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Occidental Petroleum (OXY -1.14%)
Q3 2021 Earnings Call
Nov 05, 2021, 1:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Good afternoon, and welcome to the Occidental's third quarter 2021 conference call. [Operator instructions] I would now like to turn the conference over to Jeff Alvarez, vice president of investor relations. Please go ahead.

Jeff Alvarez -- Vice President, Investor Relations

Thank you, Eileen. Good afternoon, everyone, and thank you for participating in Occidental's third quarter 2021 conference call. On the call with us today are Vicki Hollub, president and chief executive officer; and Rob Peterson, senior vice president and chief financial officer. This afternoon, we will refer to slides available on the Investors section of our website.

The presentation includes a cautionary statement on Slide 2 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. 

Vicki Hollub -- President and Chief Executive Officer

Thank you, Jeff, and good afternoon, everyone. Our strong operational and financial performance continued in the third quarter. Consistent with prior quarters this year, we generated a record level of free cash flow before working capital, which we apply toward reducing debt and strengthening our balance sheet. Operationally, our business has excelled driving our robust financial performance.

OxyChem had its strongest quarter in over 30 years in our Permian, Rockies, Gulf of Mexico, and Oman teams, set new operational records and efficiency benchmarks. As was the case last quarter, our cost structure and capital intensity leadership served as catalysts for our strong financial results and provided a solid foundation for free cash flow generation. Our Gulf of Mexico and OxyChem operations were impacted during this quarter by Hurricane Ida. Our primary focus was the safety and well-being of our employees and contractors, and we were relieved to hear that our people remained safe during the storm.

We are working closely with those that were impacted, and I could not have been more pleased with how our teams overcame the challenging events triggered by the storm. The Gulf of Mexico and OxyChem operations that were affected by Ida are back online with no lasting impacts. I'd also like to pass along our best wishes to our coworkers in Oman's capital of Muscat and to all the people of Oman as they recover from the devastation recently caused by Cyclone Shaheen. This morning, I'll cover our third quarter operational performance and divestiture progress, Rob will cover our financial results and balance sheet improvement as well as our fourth quarter guidance.

Our guidance for the fourth quarter and full year includes an increase in production and an improvement to earnings guidance for Midstream and OxyChem. The commodity price environment continued to be supportive in the third quarter as our focus remained on generating free cash flow and maximizing margins. This is the third consecutive quarter that our operational success and capital intensity leadership have produced a record level of free cash flow. In fact, our third quarter free cash flow was the highest it's been since at least the turn of the century.

As you know, that time frame included several periods of significantly higher oil prices. Total production for the quarter reached the high end of our guidance, which is a noteworthy accomplishment considering the extended downtime in the Gulf of Mexico. Hurricane Ida's impact on third quarter production and the costs associated with safely shutting in production, evacuating and then restarting the platforms and ongoing projects resulted in higher-than-expected domestic operating costs for the quarter. Our fourth quarter domestic operating cost guidance reflects normalized conditions and is relatively in line with our previous expectations for the year.

On our last earnings call, we highlighted OxyChem's many strengths and consistent free cash flow generation. OxyChem's third quarter earnings were the strongest since 1990 and are a great example of what the business is capable of delivering. While Hurricane Ida disrupted third quarter operations, the impact to OxyChem's Louisiana-based facilities was temporary. The storm reduced production capacity in the period when market inventories were already fairly tight by historical standards.

OxyChem continued to benefit from supportive PVC and caustic pricing resulting in a stronger-than-anticipated earnings. Our Midstream and marketing business benefited from the timing of export sales during a rising crude price environment and a healthy market for the sulfur produced at Al Hosn. The marketing team was able to capitalize on natural gas price volatility during the quarter by directing gas toward transportation solutions, yielding the high spreads. In summary, our team was once again able to utilize existing contracts and their expertise to maximize margins by delivering product to the markets that needed it the most.

We continue to make notable progress in reducing debt and strengthening our balance sheet. We exited the third quarter with approximately $2.1 billion of unrestricted cash following the repayment of $4.3 billion of debt and the settlement of $750 million of notional interest rate swaps. We are pleased to have delivered such a sizable reduction in debt in a single quarter. In a healthy commodity price environment, we expect to continue reducing debt in future quarters as we delever and take the necessary steps to move toward returning additional capital to shareholders.

Our oil and gas teams continued to demonstrate a consistent drive for efficiency as we never tire of setting new operational records or generating record levels of free cash flow. I continue to be impressed by how our global teams are able to deliver outstanding results. And I want to highlight several of the examples of operational excellence in the third quarter. I'll start in the Permian, where we drilled our first 15,000-foot lateral wells in the Midland Basin and did so with impressive results.

One of the first wells was delivered in less than 10 days from spud to rig release. In the Delaware Basin, year to date, we're drilling 16% faster than we were just a year ago. The efficiency gains that our teams are recording extend well beyond the Permian. Our Rockies teams set a new Oxy daily drilling record in the DJ Basin with over 9,700 feet drilled in 24 hours.

In the Gulf of Mexico, we set a new cycle time drilling record, and our hosting platform achieved a size production in 10 years. In Oman, we set new multiple drilling records and completions efficiency records as our teams continued to leverage new technologies and drilling techniques to improve performance. Another significant milestone reached by our international business was Dolphin, delivering its tenth Tcf of natural gas in the third quarter. The impressive efficiency gains we have highlighted on the last few earnings calls are translating into tangible financial results.

Our innovative approach to drilling and completion techniques, coupled with supply chain optimization, will enable us to deliver higher production than initially planned this year. And I want to point out, we're accomplishing this all while maintaining our commitment to capital discipline. We continuously seek new ways to work with our partners to lower cost in a socially and environmentally responsible way, and we're pleased to have been able to do that in the third quarter. Through our partnership with a leading midstream company, we increased by about 30% the capacity of the water recycling plant that supports our Midland Basin, South Curtis Ranch development.

This expansion has enabled us to recycle and utilize higher volumes of water from the plant. In addition to lowering costs, we have not disposed of any water at the South Curtis Ranch development since August. Across our U.S. onshore assets, our transition to using dual-fuel frac fleets and drilling rigs has saved over 6 million gallons of diesel year to date, lowering cost and reducing emissions.

And Colorado's new permitting process became effective at the beginning of this year, we worked closely with regulators to adapt to the new process and requirements. As members of the communities where we operate, our goal is to serve as a resource and educate stakeholders on Oxy's approach to responsible development. Our inclusive approach has been helpful in securing DJ permits. In September, we were pleased to see the process move forward for Oxy with the approval of additional permits in Weld County.

Our engagement with and support from communities remains strong, as does our commitment to responsible development as we work to secure additional permits. The momentum that our oil and gas business has generated throughout 2021 has helped position us for a strong start in 2022. We recently completed our large-scale divestiture program with the sale of our Ghana assets for $750 million. As many of you know, we have been working closely with our partners in Ghana to complete this divestiture and have successfully closed the transactions with both buyers.

For the Ghana divestiture, we have completed our goal of divesting $2 billion to $3 billion post-Colombia, marking the end of our large-scale ongoing divestiture program. We have now divested approximately $10 billion of assets since August of 2019, and including the debt that was repaid in the third quarter, we have repaid approximately $14 billion of debt. As we maintain our focus on shareholder value, we'll continue to seek opportunities to optimize our portfolio. We will continue to complete acreage trades or bolt-on acquisitions if they create value for our shareholders.

I'll now hand the call over to Rob, who will walk you through our financial results for the third quarter and guidance for the fourth quarter. 

Rob Peterson -- Senior Vice President and Chief Financial Officer

Thank you, Vicki. In the third quarter, we generated a record level of free cash flow as commodity prices remained healthy and our businesses performed well. We exited the third quarter with approximately $2.1 billion of unrestricted cash on the balance sheet after repaying $4.3 billion of debt in the quarter. Through September 30, we have repaid $4.5 billion of debt and retired $750 million of notional interest rate swaps.

We estimate this will reduce interest and financing costs by $170 million per year going forward. Our consistently strong operational results, in combination with current commodity price environment, are driving improved profitability on top of our already robust free cash flow generation. In the third quarter, we announced an adjusted profit of $0.87 and a reported profit of $0.65 per diluted share, following on a return to profitability on an adjusted basis in the second quarter. Similar to previous quarters this year, our reported results were less than our adjusted results primarily due to the mark-to-market impact of derivatives.

As commodity prices improved throughout the third quarter, we made payments of $14.2 million on the remaining oil hedge position and $24.1 million under our gas hedges. We recognize that shareholders appreciate our leveraged oil prices and the recent uplift in natural gas prices. Our current oil and gas hedges will expire by the end of this year, and we have not added any new hedges for future periods. As Vicki mentioned, the sale of our Ghana asset marks the completion of our large-scale divestiture program.

These assets were classified as discontinued operations around financial statements, so there will be no impact on ongoing production. We will apply the cash from this divestiture and any cash to generate from future portfolio optimization toward our cash flow priorities, which are currently focused on reducing debt. We have raised our full year production guidance to 1.155 million BOE per day for 2021, while our full year capital guidance of $2.9 billion remains unchanged. Last quarter, we raised our full year production guidance shortly before Hurricane Ida temporarily disrupted our Gulf of Mexico production.

Even taking into account the impact of this sizable storm, we met the high end of our companywide production guidance for the third quarter. Our fourth quarter capital spend is expected to be higher than prior quarter this year primarily due to the timing of maintenance activities in all three of our business segments. In oil and gas, for example, a portion of the capital spending in the Gulf of Mexico was moved from the third to the fourth quarter due to Hurricane Ida, and we plan to accelerate the start of two rigs in the Permian, which I'll touch on shortly. Companywide fourth quarter production is expected to be 1.14 million BOE per day, which represents a 5,000 BOE per day increase from the guidance provided on our last call.

Our fourth quarter guidance, which is slightly lower than our third quarter results, takes into account production sharing contract price sensitivities, planned maintenance, and our activity schedules. We expect to exit 2021 at approximately the same average quarter production as we exit 2020 with. We have updated our activity slide to include two additional Permian rigs that were originally scheduled to start early next year and will now begin operating in the fourth quarter in the Texas Delaware and New Mexico. Similar to the activity change we announced last quarter, this adjustment will be fully funded through cost savings and optimization of capital projects gained through efficiency improvements and will not increase our 2021 capital budget.

Texas Delaware and New Mexico are two of our highest-return assets, and introducing activity in the fourth quarter will place us in a stronger position for 2022. We expect that the market dynamics, which drove Midstream and marketing performance in the third quarter, will continue in the fourth quarter. We have increased forward guidance to reflect improved differentials benefiting the gas marketing business and robust sulfur pricing at Al Hosn. We have increased earnings guidance for OxyChem for the third time this year, reflecting year-to-date performance and continued strong product demand.

Not only do we expect 2021 to be a record year for OxyChem, we also anticipate the fourth quarter will be even stronger than the record third quarter. We believe that the market recognizes and appreciates the value being delivered to shareholders through debt reduction and balance sheet improvement. As we work to repay additional debt, we expect that shareholders will continue to benefit in several key ways. First, we expect that the additional debt reduction will translate into share price appreciation.

We acknowledge that healthy commodity prices have played a role in the improvement of Oxy's enterprise value over the last 18 months. Assuming the enterprise value our company remains stable or improves, equity will become a larger portion of enterprise value over time as debt is reduced. The interest and financing costs saved on a go-forward basis lowers our cash flow breakeven. We expected a lower cash flow breakeven will result in additional discretionary cash being available to allocate toward our future cash flow priorities, including returning capital to shareholders.

As we stated previously, we want to ensure that returning additional capital to shareholders, including any increase in the dividend, is sustainable and ratable throughout the cycle. Reducing the amount of cash committed to interest payments today places us in a stronger position for the sustainable return of capital in the future. Finally, lowering fixed costs in the form of interest or interest rate swap payments improves our flexible and optionalities at any point in the commodity cycle. Our balance sheet improvement efforts have placed us with a clear runway for the next few years, and we are taking a thoughtful approach to repaying additional debt in a manner that is opportunistic for Oxy.

Executing additional tenders or exercising attractive make-whole provisions are just two of the solutions we are considering. We may also choose to retire the remaining interest rate swaps, which have an uncollateralized value of approximately $400 million and could be another opportunity to improve cash flow by approximately $45 million per year at the current interest rate curve. As we advance our cash flow priorities, we expect Oxy's financial position to strengthen, aided by our deleveraging efforts and our strong liquidity position. As we near the end of 2021, we are preparing for the year ahead with the underlying focus on safe, responsible operations and financial discipline, which we believe will create value for our shareholders.

I will now turn the call back over to Vicki. 

Vicki Hollub -- President and Chief Executive Officer

Thank you, Rob. We understand that there's a high level of interest in our 2022 plan, which we'll announce in our next call. But now we'd be happy to take your calls for this segment of the call.

Questions & Answers:


Operator

[Operator instructions] Our first question today comes from Jeanine Wai with Barclays.

Jeanine Wai -- Barclays -- Analyst

Hi, good morning, good afternoon, everyone. Thanks for taking our questions. Our first question is perhaps on the balance sheet and growth. When do you see Oxy getting to the net debt of about $25 billion for that marker? Depending on oil prices, our model suggests you can achieve that by about year end.

And if that's the case, is it just a matter of waiting for the macro to give you the all-clear sign in order to begin layering some growth capital?

Vicki Hollub -- President and Chief Executive Officer

Certainly, we are achieving a line of sight toward getting to that net debt target of $25 billion. So we're going to get there sooner than we expected. But in terms of what we would do with the cash flow after that, we'll follow our commitment to our cash flow priorities, and the next in line would be to start to increase our fixed dividend. So that would be in terms of orders of priority, our next target.

We really don't feel like we need to provide growth at this time from the standpoint of where we are today with respect to our cash flow generating capability. So future growth for us really is -- would be in support of growing a dividend, not growth for growth's sake.

Rob Peterson -- Senior Vice President and Chief Financial Officer

Yeah. And Jeanine, I'll add to Vicki's comments on that. Just as we get to that, we've discussed feathering in the dividend at $25 billion. We're not going to stop our debt reduction at that point.

We're continuing to put cash flow into our debt reduction priorities beyond our other top priority of maintenance capital.

Jeanine Wai -- Barclays -- Analyst

OK. And then maybe we can pivot to a different kind of growth. The role of carbon capture, it's going to be absolutely tremendous in the energy transition. And Oxy clearly has core competency in this area.

And Vicki, in the past, I think you've sized the potential of Oxy's carbon capture business as rivaling that maybe of your other businesses over time. So if you have any comments or update on that, that would be great. And if overall, you can just discuss your updated view on Oxy's future as a carbon management company?

Vicki Hollub -- President and Chief Executive Officer

We still believe and are moving toward becoming a carbon management company. We think that's going to be needed for the energy transition. And we're actually filling a gap with what we're doing, as you know, with respect to what others are doing. Every -- there's a lot that really needs to happen in this energy transition for us to be successful to cap global warming at 1.5 degrees.

So there are some companies in the oil and gas industry that are moving more toward renewables, and that's very much needed. And there's -- there are others that are working very hard to mitigate all of their emissions from current operations. We're working on both of those but not the renewables. We're working on reducing our current emissions from ongoing operations but we're also, as you know, taking advantage of the core competence we have with CO2 and the handling of CO2 will enhance oil recovery.

So we believe that that's a gap that nobody else is filling. And the reason that gap is necessary is for several reasons. First of all, there has to be CO2 removed from the atmosphere. There's nobody in the world that disputes that.

So direct air capture is going to be critical for that to happen. So with direct air capture, not only can we remove CO2 from the atmosphere, but also that helps us to develop and produce oil that's either net-zero or net-negative carbon. So that enables us to provide the hard to decarbonize industry, such as aviation or maritime with fuels that are net-zero carbon. So there are two reasons to build direct air capture, first of all, for the removal from the atmosphere, the provision for providing those net-zero carbon fuels.

And the things that makes it very versatile is you can build it anywhere. So we think that because of the magnitude of that impact around the world and the need for thousands of these to be built, it provides us the opportunity to be a big part of that and to actually be a leader in developing the technology. So we think we will transition, the transition will take some time. But over the next 10 to 15 years, I think we'll make a lot of progress toward becoming net carbon management company and a go-to company for those that need the CO2 offsets. 

Operator

Our next question comes from Doug Leggate with Bank of America.

Doug Leggate -- Bank of America Merrill Lynch -- Analyst

Thanks. Good afternoon. I guess it is now. And welcome to the end of earnings week, Vicki, thanks for closing us out, I guess.

I've got a couple of questions, specifically around the return of cash comments. And if you don't -- if you can indulge me for a minute, I'd like to kind of lay out my thinking here. Your share price is lagging pretty badly today despite extraordinary free cash flow yield in our numbers and a clear line of sight to deleveraging. So there's something the market is not acknowledging, obviously.

And our feedback, I guess, is that you're the only company not giving meaningful cash returns back to investors. So my question is, how do you think about the right level or the appropriate mechanism to return cash when your stock has such a high free cash flow yield. Let's assume that persists. That's my first question.

And my second question is Pioneer and NOG, one has practically no net debt, the other is targeting no net debt. Where do you think the right level of debt is once you surpass your $25 billion target? Where do you want it to be? So first question, the mechanism for cash returns. Second question, the long-term mid-cycle appropriate level of your balance sheet. 

Vicki Hollub -- President and Chief Executive Officer

Well, as you know, to get to around $25 billion net debt was our target. And as Rob mentioned earlier, now that target is in line of sight and, again, much sooner than we expected. So once we have actually achieved that, then we'll begin to layer in some of the other things that we can do with our cash, most notably and primarily would be to grow a fixed dividend. And then beyond that, again, I don't see capital growth until we've gotten to a point where we need to make that happen.

I think we've talked about it over the last couple of years that we feel like it's very important to keep our breakeven around $40. So as we establish a fixed dividend and move forward, we would grow our cash flow to match the growth in the dividend rate. So that it will happen, and it will happen over time. With respect to other considerations for the use of cash, it will really depend on the circumstances that we're in when we actually have reestablished or actually grown the existing fixed dividend that we have. 

Rob Peterson -- Senior Vice President and Chief Financial Officer

Doug, I guess a piece I'd add to that is what we've done is consistent of what we've been messaging ever since we got into this deleveraging process. We indicated to market, as Vicki said, that we were going to get into that net $25 billion debt range before we considered raising -- increasing value return to shareholders. And so we do have line of sight. It's obviously here a lot closer than we anticipated it would be because of the combination of all the work we did to strip out cash, but certainly commodity prices are much stronger than we anticipated.

And if it continues that way, it's not that far away that we'll reach that target. But we aren't there yet, and that's the reason why we're not increasing value returned to shareholders because we're sticking to our messaging and the plan we've set out in front of our shareholders. And so for us to prematurely deviate from that plan, bringing inconsistency to that message, we certainly don't want to bring to the marketplace. 

Doug Leggate -- Bank of America Merrill Lynch -- Analyst

OK. This is a quick follow-up, and I'll jump off. I'm looking at the Apache example. We've come out basically given a framework where they are saying essentially, like you guys, the free cash flow yield is extraordinary.

And so we're going to buy back a bunch of stock. That's really what I'm driving out here. Your capacity for potential buybacks is pretty material. Can you offer any kind of thoughts as to why that might not be the case and what the limitations are around the preference shares as it relates to whether share buybacks would be practical.

I'll leave it there.

Vicki Hollub -- President and Chief Executive Officer

I would say, Doug, we're not at the net debt of $25 billion yet, and we want to see what the macro conditions are and what's happening with our stock at that point. So since we're not there, it's really hard to provide any direction right now on what we would do. The one thing we can tell you is that we will follow our cash flow priorities, which is the fixed dividend first, before we would do and consider anything else. The share repurchases are a longer-term possibility for us but not the nearest term.

The nearest term would be the growing the dividend.

Operator

Our next question comes from Neil Mehta with Goldman Sachs.

Neil Mehta -- Goldman Sachs -- Analyst

Good afternoon, team. Vicki, the first question is just around sustaining capital, recognizing you're going to provide a little bit more clarity on '22 here in the coming months. But can you just talk about how you see that trending as we move into '22? And what are the tools that you have in place to mitigate the natural cost inflation that should arise as oil prices stay at elevated levels?

Vicki Hollub -- President and Chief Executive Officer

I'll take the second one first. Our teams have worked hard to try to establish the right kind of contracts and business situations with service providers and material providers to mitigate inflation. We don't think necessarily we would mitigate all of it. We're just not sure right now what inflation will be.

But we know that our efficiencies and our established relationships and business situations will help to mitigate some of it. We're hoping to continue also to further improve our efficiency so that we can mitigate more than what we would see today. But that's -- there's a lot of work going on around that and especially with respect to how we manage our supply chain and the strength of our position not only in the U.S. but around the world.

So we're leveraging that as well. With respect to the sustainability capital, I will say that inflation, whatever amount we can't mitigate would be certainly on top of what we have today. And the only thing that I could really point to in terms of what we've said before about this is, in 2022, we won't have as many DUCs to complete as we did in 2021. So there's a difference there.

We completed about 100 DUCs this year. In addition to that, we're going to have some capital investment that we'll need to make in two other areas, both of which we mentioned before. Al Hosn, we'll begin the expansion of that in 2022. So we'll have that cost.

We'll also have some incremental cost in the Gulf of Mexico. So it will be higher than the $300 million we had this year because the Gulf is a little bit lumpy in terms of capital investments. So we'll have those things to consider when we are putting together our final plan for 2022. 

Neil Mehta -- Goldman Sachs -- Analyst

That's helpful. And just the follow-up is the composition of the portfolio. As you evaluate the different upstream buckets, the Permian, Rockies, Gulf of Mexico, Middle East, how do you see that evolving over time? Is there an area where you see is going to represent a disproportionate amount of the incremental capital beyond what you've already laid out?

Vicki Hollub -- President and Chief Executive Officer

The Permian will always see a bigger portion of the growth capital or even the maintenance capital than anywhere else. As we're starting to -- are continuing to offset declines, there may be some of our areas that do decline. That would be made up usually by the Permian Basin. But all of our areas play a role in what we're doing.

In fact, the -- for example, the Middle East, that's a -- that area for us is very helpful to continue development there because the contracts provide us some protection in a down market the PSCs do. So Oman is important to us from that respect. And we do have a low cost of development there, and we get our cash back fairly quickly. So that's the good part of Oman.

It delivers good returns. And Al Hosn is a low decline asset for us. So it plays that role. We want to continue building on our low-decline assets, but that will be -- a lot of the growth for that will be going back to EOR at some point to start building there as we get this anthropogenic CO2.

So EOR in the Permian will play a bigger role in the future. But low decline assets are important to us, but the bulk of our dollars beyond sustainability ultimately would go to the Permian. 

Operator

Our next question comes from Raphael Dubois with Societe Generale.

Raphael Dubois -- Societe Generale -- Analyst

Good afternoon and thank you for taking my questions. The first one is a follow-up on the shareholder return. Can you please remind us why you think it is more appropriate to start by increasing the dividend instead of starting shareholder return by a large buyback program considering you -- I think we all agree that you are somewhat undervalued? So wouldn't it make more sense to start by the last buyback program? Thank you very much.

Vicki Hollub -- President and Chief Executive Officer

The reality is that there are multiple things that we could do with our cash. We believe that restoring the dividend as the -- and not restoring it to the prior level but continuing to increase it over time is a better and more predictable value creator for our shareholders. We have always been a dividend-paying company. It's important for us to get back to that and make it a more -- get it to a level where it's more meaningful to our shareholders, but we always want to evaluate buybacks.

And so I'm not saying that we would never do it or never consider it. We're just not at the point now where we have all the data to be able to make that assessment. For example, today, we're not at $25 billion net debt. Now when we get there, we will take a look at all the things that are available to us to do.

But starting to grow the dividend we have today is a high priority because of the fact that we did have to reduce it significantly, we want to start restoring it. But any time we look at cash, we would have cash beyond that available. And then we would just do the value calculations to determine whether it makes sense given the other opportunities for us to buy back shares. It's always a consideration.

Raphael Dubois -- Societe Generale -- Analyst

Great. Thank you very much. One extra question on OxyChem, the results in Q3 were excellent, and your guidance in Q4 is nothing short of amazing considering there is always seasonality in this business. And usually, Q4 is not as strong as Q3.

So can you maybe tell us a bit more about the market dynamics in terms of supply and demand? When do you think we should expect some sort of normalization of your chemical business?

Rob Peterson -- Senior Vice President and Chief Financial Officer

Yes. Sure, happy to discuss it, Raphaël. So I would say what we see today in the chemical business is still very strong conditions in our vinyl business and steady improvements in the caustic business. And you're correct.

Typically, we're normally entering into a seasonally slower period of time. But we're just not seeing that thus far because if you step back and look at the year, the industry, which already was pretty tight on supply to begin the year, lost almost two months of production because of the freeze we had in the Gulf states in February and then the impact of Ida that we had in the third quarter. So the combination of those two has kept coupled with the demand being as strong as of all our products has kept the supply demand balance much tighter than anticipated or typically historically at that time of the year. Those are the two main drivers.

On Slide 31 of the deck, we included. Obviously, the main profit drivers for the business and the earnings are going to come from both the PVC business and the caustic soda business. The operating rates year to date are over 80% in the PVC business despite the impacts of the two storms and the lost months of production. And domestic demand is up over 13% versus this time year to date last year.

And that's even when we started picking up the demand post COVID last year. The other thing I would say is that the construction sector, much like it is with other building products remains very strong with inventory levels still very low. And you can tell that inventories are very tight because exports are really soft still compared to historical levels. And what you have is with exports being down over one-third versus prior year, even prior being a COVID year, that's because the discretionary resin is just not available.

And so what you only exported PVC resin is really destined for long-term contractual sales from U.S.-based producers that have relationships overseas. And you're not seeing that spot resin flow into the market, which means people are still just trying to get enough resin for the domestic market, which is going to keep prices elevated and margins elevated through that period of time. And so that's kind of atypical for this time of the year, but we do see it continuing through the balance of the year. Does it continue all into the winter? Construction necessarily has to slow during the winter, but we don't have a flavor for is how much are people going to want to restock inventories to be ready for what looks like another strong spring construction, which will return pretty early in the year next year.

On the chlor-alkali side, I'd say chlorine is extremely tight as producers are still trying to seek the highest value for the outlet. This is where OxyChem's vast portfolio of derivatives gives us so much strength versus many others because we're not just making PVC, we're making all three parts of the Vinyl's chain. We're also selling into a domestic market that gives us exposure to the polyurethane markets, the TiO2 markets, etc., and water -- beyond just water treatment and others that traditionally think of and our own chloromethanes business. And so all those we're seeing strong demand and supply/demand balances are very tight.

And we will see more than likely in the backside of another difficult operating year in the industry a continued effort to rebuild inventories, not only in supply chain, but there's also -- we're seeing a lot of pent-up demand still coming back as things somewhat return to normal on the backside of the pandemic. Particularly, caustic soda demand globally will continue to improve as manufacturing activity is restored in both South America and Asia, and Europe. And so what we're seeing on the caustic side is, again, steady improvements where we're not seeing record prices on caustic soda yet like we are on PVC, but some of the prices in Asia have risen to levels that haven't been seen before. And so both businesses are very strong right now.

We will see a seasonal slowdown in caustic domestically because you're no longer able to transport caustic up the Mississippi River for the winter, but we don't see it really impacting the industry enough just because inventories are so tight. And so I still think January, February will continue to be slower months for the industry but it's going to be such a narrow period with the tight inventories. We'll probably hit the ground running pretty quick in this spring again. 

Operator

Our next question comes from Neal Dingmann with Truist Securities.

Neal Dingmann -- Truist Securities -- Analyst

I guess when you -- thanks for the time. Vicki, can you just share maybe just broadly how you're currently thinking about sort of just on the strategy growth versus capital discipline today in light of -- I know Rob's just had some minor comments on just adding some Permian rigs, but just maybe if you could share your thoughts on where you sit with that today.

Vicki Hollub -- President and Chief Executive Officer

Yes. I would say that, for us, growth -- production growth is not a priority for us right now. because if you look at our cash flow generating capabilities and with our strategy around that going forward, is to basically when we get to our net debt target of $25 billion, that's not where we'll end. As Rob mentioned, we want to continue working to reduce our debt beyond that.

But the need to do so at a bigger level is just not there. We get to the $25 billion. We'll share more information as we get there about what our next target would be with respect to debt reduction. And then again, it's to start growing our dividend again.

And the only point at which we would really need to start growing our production would be down the road, where we want to continue growing the dividend. We don't need additional growth from production right now to be able to increase the dividend over the next couple of years because, again, with what we expect the macro to be and the level of increase in our dividend, we believe that we can do that without any production growth over the next at least couple of years. So it would be continuing to maintain our operations, our production level. And then these occasional projects that are beyond the sustainability capital, like the GoM, Al Hosn could be those over the next couple of years.

But other than that, it's then going to the dividend and further debt reduction. 

Neal Dingmann -- Truist Securities -- Analyst

And I assume your low decline helps with all that.

Vicki Hollub -- President and Chief Executive Officer

Pardon me? Yes. And that's why it's important to have these low decline projects that enables us to execute on this strategy.

Neal Dingmann -- Truist Securities -- Analyst

Absolutely. And then one last one, if I could. You've mentioned, I think maybe even on the last call or maybe the prior in the past about maybe having hopes to get more than just a Q45 tax credit can maybe help you and others potentially expedite some of your plans in that low carbon area. I'm just wondering, is this still something you think is needed to help you and others expedite clients with low carbon and if you did end up expediting this, would that come at the expense of cash going toward the upstream business?

Vicki Hollub -- President and Chief Executive Officer

I would say that the world absolutely has to have acceleration of direct care capture, not just our DAC facilities, the carbon capture and retrofitting industry. It has to happen. So the only way that it can happen and at the pace that's needed for the world is for the U.S. to get on board with supporting it, and the U.S.

has the strength and the capability to do that. And the best way to do it is through 45Q and direct pay 45Q. So you're right on that, that's incredibly important to us. Otherwise, the U.S.

will not achieve the targets that we've set with even the prior Paris accord, much less what's happening in Glasgow right now. So 45Q has to happen and really needs to be direct pay. Otherwise, we're going to struggle to be successful. But with respect to what we're doing, there is going to be a price for carbon because there's a lot of commitment from corporations now to get to net neutral.

Everybody, I think, realizes at some point that if we don't achieve our goals through the incentives like 45Q, and there's going to have to be some price mechanism on carbon to make it happen. And so what we're seeing is a lot of corporations are trying to get ahead of that. A lot of corporations are starting to fill. Just see that there's a social license to operate in that -- to have that, there has -- they have to proactively start seeking CO2 credit offsets to become net neutral.

United has been one, as you know, that we've announced that wants to do that, and they're proactively committing to dollars to the building of the direct air capture plus, the purchase of the oil that would be the net-zero oil. Other corporations are calling us. We're getting a lot of incoming interest in the direct air capture because of that. So I do believe that there's going to be sufficient growth and commitment to make what we're doing here in the next -- in the initial phases work.

But beyond that, again, what it's going to require is a much more acceleration than that. 

Operator

Our next question comes from Phil Gresh with J.P. Morgan.

Phil Gresh -- J.P. Morgan -- Analyst

Hey, good afternoon. One follow-up question just around the dividend situation. You talked about wanting to have a $40 WTI breakeven. And I just wanted to get some clarification of how you would calculate where we are today.

And then it sounds like you would want to grow the dividend multiple years up to the $40 WTI breakeven as opposed to call it once. So just a clarification around that, please.

Vicki Hollub -- President and Chief Executive Officer

Yeah. The clarification is, right now, we're in the probably upper 30s on a breakeven, but that's not -- that's assuming that's without the preferred. So we're really close to where we want to be and where we want to stay. So as we grow -- as we restore the dividend at a moderate level, we'll do it in a way that enables us to grow it over time but probably not at the pace that we've done in the past.

So it will be a moderate growth, but it will be a material dividend as we've always tried to maintain.

Phil Gresh -- J.P. Morgan -- Analyst

OK. So are you willing to go above the $40 WTI breakeven for the dividend? Or you want to keep the dividend within that, just to be clear?

Vicki Hollub -- President and Chief Executive Officer

Ultimately, we want to keep it within that. Now there's going to be some discussion and some evaluation of how do we start out that dividend growth, but we'll determine that when we get to the $25 billion net debt. We'll see, again, what will be supported by mid-cycle, what would be supported by a $40 breakeven.

Phil Gresh -- J.P. Morgan -- Analyst

Got it. And then just one follow-up for Rob. Do you have a sense that you can share with us around U.S. cash taxes, what your situation is there when you become a full U.S.

cash taxpayer?

Rob Peterson -- Senior Vice President and Chief Financial Officer

Yes. I think, Bill, from the standpoint, certainly, of this year where you don't anticipate any material cash taxes. Based on our viewpoint of 2022, we don't see that happening again also. We see ourselves, depending upon certainly the macro conditions, becoming a U.S.

cash taxpayer in a meaningful way in 2023.

Operator

Our next question comes from Paul Cheng with Scotiabank.

Paul Cheng -- Scotiabank-- Analyst

Hey, good afternoon, guys. Vicki, two questions, please. Shell had just sold their Permian asset to Conoco. Just want to see if you see that as a maybe additional opportunity for you guys to work with different partners and seeing either asset swap or other opportunity associated with that.

Or do you think that this is just business as usual given that you are the operator and that doesn't really change anything. That's the first question. On the second question, I think the focus has been everyone knows, nothing new about when you're going to increase your capex in the oil and gas sector, and you made it very clear not in any time soon. But how about in the chemical? And in the chemical, you guys have a very unique position.

You are not in the typical olefin chain. And that, with the housing sector, has been very strong, and that really has been doing quite well or much better than before. So do you have any intention to expand and grow that business? And that may also be good in terms of energy transition. So I want to see that what is your overview in terms of from a growth prospect standpoint for that. 

Vicki Hollub -- President and Chief Executive Officer

OK. I'll start with the Shell assets. And we're always looking for opportunities to core up while we operate. And so asset swaps have been a big part of helping us to increase our working interest in the areas that we already operate over the last few years, and that's been very successful.

And we will continue to try to do that. And we'll be working with Conoco and any other partners that are in our current operations and or nearby what we have to make swaps that work because those are always better for each company. Those are win-win scenarios. So those are something that's really important for us to do.

We'll continue that. The second part of the question is OxyChem...

Paul Cheng -- Scotiabank-- Analyst

Actually, before that, have you already reached out or that Conoco already reached out and talked to you between you and mine on that? Or that this is something that you guys are going to do?

Vicki Hollub -- President and Chief Executive Officer

Well, we had been in conversation with Shell for a long time, and we certainly have had conversations. Our teams worked with Conoco on other things. And so we have had contact about potential swaps. We think it would be best for both of us to be open to that and pursue that.

So just as we have done with Shell, we're doing the same with Conoco. So with respect to the OxyChem business, Rob knows this better than I do, but OxyChem has been very opportunistic in the past to ensure that they mitigated market risk by working out with partners opportunities to build and to grow but, again, without taking market risk. You have more to add?

Rob Peterson -- Senior Vice President and Chief Financial Officer

Yes. I would just add to that, yes, Paul, that if you look back to the history of projects, whether it was the chlor-alkali plant adjacent to the CO2 plant, or the cracker that we built at Ingleside the venture together or any of the relationships that we have, what we've been able to do is build long-term partnerships with our downstream customers that gives us sort of a pseudo integration into markets. Otherwise, we don't want to build into like CIO2 or polyurethanes or etc. and partner with the leaders in those industries.

And so we're always evaluating that. But to Vicki's point, it's going to be something we're going to structure around where we're guaranteed a return on and of the capital necessary to continue to fund the cash from that toward the rest of -- the remainder of the business as a cash flow source. And so I think we're constantly evaluating that. Like anything else, there's probably a dozen projects that end up on the drawing board to get one good one that works out.

But you're right that, there's a lot of growth in the chlorovinyl sector as a building product, and the advantage the United States has versus the rest of the world, the feedstocks is pretty significant. So we'll continue to evaluate those. And if something comes together, we'll be happy to share it with the market. 

Vicki Hollub -- President and Chief Executive Officer

And you're right, Paul, that it is really an important part of our transition story. OxyChem will be a key player in that, and certainly, we're open to opportunities from any of our existing partners and new partners to help with that.

Paul Cheng -- Scotiabank-- Analyst

They can. And Rob do you guys foresee growth capital into the OxyChem over the next one or two years or a little bit longer term?

Rob Peterson -- Senior Vice President and Chief Financial Officer

Yes. It's hard to say, Paul. I mean, I think it depends on timing of investments and what the opportunities are out there. And so we're constantly evaluating that and would integrate it in our portfolio if it made sense.

But I would be purely speculating to give timing on when we might make the next significant investment in OxyChem.

Operator

Our final question today comes from Leo Mariani with KeyBanc.

Leo Mariani -- KeyBanc Capital Markets -- Analyst

Hey, guys. Wanted to follow up a little bit on one of the prepared comments that you guys made. I think you commented there could be some bolt-ons in the future. Just wanted to get a sense in general of what Oxy's appetite might be for doing those type of things, just given that you've had a pretty prolific asset sale program for the last couple of years.

Vicki Hollub -- President and Chief Executive Officer

Yes. We would only do it if it was very strategic and something that fills the gap that we currently have. And there are situations where picking up some acreage would enable us to drill longer laterals. There are situations where we have the opportunity to increase working interest in something that we already own.

And so those are situations that when they do come along, you almost need to do it. Otherwise, you may not get the chance to do it again.

Leo Mariani -- KeyBanc Capital Markets -- Analyst

OK. That makes sense. And I just also wanted to ask you guys, is there any update that you might have on the funding situation for your direct air capture projects? I think you guys were seeking kind of external off-balance-sheet financing for that.

Vicki Hollub -- President and Chief Executive Officer

We don't have an update currently, but our plan is still to hold an LCD day, a rivet in the first quarter of next year. By then, a lot of what we're working on right now, we hope to be able to talk about publicly.

Leo Mariani -- KeyBanc Capital Markets -- Analyst

OK. Thank you.

Vicki Hollub -- President and Chief Executive Officer

Thank you.

Operator

This concludes our question-and-answer session. I'd like to turn the call back over to Vicki Hollub for any closing remarks.

Vicki Hollub -- President and Chief Executive Officer

Thank you all for your questions and for joining our call. Have a great day.

Operator

[Operator signoff]

Duration: 55 minutes

Call participants:

Jeff Alvarez -- Vice President, Investor Relations

Vicki Hollub -- President and Chief Executive Officer

Rob Peterson -- Senior Vice President and Chief Financial Officer

Jeanine Wai -- Barclays -- Analyst

Doug Leggate -- Bank of America Merrill Lynch -- Analyst

Neil Mehta -- Goldman Sachs -- Analyst

Raphael Dubois -- Societe Generale -- Analyst

Neal Dingmann -- Truist Securities -- Analyst

Phil Gresh -- J.P. Morgan -- Analyst

Paul Cheng -- Scotiabank-- Analyst

Leo Mariani -- KeyBanc Capital Markets -- Analyst

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