Occidental Petroleum CEO Vicki Hollub’s Oil Outlook

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I think it will be a growing industry for those who have the strategy that allows them to grow. For one thing, to get methane emissions under control. That means to target trying to get methane emissions to a net zero in your own operations. The second is to be able to offset your own carbon footprint. And so our view is that if you have that scenario, then we could grow production, oil and gas production over time.

Hello and welcome to the Barron StreetWise Podcast. I'm Jack Howe, and the voice you just heard is Vicki Hollub. She's the CEO of Occidental Petroleum, and in a moment we'll hear from her about shale drilling and the long-term outlook for oil demand and her plan for pulling carbon out of the air and storing it in old wells while squeezing out more oil. Listening in is our audio producer Meta. Hi, Meta.

Hi, Jack.

I want to get to petroleum, but should we tell people about your weekend of murder?

Sure.

You killed, uh, 300— well, 301 living things. And these were what?

Japanese lanternflies.

Right.

That sounds mean, but they're an invasive species and you're supposed to kill them, right?

We're told to kill them. Yeah, we're told to squash them.

Oh my God. And where were these?

They were living on a couple of small trees in our backyard. And they're very hard to kill, actually. So I had to cut off the branches of this tree that they were on, which is also, I found out, an invasive species. And then I gently would put it on the grass and then I'd stomp.

So what kind of trees are these?

They're called Tree of Heaven.

It already sounds like a death cult, but go ahead.

Yeah, they're kind of beautiful.

I like the tree, but it's bad and the flies love it.

So do people in your neighborhood now just kind of Avoid you, like take a wide berth on the sidewalk, go to the other side of the street and say, did they say there's the murder lady when you walked by?

Or yeah.

And sometimes if I want to get my way, I just stomp and they like back off, you know?

All right.

Well, look, I'm going to try not to upset you during this episode. Now we should tell people I, this week I will be, how should we say, on the go, right? We never say the V word. That makes me sound like I'm not industrious.

Right. You would never.

I don't take vacations. I'm gonna be on the go. So what we're gonna do is play a couple of conversations with top CEOs. Barron's recently had their top CEOs issue. I spoke with a number of CEOs for that. We're gonna play a couple of those for you this week, starting with Vicki Hollub at Occidental Petroleum. And later in the week, we have Brian Niccol at Chipotle.

And then we're gonna dedicate a 30-minute special to me talking about pest control.

Excellent. Can't wait. Can't wait for those tips. Let me tell you just a couple of things about Occidental Petroleum and Vicki Hollub before we start the conversation. Vicki became CEO in 2016 and she did a, a controversial mega deal in 2019, and that was the purchase of a company called Anadarko, which had some choice West Texas shale deposits, and Occidental had to beat out Chevron for that deal. And there were some critics who said that they overpaid. Among them was Carl Icahn, and he launched an activist campaign. And then there was COVID, and that briefly crashed the oil market. Okay, so oil has recovered. Carl Icahn has cashed out. Warren Buffett, he helped finance that Anadarko deal originally with some preferred shares. He's lately been raising his stake in common shares. Occidental stock is doing better. It's solidly beating the market over the past 3 years. The company's been very focused on maximizing its cash flow so it can pay off those preferred shares. It's also been raising production, and Vicki's next big investment is an enormous facility for capturing carbon from the air. But I'm going to let her tell you about that. Here's Occidental Petroleum CEO Vicki Hollub. Question number 1 is, how do you run a big oil company? I don't expect to have to do that myself anytime soon, but it seems like such an unusual business because the product is the product everywhere. So what are the most important parts of the job? Is it deciding how and where to invest money, deciding when to deploy resources according to what you think the prices of oil is going to be going forward? Is it motivating people? What, what are the most important parts of your job?

Well, I think what makes my job easier than some is we have the best set of assets that we've ever had. So in the oil and gas business, the one thing you gotta have to be able to make it through all the cycles is assets that are really good. And secondly, though, even if you have assets that are really good, you could still mess it up and you could still not create value for the shareholders. So the second thing that, that we really have to have are the incredible people and technical excellence. And we can get into more detail on that, but technical excellence in our business is you just can't put anybody in a role. You've got to make sure that they have the capabilities, expertise, and the drive. So the passion. So I call it the 3 Ps. You got to have the people, you got to have the passion, and then you have to have processes so that no matter who you may move in or out, there's a workflow process that helps guide us to consistency. Then the third thing to me is the sustainability. And the sustainability, if you do all those things, first two, if you get those two right, then you really need the development inventory. And so for oil and gas, that comes with having a deep inventory of things that you can develop over time. And in chemicals, having a way to attract people to you, like we don't like to go out and just be speculative in our chemicals business on how to build out. We wait, and then we've done it really well. The team there is incredible. But what they do is they wait for people to call us who need products, and they know that we can deliver products pretty efficiently and low cost. And so that's how we built the business over the past few years, and we're continuing to get people calling us wanting to grow that business. And then the other part of sustainability is not just the inventory and the opportunities, but it's how you do it. It's focusing on doing it the right way with respect to climate, but also doing it the right way with respect to community. And community is employees, external people, our contractors, and, and those that live in the cities and communities where we operate.

An important part of that job is recruiting, right? The same companies are going after the most talented players in your field at the same time. How do you get them to come work for you?

You're absolutely right on that. And especially now, there's a lot of pressure on the oil and gas industry because many people want us to go away. They feel like we're the, the cause of the climate issues, but they don't understand the second part of that is that we can help with that now. And that's one of the differentiators for us is that we have a clear path to be able to control our own destiny with respect to being able to reduce our carbon footprint. We don't have to depend on what other companies want to do. And what I mean there is we can go beyond just waiting on someone or trying to get someone to allow us to put carbon capture on their industrial site. With our direct air capture technology, we can move forward controlling our own ability to build those as we see fit and as the demand grows. From those corporations around the world that have already committed to want to reduce their carbon footprint.

Is that the most promising of the different opportunities out there? I see a lot of companies doing very different things. Some, you know, over the years have put up solar and wind facilities, and some like yours, you're active in carbon capture. And I see this project that you're working on is going to be the biggest in the world for pulling carbon straight out of the air and I guess capturing that. Is that the most promising way forward. See, if we could have just a big vacuum cleaner that would pull the carbon out of the air, that seems like it would be a pretty handy thing. How promising does that look to you?

It looks very promising to us, but what other people don't recognize immediately about that until you delve into the details— and when you look at it in detail, reality is the way we're going to do it is we're going to use radial fans that already exist today. They're used in other types of industrial situations. So we'll pull air through a contact tower and the contact fluid that's going to take the CO2 out of the air is potassium hydroxide. And our chemicals business is the largest marketer of that in the United States, second largest in the world. So we have a lot of skill and ability and knowledge around how to use potassium hydroxide. So that's a key component. So the second thing is that in the contact tower, To make it mix better and create better efficiency, you need to put diffusers in there so that the mixing happens. And the diffusers in the contact tower will be PVC-based, which is another product that we make. And we're building the first one in the Permian Basin where we already have the infrastructure to support it. So there are a lot of reasons why this strategy fits for us because What we didn't want to do is we didn't want to try to be something that we're not. We wanted to try to build on our core competence of using CO2 for enhanced oil recovery for more than 50 years. And so handling that CO2, knowing how to handle it, and knowing how to put it underground and make sure that it's sequestered underground, whether it's a saline reservoir or whether it's in oil and gas reservoirs. We have the knowledge, skill, and ability to do that because we've been doing it for a long time. And this strategy is very attractive to recruits. And we have people not only externally wanting to come to work for us because they see that we have a real pathway and we're executing on it to get to not only carbon neutrality for ourselves, but to help others get there. And too many other companies are not quite as progressed in terms of laying out not only what they're going to do, but how they're going to do it. And continuing to grow oil production over time, but in a much lower carbon intensity way, and ultimately carbon neutral.

Thanks, Vicki. We'll continue our conversation after this quick break.

Data is everywhere. When orchestrated properly, it sings. At Morningstar, we analyze and enrich data, making it actionable and powerful for you. Morningstar, where data speaks.

Welcome back. Let's get back into my earlier conversation with Occidental Petroleum CEO Vicki Hollub. You return, to my eyes, a lot of cash to shareholders. All those dollars that you send back to shareholders, there's a project out there that you could spend that money on and Maybe you're on a rate of return now and there must be people coming to you saying, hey, we've got something good we think you should spend the money on instead. How do you prioritize? How do you decide here's money that should go back to shareholders, here's something where we should invest?

As a company grows and a company over time goes through cycles, we're in that cycle right now for our company where investing in our own business delivers a great return. In our view, because we view that we're very undervalued at the moment. And so investing in our own shares actually delivers greater returns for us and for our shareholders. And so in the near term, that's why the purchases are so significant. But we do believe that over time, share repurchases will continue to be a part of our strategy because we want to continue to grow our dividend We've always been a dividend-paying company. We had to pause it during the pandemic, but now we're starting to grow it back again. But we want to make sure our shareholders understand that we'll be protected in the low-price environment. So we're growing our dividend, but we're doing it in a way that will keep us always at close to $40 neutrality in a $40 WTI market or situation. So we'll still be, I guess, we call it break-even price, but it's really a sustainable price at $40 that keeps our production flat and maintains all of our facilities. So when you look at it like that, for every dollar that we reduce some debt, that's another dollar that would be available to go to increasing the dividend. And the same with reduction in shares. As we reduce our shares, and that reduces the absolute cost of our dividend, And that's the way we'll over time have the capacity to increase our dividend and still keep that $40 neutrality.

How should I think about the oil and gas industry long-term, 10 years, even beyond 10 years? Is this a growth industry? Is it an industry where, you know, the players are just managing what they have for as long as they can and it's more of a flatter industry? Is it an industry that at some point will hit a peak and go into a slow and controlled decline? How should I think about that as an investor?

I think it will be a growing industry for those who have the strategy that allows them to grow, because I think what's critically important is, for one thing, to get methane emissions under control. That means to target trying to get methane emissions to a net zero in your own operations. So every company should have that goal. The second is to be able to offset your own carbon footprint. Again, we're going to do it for ourselves, but we're also going to do it for others. And so our view is that if you have that scenario, then we could grow production, oil and gas production over time. And I do believe that once we help people understand how this strategy works, I think that what you're hearing from us and what you've heard from us for 2 years, you can go back looking over the past 2 years. This is the same thing we've been saying for 2 years. We strongly believe that our industry should adapt the same strategy that we have. That is to take CO2, put it in oil reservoirs, which creates more oil production, but the incremental oil that it produces will emit less than the CO2 volume that we had to inject to get it. That means the CO2 going in is higher than than what the extra oil coming out will emit when used. And so if you have that strategy as an industry, that would mean that on most onshore oil reservoirs, you would be able to apply this. Offshore is a different deal. It's more difficult. But if you have an onshore reservoir and you have direct air capture, you would be able to do this in a lot of reservoirs around the world.. And the reason it's so important to do that, especially here in the United States, is that it helps you recover more out of the reservoirs. So you're not leaving as much oil left in the ground, which means you could get away with not developing some of the oil that's in real pristine areas. You could stay away from that if we just get more out of the reservoirs we have today. In the United States, that's critically important because right now production from conventional reservoirs is less than 5 million barrels a day. So 7.5 million barrels a day is from shale. And 3 of the 4 shale basins in the United States are starting to plateau and potentially starting to decline. Ultimately, the Permian will too. It's a few years out, but ultimately it will too. So if you look at the United States in say 2045, 2050, our production, if we continue the way we have been, will not be enough to meet the demand in the United States, and we will no longer at that point be energy independent. However, if our strategy is applied across the United States, then the next wave of incremental oil production will come from CO2 enhanced oil recovery, not only in conventional reservoirs, but also in shale reservoirs. Our strategy checks just about every box in that you want to get the most out of reservoirs because in addition to what I just described with respect to how the CO2 behaves and creates incremental oil that'll emit less CO2, you also get to take advantage of these existing infrastructure. You don't have to build new infrastructure, and building new infrastructure would create more carbon footprint. So you can avoid doing that. And so I believe, and those who study our strategy really believe, that this is what the industry needs to do and ultimately I think will do. And I think you'll start hearing changing rhetoric— I shouldn't say rhetoric— messages from other CEOs in our industry who are going to at some point realize this is what we need to do and this is the only way to restore credibility ultimately to our industry. And then we don't have to go down a climate transition path that's so incredibly expensive. It will enable us to be able to afford a climate transition, also helping us to lower carbon in all the areas we operate in the world.

Is there anything I neglected to ask you about your company, about your long-term ambition that you want to add, or you think we've got it covered in terms of a broad overview?

When we talk about our company, we're so excited about where we're headed and about our employees. But I think one thing gets lost, and that is our technical excellence. And if you look at our operations in the field and you go back and you listen to earnings calls from other CEOs, many of them are talking about their wells are not as productive, weren't as productive last year as they were the year before. But for 7 years in a row, we've grown our productivity in the Delaware Basin while others could not. And I think that getting back to the assets are good, but even in comparable settings where others have the same assets that we do, our team— and this is our team, this is not me, this is our team— has been able to go above and beyond in terms of the way they look at the subsurface. And we started about 5 or 6 years ago to revamp our teams so that, back to your point about making sure you get the best players and you put the best players where they can really excel, and then you give them the tools to excel in that position, then they can do amazing things. And our team has developed what we believe to be proprietary processes around subsurface evaluation that has led to frac designs that are far exceeding the deliverability of some of our competition. And I think that when we're, we're so often talking about debt reduction, share repurchases, and all of that's important because that delivers value, we're transferring value to our shareholders and all of that. But the basis and what helps continuing to deliver the most oil that delivers all this cash flow is from these guys who are technically— I use guys generically, who technically are delivering incredible results. And in the subsurface modeling, far exceeds anything I ever thought we would do. You would ask me 5 or 6 years ago, will we be able to model these reservoirs to take them from what used to be a 600-barrel-a-day well to over a 10,000-barrel-a-day well and to be better than those that are offsetting us. I wouldn't have believed it, but, you know, Oxy used to be a company that would go into countries where no other companies would go. We kind of have scratched that now. What we'd rather do is tackle the reservoirs that others either don't want to do or can't get as much out of as we can. And we've done that around the world. We're continuing to do it here. I'm excited about it. I feel bad for our technical teams that that often gets lost in all the discussion about all the other good things that are happening with our company. And again, this wouldn't happen if we didn't have the culture that enabled it to happen. And this culture has been, in a lot of ways, driven by the people and the organization that we have.

Thank you, Vicki, and thank all of you for listening. Meredith, we're going to hear from Chipotle later this week, and then next week we'll play part of a conversation I had with GE CEO Larry Culp. Do I have that right?

You got that right.

That's for when I'll be back. Although when I say be back, I mean, it's not like I'm on vacation. I don't take vacations, right?

We covered that.

You would never. Right. And I should just mention, we did a recent episode on obesity drugs, and we heard from Eli Lilly CEO Dave Ricks. He was also on The Barron's Top CEOs list. Meta Lootsoft is our producer. Subscribe to the podcast on Apple Podcasts, Spotify, or wherever you listen. See you next week.

Data is everywhere. When orchestrated properly, it sings. At Morningstar, we analyze and enrich data, making it actionable and powerful for you. Morningstar, where data speaks.