareholders beyond the dividend is through share purchases because it does increase the sustainability of the dividend in lower price environments. We also have outstanding warrants, we know that there are sources of dilution, we also issued common shares as part of the acquisition, so it's a prime way for us to reduce it. And if we do make a nominal increase in share purchases in that 12-month period, it will automatically trigger the provision of targeting the Berkshire. So it's not a choice of do you want to trigger the Berkshire; it's if we cross that $4 threshold, we will begin the process of the common return and the reduction of Berkshire preferred. And so sitting here today in May, you know, eight months away from January of 2023, we're not in a position to forecast where our cash was going to be in the first quarter or where we're going to be at. But if we can accomplish these goals, it puts us in a position where you should have the optionality Richard described and discussed: production exiting the year being able to be in a position where through additional shareholder returns we would trigger Berkshire and begin reducing the principal of the Berkshire in the process of doing that. And so we have some ground to hoe to get there. The commodity price environment is very constructive for us right now. The current strip prices suggest this is very achievable. And we're doing the right things in the business in terms of driving costs out and keeping costs down in the process. So the combination of that, the chemicals business performance, our portfolio, are all setting us up to be successful in that. And we're not very big on forecasting out cash flow in subsequent quarters or what we're going to do quarters away from this, but I think we've provided you with what our expectations are to do with cash for the balance of the year. And if all those things happen, it puts us in a position where to increase shareholder returns, we would be going after principal on the Berkshire at that point.

The next question comes from Matt Portillo with TPH. Please go ahead.

Good morning all, thank you for taking my questions. Maybe just to start out on the DJ, I was hoping you might be able to provide a little bit more context around the permitting process and maybe some of the delays you're seeing. And then I was curious if you hold one rig into 2023, what that might mean from a well count perspective for you all.

Hey Matt. So thinking about the DJ this year and then to next year, we feel good about the progress we're actually making with our permits. I think the decision to move the rig allocation to the Delaware is really allowing us to get our development plans in place for 2023. We've got, I think we mentioned it in the prepared comments, we've got permits approved to take that one rig into next year. We've got another 50 wells across a couple of pads that are in various stages of approval, but we feel good about where they're at. And then we have another 200 that are part of a larger program that we're working through the system. I would say we've got a lot of engagement over the last year thinking about this. We've got a lot of improvements in technology and some things that I think will really fit well into the permitting expectations both locally and at the state level. So really as we go into next year, we would be capable of getting back to that two rig level and perhaps even more. And so from a well count perspective, it could look very similar to where we started this year for the DJ in terms of count. But the challenge for us is to develop responsibly, work with the local communities, work with the states, put together the best plan we can. But when we do that, we want to be prepared to develop because those are some very good wells for us within our portfolio.

Perfect. And then as a follow-up operational question, just if you might be able to spend a little bit of time talking about the Gulf of Mexico development plan from a tie-in and development perspective over the next couple of years and what that might mean for production. It's obviously a great free cash flow generative asset for the company, so just was hoping to get a little bit more context around how you're feeling on that front moving forward.

The next question comes from Neil Mata with Goldman Sachs. Please go ahead.

Thank you. I have a couple questions here around supply chain. And Vicki, in early March you had made the comment that I guess caught some press that the supply chains in the U.S. were in relatively dire shape as it relates to U.S. producers and that would be a constraint on U.S. growth. And a lot of that has proven out, especially around pressure pumping. So can you just talk about your latest views around the constraints as it relates to U.S. shale and how you see this evolving from here, and tie that into your view of the oil macro?

Sure, I'll just give you a few details from the U.S. onshore perspective. Where we had factored this into our plans like Vicki said, if you remember, going back really to our first quarter message, we had up to 10% contemplated in our upstream capital budget. We've certainly seen that. We feel good still with our capital outlook because of those plans and what we had factored in for uncertainty within that range. But I'd say a couple of things: one, I'll speak quickly on inflation mitigation, but importantly for us, maintaining those operational efficiencies and that time to market, wells online schedule, was very critical. And so you'll continue to hear us talk a lot about what we're trying to do to work with our service partners to protect that. But from an inflation perspective, the two big ones: oil country tubular goods, we knew going into the year we'd see that, and we've had some tubulars over 100% and that's meaningful, it's about 7% of our capital. So that's been meaningful. The one that had a little bit more dynamics from an industry perspective in the U.S. and the Permian was really sand. But we felt good, we worked through that well in the first quarter and good where we're at today. We think about winter's price and where supply is, we feel good about our supply situation. We didn't have any disruptions in the first quarter that impacted that wells online schedule, so we were able to maintain schedule there. Part of that is design; we've been able to work with our development teams to manage both white and regional sand into our designs based on that supply. The other is our primary sand supplier in the use of Aventine, so again that facility became very helpful for us in terms of storage and last mile logistics in terms of what we're doing. And so that was really good. The last thing around sand that I think played well for us, and we appreciate again our service partners with this, we moved back to a bit more of an integrated strategy with our frac providers. And so that included sand, being able to supply sand, but it also included trucking and fuel. And so from a trucking perspective in terms of moving sand for that last mile logistics, we were able to get some help from our frac providers. And then from a use of our Tier 4 dual fuel perspective, that fuel supply played out very well for us. We feel like we're in a good position, mostly locked in on price for the rest of the year, but that decision and work we did with our service partner played out very well.

Yeah, thanks. And the follow-up is just around the chem side of the business. I see the guidance bump here in terms of pre-tax income guidance. Can you just talk a little bit about how you see the trajectory of profitability through the year? It sounds like, if I understood the comments, still a strong year but might be some downward pressure on pricing as we think about the plan year out. So any color around that would be great.

Yeah, sure, Neil. Let me answer your question by laying out where we are today. So as you indicated from our comments, the conditions are still very strong in our vinyls and our caustic soda business. From our personal sales, the Russia-Ukraine impact is really escalation of prices in Europe and Asia, which is impacting their chlor-alkali operations and chlorine derivative productions and leading them to not only reduce operating rates but also increase prices accordingly. That's benefiting both sides of the business because of that. But not only that, domestically the business remains very strong on the vinyl side of the business. And so we would estimate year-to-date market operating rates through March, these lag a bit, but were reported by the industry at 81.6% year-to-date, which is not as high as you might think it might be, but there's been a lot of controls in that due to the outages that occurred during the industry during the course of the first quarter, which is pretty typical. But domestic demand in the first quarter was up about 10% versus last year, and in fact domestic demand in March for the U.S. was the highest single month for domestic demand in over a decade. So just reflecting that pent-up demand for construction, and despite what is relatively based on historical value high prices for PVC, the demand is still there and it's being pulled right through the building products. So that's great for the business. Exports are about 7.5% higher than they were this time last year through March last year, reflecting the fact that there are opportunities to sell PVC internationally. In some ways, PVC is exporting U.S. gas and ethylene overseas into places that are being impacted by the higher prices or availability. So that's all very constructive for the business, and we see that demand being very resilient through certainly the first half of the year. The favorable housing sector, etc., and the export business being open for as long as it's available simply because of the U.S. advantage on gas, ethylene, energy, etc., versus the rest of the world. So PVC feels constructive. Obviously, interest rates raising can impact housing starts and demand on that business, and so that's one of those uncertainties. We're not seeing anything that would suggest it's falling off or any fractures in the strength of PVC. We're sitting here in the month of May and watching the news like everyone else regarding the Fed getting more hawkish towards interest rates. It can have a corollary impact on housing starts and demand at some point, and so we're just a little bit less clear on the trajectory in the second half of the year. So you see a little more cautious outlook for the business. On the caustic side of things, it's been... we don't get operating rates for the industry because of the amount of people that participate in it, but we would estimate rates somewhere in the low 80s. But all producers had scheduled and unscheduled downtime, the majors during the first half part of the year so far. There's been several downstream consumers that have had issues on production issues, and we're obviously dealing with some railroad logistics issues in other industries right now. But the core sectors, just like home construction, durable goods, transport, etc., they're all very strong right now. Improvement in travel and customer spending is still there. And obviously, just like in the PVC business, we're taking advantage of the fact that with the energy advantage in the U.S. versus the rest of the world right now, from a pricing standpoint despite being high here, it's nowhere near as high as it is in Europe and Asia, which opens up opportunities and will lead some consumers of our products to produce products here versus overseas and export those products. And so again, similar to the PVC business, the caustic business in the second half of the year, I think it's very strong for the first half of the year, it's just a little less clear the trajectory in the second half of the year only because of those overhanging potential impacts on the economy and the associated GDP, which typically drives a big part of the business. And so I wouldn't say that we're pessimistic towards the second half of the year. If you look at the guidance range we gave and look at the course of what we're doing for the second quarter and look at slide 33, which has a historical view of chemical performance, the second quarter guidance alone would have been a great year by many standards for many years prior to '21 and '22. And then if we look at the second half of the year, even if we reach our guidance mid-year, you're talking ranges that would also be close to a billion dollars on the high end of our range. Certainly if things are more constructive, we're on the high end of the range. I think that's the feeling that we have right now. We'll get more clarity, and we're really in a zone right now where we're trying to understand what might be the impacts of rising interest rates on the business. But all the demand factors today are still very constructive for supply-demand. And the longer that supply-demand balance remains tight on the two sides of the business, the higher we're going to go towards the high end of that guidance. And we'll potentially revise that guidance at some point mid-year obviously once we see how the second quarter turns out. But our guidance that we provided for the year beyond the Q2 guidance just takes into consideration that uncertainty we have on the second half here just because of what's going on not only in the U.S. but globally in the economy.

The next question comes from Doug Legate with Bank of America. Please go ahead.

Thanks, appreciate you taking my questions, everybody. Rob, I hate to do this but I'm going to go back to the capital structure of the company. And I want to ask two questions related to the preference shares, but I want to nuance them just a little bit if I may. So my first question is: you talk about absolute and net debt targets, you don't talk about the capital structure including the preferred. So if I include the preferred as debt, for example, one could argue that once you get back to investment grade, your cost of debt is going to be a substantial potential offset to the premium you'd need to pay for the preferred if you chose to raise debt to buy the preferred. See what I mean? 8% money on the preferred, let's say 4 or 5% money on the debt, even with a 10% premium, that would make sense. Why would you not do that?

Why would we not retire the preferred? Is that what you're saying? I didn't catch the very end.

Sorry, yeah. Why is that not an option? Because it seems to me that the premium is worth paying if you can reduce the cost of overall money, which is what you would do if you go out and borrow to actually fund the retirement of the Berkshire once you hit investment grade.

Yeah, the challenge with it is this is not just a premium, it's also the return to the shareholders too. And so it's not just considering the premium on the Berkshire of the 10% through 2029, it's also that there has to be an equivalent value returned to the shareholders at the same time. And so versus retiring the debt like we're going to do the balance of this year, where every dollar that goes to debt reduces our gross debt, going into when we retire the Berkshire will reduce shares by an equivalent amount, but it'll be split bifurcated into the two. And so one dollar, half of it goes towards shareholders and half of it goes towards the Berkshire. And so I think once we achieve the ability, if we start retiring the Berkshire, we'll certainly want to deviate and put whatever cash we're applying to debt reduction into the Berkshire. The way that our maturities are laid out today is not very difficult for us to do. We don't have any maturities of any meaningful size until the second half of 2024, and even that isn't very large in scale. And so we have the ability to allocate all the cash that we have available to us if we want to towards shareholders and Berkshire return if we're doing that point without having to retire debt because we don't have any maturities over that period of time.

Okay, well I apologize for asking, I just wanted to understand if it was a crazy idea or if it was something you would actually consider. My second question is even nittier if you don't mind me going down this route. Berkshire obviously has now a vested interest in a better share price for obvious reasons. They've built up a very large position in your stock, and 8% money on the preferred is obviously still pretty expensive. Is there any consideration, likelihood, discussion, or anything else you might want to share with us that could ultimately see you swap out of the preferred at favorable terms for ordinary equity with Berkshire, given that they've already built a very large position? Just curious if that was a consideration.

Doug, we don't share the discussions that we have with other shareholders, as you know. But I can tell you that we always consider ways to add value to our shareholders, and we'll continue to do that. So we really can't disclose any private conversations with other shareholders.

The next question comes from Phil Gresh with J.P. Morgan. Please go ahead.

Yes, hi, good afternoon. With respect to capital spending, in the past you've talked about sustaining capex of $3.2 billion at $40 WTI, and obviously we're in a much higher environment and probably for longer. So I'm curious if you have another way to think about that, in particular the capex you think would be required to sustain this 2022 exit rate you're talking about that should be somewhere around 1.2 million barrels a day. And I'm looking at this in the context of your capex guide for the year would seem to imply we're running maybe in the high fours on capex, but would just be interested in any color there.

So just to clarify, if we're exiting at, call it, $4.8 billion or something like that in the fourth quarter on capex, would you be saying then that there's maybe still some catch-up spend that was embedded in that, or is that actually the sustaining capital rate?

And the last questioner will be Paul Chang with Scotiabank. Please go ahead.

Hi, thank you. Good afternoon. Maybe the first one is for Rob. I know that it's too early, you guys haven't decided what your program is going to look like for next year, but can you tell us roughly what percent of your work may already have some kind of fixed price contract for 2023? And maybe some give and take, how you see that program, like higher inflation or invasion will continue to push it higher? Any insight you can help. And second question is real quick: in your midstream, your four-year guidance seems to suggest second half you're going to go back to a loss. Is that just being conservative or is there some identified item that makes you believe the second half result is going to be much worse than what we've seen in the second quarter or what you are guiding to? Thank you.

Hey Paul, this is Richard. Maybe I'll start with just a little bit of the sort of U.S. contract and talk around it in terms of inflation. We can start there to kind of give you a view how it's going into the back half of this year and into 2023. I think from some of the critical components like rigs and frac crews, we have flexibility going into the back half of the year. We have some contracts that do not extend into 2023, so again as we sort of land on what the final 2023 plan is, we've got some flexibility there. We also want to make sure we've got the highest performing crews and rigs that we can. Again, from an OCTG and sand supply, I think one of the real advantages we have beyond what I mentioned earlier is that we're operating most of our activity within five core development plans. So we've got this year about 80 to 90% of our activity within five areas and would expect that to continue into next year. And those designs being locked in gives us the advantage of being able to schedule out things like sand delivery and tubular. So both of those, we will order out six months in advance, we'll be able to secure the pricing that we can. And those represent really the biggest uncertainties in terms of inflation going into next year. The rest, we obviously work contracts globally, so work with Ken whether it's the Gulf of Mexico internationally to be able to work with our service providers as best we can to do that global view in terms of our need. So we feel good again where we stand this year in terms of supply and price, and we'll be looking in the back half of this year to get that firmed up into next year.

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