Q3 2019 Earnings Call
Facilitator today welcome to Chevron's third quarter 2019 earnings conference call. At this time, all participants are in listen only mode. After the speaker's remarks, there will be question and answer session and instructions will be given at that time, if anyone should require assistance. During the conference call. Please press Star then zero on your Touchtone.
As a reminder, this conference call is being recorded.
Well now turn the conference call over to the General manager of Investor Relations Chevron Corporation Mr. Wayne for June . Please go ahead.
Thank you Jonathan.
Welcome to Chevron's third quarter earnings call and webcast on the call with me today our.
Hey, Johnson GDP of upstream and peer forever CFO .
Well refer to the slides that are available on chevron's website.
Before we get started please be reminded that this presentation contains estimates projections and other forward looking statements.
Please review the cautionary statement on slide two.
Turning to slide three and Pierre.
Helane we.
We had another quarter of strong operational and financial performance.
First an overview of our financial results.
Earnings for $2.6 billion or $1.36 per share.
The quarter's results included.
A 430 million special item tax accrual associated with a cash repatriation in the fourth quarter.
Foreign exchange gains for the quarter were $74 million.
Excluding special items, and FX gains earnings were $2.9 billion or.
Dollar 55 per share.
A reconciliation of non-GAAP measures can be found in the appendix to this presentation.
Cash flow from operations was $7.8 billion.
We also maintained a strong balance sheet with a low debt ratio.
Importantly, our.
Strong cash flow allowed us to continue to deliver significant cash to our shareholders.
During the quarter, we paid over $2 billion in dividends.
And repurchased $1.25 billion a shares.
Inline with our annual share repurchase run rate guidance of $5 billion.
Year to date.
We've returned approximately 9.5 billion in dividends and share repurchases.
Year to date organic Capex was $14.5 billion.
Slightly below our ratable budget, a 15 billion.
Total capex, which includes.
Transactions that are unbudgeted totaled $15 billion.
We are maintaining a firm commitment to capital discipline to improve returns on capital.
Turning to slide four.
Third quarter cash flow was strong.
Down from the prior quarter.
Due to lower Brent prices in the absence of the termination fee received from Anadarko.
On a year to date basis cash flow from operations of nearly $22 billion.
Funded all four of our financial priorities.
But nearly $12 billion in free cash flow.
We currently have an annualized yield about 7%.
Highlighting our ability to generate strong free cash flow in a lower oil price environment.
Through three quarters, the company's cash flow dividend breakeven price.
Excluding working capital is in the low.
No fifties Brent.
Asset sales proceeds add to our positive cash flow.
And further lower the breakeven while high grading our portfolio.
Since the beginning of 2018.
Asset sale proceeds have totaled $3 billion.
And by year end.
After the expected closing of the sale of our UK North Sea assets.
We will be near the low end of our five to 10 billion dollar guidance range with one year to go.
Turning to slide five.
Third quarter 2019 earnings of 2.6 below $2.6 billion.
Decreased about 1.5 billion versus prior year.
Excluding special items NFX.
Upstream earnings decline, primarily due to lower crude and natural gas prices, partially offset by higher liftings.
Downstream earnings also were down primarily due to higher.
In around and maintenance costs.
Lower volumes driven by the Southern Africa divestment.
Lower chemicals margins.
The variance in the other segment, primarily reflects lower corporate charges versus last year.
Turning to slide six.
Compared to the second.
Order.
Third quarter earnings decreased by about $1.7 billion.
Excluding special items NFX.
Upstream results were lower primarily due to a 10% decrease in Brent prices since the second quarter.
Downstream earnings excluding FX.
Due to stronger refining and marketing margins.
Partly offset by lower chemical margins and the impacts of planned turnarounds.
The variance in the other segment, primarily reflects lower corporate charges and tax items.
Ill now pass it to Jay.
Thanks Peter.
On slide seven.
Third quarter oil equivalent production increased 3% compared with year ago with higher shale and tight production in the Permian as well as higher production from major capital projects fell in the ramp ups, a big foot and he Brian .
This growth was partly offset by unplanned downtime at Hibernia asset sales and.
The impact of Hurricane buried in the Gulf of Mexico.
Turning to slide eight.
Third quarter production was strong at more than 3 million barrels a day for the fourth consecutive quarter. Despite the impact of planned turnarounds and asset sales.
Year to date production, excluding asset sales is about 5% higher than.
28 team, which is consistent with our earlier guidance of 4% to 7% as shown by the Middle bar.
Looking forward to the fourth quarter, we expect production growth to be primarily driven by our shale and tight assets as well as the continued ramp up of Hebron.
Turning to slide nine I'll provide an update on the.
Oh project.
In the third quarter, we completed a detailed cost and schedule review of the future growth and wellhead pressure management project in Kazakhstan.
As a result, the cost estimate for the project has been updated to $45.2 billion with an additional 1.3 billion in.
Engines.
The expected startup of GP has shifted to mid 2023 and will now follow W.P. MP.
It's remains on schedule for start up in late 2022.
The updated estimate has been submitted by TCOS for shareholder approval.
Overall.
The increase in total cost, including contingency is about 25%.
The waterfall shows the key drivers of the updated estimate.
As discussed previously higher engineering costs and engineering impact on fabrication consumed about two thirds of the original contingency.
Additional construction costs represent the largest category of the revised estimate.
More than half of the increase in construction cost is due to higher quantities than originally estimated including significant increases for electrical and instrumentation, which was one of the last scopes of the engineering work to be completed.
Good.
The balance is primarily driven by higher unit construction rates due to higher market rates and more complex work than originally anticipated.
Finally, the schedule and other category is primarily driven by the F. GP schedule delay and increased costs for operational readiness.
And the owners team.
Despite the increased project cost CCOH remains a world class assets, that's expected to generate strong cash flow for many years.
Turning to slide 10.
Beginning in 2020, we expect spending to ramp down as we complete the project.
The project is approximately 70% complete.
Detailed engineering and procurement or essentially complete mitigating the risk of further impact on fabrication for construction.
Work at three of the for fabrication yards is complete.
The logistics system is working well and the 20.
Teensy lift has successfully concluded.
Modules are being delivered Restacked and said on foundations as planned.
Drilling is ahead of schedule with 40 of the 55 wells drilled and completed.
The lower chart on the slide shows the completed and remaining capital spend.
Most of the remaining scope now resides with construction and start up activities.
Given the work completed including two full years of on site construction experience. We believe we're on track to deliver the project in line with the updated estimate.
Importantly, we're not changing chevron's capital guidance.
Our 2020 capital to be announced in December we'll be in the range of $18 billion to $20 billion.
And we're reaffirming our capital guidance of $19 billion to $22 billion for 2021 through 2023.
We remain committed to capital discipline and delivering.
Leading returns for our shareholders.
Slide 11 highlight some recent commercial developments in our upstream business.
First we recently announced a farm in agreement to take a 40% working interest in three Mexican blocks in the deepwater Gulf of Mexico.
We also recently participated.
In Brazil, 16th bid round and were awarded a 35% to 40% working interest in two operated and three non operated blocks.
We're excited about these additions to our exploration portfolio.
Last week, we signed an agreement to sell the company, which holds our interest in the melon Paya gas.
Builds in the Philippines, we're expecting the transaction to close in the first half of 2020.
Now I'll turn it back to peer thanks, Jay in turning to slide 12.
This quarter they were a number of highlights related to lowering the carbon intensity of our operations.
Earlier this month.
Earlier this month, we announced two new greenhouse gas reduction goals.
The new goals are aimed at reducing our oil emission intensity by 5% to 10% and our gas emission intensity by 2% to 5% in between the years a 2016 in 2023.
These arnie.
Addition to the targets we set at the beginning of the year to reduce our flaring intensity and methane emissions over the same time period.
In Australia, we started up the Gorgon Cotwo injection project in early August and are in the process of ramping it up to full capacity.
Once fully operational.
This will be one of the world's largest carbon sequestration projects.
And is expected to produce gorgons greenhouse gas emissions by about 40% over the life of the project.
Lastly, construction is underway on a new 29 megawatt solar.
Our farm, which will supply electricity to Chevron's lost hills field in California.
Now looking ahead.
In upstream we expect full year 2019 production growth to be in the middle of the 47% range, excluding 2019 asset sales.
Asset sales, primarily in Denmark in Brazil are forecasted to have a full year impact near 30000 barrels per day.
Planned turnarounds, primarily on Gorgon in Nigeria will be lower than the third quarter, but are expected to impact production in the fourth quarter by more than.
70000 barrels per day.
As Jay mentioned earlier, we've acquired new exploration acreage in Brazil that is expected to add a dot $120 million in inorganic capital, which is on budgeted.
Full year Tcl co lending is expected.
To be below the full year guidance of $2 billion dependent primarily on the fourth quarter distribution decision.
In downstream, we expect high refinery turnaround activity.
This includes a refinery wide turnaround at S. PRC in Thailand.
Which occurs once every five years.
In the fourth quarter, we expect to make the 430 million dollar tax payment related to the cash repatriation.
And to repurchase shares of $1.25 billion.
With that I'll hand, the call back over to Wayne.
Thanks, Pierre that concludes our prepared remarks, we're now ready to take your questions keep in mind that we do have a full Q. So please limit yourself to one question and one follow up we'll do our best to get all of your questions answered Jonathan Please open the lines.
Thank you ladies and gentlemen, if you ask the question at this time please.
Press Star then one on your Touchtone telephone. If your question has been answered we wish to move yourself from the Q. Please press the pound key if you're listening on a speaker phone. We ask that you. Please first lift your handset before ask your question to provide optimum sound quality again, if you have a question. Please press Star then one our first question comes on line up.
Jason Gammel from Jefferies. Your question. Please.
Thanks, very much guys I guess the first question.
Related to the the updated tend to use budget.
Given that a lot of the spending is already behind you do you anticipate the this is going to have any significant effects on the co lending that you'll be making.
To the venture.
In the coming years.
And then maybe I'll just ask my second question now.
The U.S. downstream earnings were pretty robust this quarter relative to what I would it what I would have expected just given a heavy turnaround schedule.
Just the margin environment that was helping out or is there anything.
Thing else that's happening in downstream that is maybe more ratable.
Alright, Thanks, Jason This is Pierre so on co lending.
We'll provide guidance for 2020 next quarter as we as we have in prior years as you know co lending depends.
On three primary factors the level of the capital spend.
Oil prices, the macro environment and any dividends.
Guided in the fourth quarter that we expect the full year for 2019 to be lower than our $2 billion, but it will vary depending on the fourth quarter.
Dividend.
In that Tcl makes so if the dividend is higher co lending would be higher if it's lower the co lending.
The lower so if you go back to how this.
Cost increase impacts.
Oh lending you really have to look at it has over overall cash flow. So clearly if you hold prices in dividends constant.
Higher capital costs will result in higher co lending.
But that does not translate to lower chevron cash because we're going to offset the increases in tcl elsewhere in our capital program and so if you remember Tcl capital spend is noncash and co lending turns.
Part of it into cash because we think it's the most economic way to finance finance our share of the TCOS spending, but again, we're going to have offset elsewhere in our capital program, which will be cash capex and that'll help offset that that higher co lender.
If we go to downstream in the quarter you know we don't.
No. There's nothing that's you know that isn't inherent in the underlying.
Margin, so that I can really point out too.
We've had.
This led margins have popped up a little bit and we tend to have.
Some.
More production in that space, you're seeing some of the.
ER effects of IMO are rolling through the system I mean west coast margins had some strength.
Times in the quarter, but I would attribute the third quarter performance largely to.
How we operated underlying margin environment.
Very clear thanks for your.
Thanks, Jason.
And.
Your next question comes from the line of Phil Gresh from JP Morgan Your question. Please.
Yes, hi, good morning.
First question, just coming back to the idea that.
The 10 geese capex increased will not affect.
The overall capital spending plan.
Is this.
Are we just talking here about the fact that.
Perhaps you are at low end of Capex ranges.
Now you move to high end of Capex ranges or how do you calibrate.
Being able to offset four to 5 billion of incremental spending night Chevron.
Within the budget as.
Is it activity elsewhere or is it just within ranges here, we're talking about thanks.
So there's there's a couple of different places that we look to first CCOH itself and its base capital spend has offset.
And we'll continue to offset some of the increase in the F. GP spend.
On that.
That though as peer was talking about we have a much more flexible capital program now with a lot of short cycle activity and were able to pace and adjust that program to fit within the investment.
Levels that we've set and particularly as it relates to gas related investments are opportunities for us in this.
Current environment to scale back some of that as appropriate and those are things we may have done anyway.
And the final thing is just the capital efficiency that we're driving throughout the business. Our base business performance has been very strong we have digital initiatives trying to reduce our make our capital spend more effective.
And so right across the board people are figuring out ways to do more with less I'll give you. A good example was in Bangladesh recently, where instead of making a major capital project to add some additional compression. The team was able to look at Recompleting, some wells, adding some perforations and doing some de bottlenecking on existing facilities, which extended.
Production plateau.
Alleviated the need for incremental capital spend on a on another project. So it's it's these types of spending that we constantly are working through as we allocate our capital each year, we're going to remain capital disciplined we're gonna stay within the ranges that we've given you and we're going to look to do.
While we stay focused on delivering the value and returns that that are really what's driving our our decisions and if I can just just build off of Jays answer there and just to be very specific no. We do not intend to go from the low end to the high end of the range, we intend to find offsets.
Through the way that that Jay has talked about we have a range because.
As we are giving guidance out the 2023 it is cyclical business.
Ill prices can change Cogs can change we have short cycle capital that we can flex up or down as Jay mentioned, but so the intent of the range, we still want to keep the range for what is therefore, and our intent is to offset increase elsewhere.
Okay Alright, thank you for that color and then I guess just a follow up.
It would be for Jay I'm, just trying to kind of rewind here back to a year or so ago.
There are some fears that things are getting a bit behind and 10 geese and then back at the analyst day.
Sounded.
Much better the thanks.
And on track and now we have a 25% increase which is fairly sizable. So I'm just hoping you could provide a little bit more color about how these things have progressed to the point that we have this kind of increase thank you.
Yeah, I think what's changed fundamentally as we completed a very detail cost and scheduled review in the third quarter. So.
That's just been completed and as we looked at it there were a couple of key elements. We've talked in the past about the overall engineering program the cost of that program and the impact the engineering has had on fabrication and construction and you can see those in the first two bars of.
Page nine slide.
And that really reflects that accelerated consumption of contingency that we've talked about in the past what was frankly, a surprise was the increasing quantities that we're seeing coming out of the late stages of engineering, particularly related to things like the electrical and instrumentation controls fire and gas.
Some of the.
Late changes in how we're going to do the backfill and quantities associated with.
Those drove a much higher construction costs than we had anticipated and if you look at the third bar you see that represented the other big surprise was having to delay the startup of SGP by year.
This is really driven.
Fundamentally by an assumption change we had planned to integrate modules.
Estimate was based on the integration of the modules and.
GP.
Each one taking about 12 months from the time it was placed on its foundation until it was fully integrated.
While we're seeing very complete.
Modules come from the fabrication yard.
But as we've gotten a year of EMEA and I experienced this year. Our view is change that we're using 14 months as our as our planning basis and that's push that scheduled time out so the growth in quantities.
And the longer schedule have really been the surprises that we.
We didnt anticipate.
Obviously.
So that's that's really where we are at this point in time.
Okay. Thanks, a lot.
Thanks, Phil. Thank you. Our next question comes from the line of Neil Mehta from Goldman Sachs. Your question. Please.
Yes. Thank you. So so the first question.
On just on the Permian glide path here you continue that trend.
Above your target levels can you just talked Jay.
With some detail about how the plan is progressing in the Permian and any comments that you would have on stronger this upcoming U.S.
Sure and any impacts the way you think about prosecuting your acreage.
Well I'll start with just the performance in the Permian Our view as you know has been to be very disciplined and focused on returns and efficiency.
And we have seen continued performance improvement in our drilling.
In particular are completions have remained very strong throughout.
And so we're watching every segment of the value chain from the actual land acquisition to fill in some of the checkerboards and allow the longer laterals right through the drilling efficiency the into the completions.
Realty and on production and then working with our marketing and transportation group to ensure that we're getting the highest realizations. We can for the products that were producing so we're on plan we've actually.
As we said doing very well with our production profile.
We're pleased with the performance that we're seeing but we're always driving for better.
Limits in terms of the upcoming election look.
Hydraulic fracturing has been done for millions of wells not only in the U.S., but around the world. It's done safely. It's done effectively we learn more about at all the time and that's really unlocked and economic.
Huge economic benefit for the country as well as.
For the companies involved.
It's also unlock some environmental benefits in terms of the proliferation of gas, which isn't always toward benefit from a profit standpoint, but it's a great fuel.
For the U.S., if you look at it from our company's standpoint, we have less than about 10% of our Permian and.
Conventional acreage that is on federal land and all that is in new Mexico, So from a relative standpoint.
We would not like to see any kind of restrictions on hydraulic fracturing. It's that's the context for our company.
No that's great I.
In it and then a follow up here is a relate to Brazil theres the upcoming transfer of rights auction. Then you called out some of your increased exploration acreage. There can you provide some context in terms of the way that chevron thinks about Brazil, and how aggressive exceeds its helping there over the next couple of years.
Well.
We've talked before that we are very happy actually with our existing resource base. We've been doing a lot of portfolio work as you know over the last several years to really clean up our portfolio and part of that it's been a re load of our exploration strategy, but because we're happy with our resource base.
We have primarily focused on reloading in the exploration space because we're looking for resource additions out in the future and we also want to manage our capital over the period of time. So our focus has been on.
Exploration opportunities, that's what you've seen us do in.
Bill and our focus has been that way, we're interested in Brazil, because we see the pre salt as a prolific hydrocarbon basin. It's a good place to be to increase the probability of success on exploration and we'll stay focused on that we have a couple of wells coming up next year, which will be good wells for us we're looking forward to see in those.
Hello.
But we'll continue to stay focused primarily on exploration as we look forward.
Thanks, guys.
Thanks Neil.
Thank you. Our next question comes from the line of Paul Cheng from Scotiabank. Your question. Please.
Hey, guys good morning.
All right Jade.
The one to beat that that whole us on pinkie.
But one have you done some 10 d. in terms of to fight for the fine tune your development and projects that conversion process candidate that something was not booking.
Last that to happen.
Page to have that DNA flat for a year and also debt.
For 25% increase so wondering what happened.
Paul It's a good question, we ask yourself all this time all the time, how can we do better.
Clearly this is a disappointment I'm very disappointed because we have taken all the lessons learned from the past and tried to make sure.
We're building those into each project as we go forward.
When we think about what's gone well theres been a lot of dimensions to this particularly the execution work is going very well.
Happy with the way the fabrication work is gone into yards. The modules are coming out very complete and dimensionally accurate when we set among their foundations.
Thing is lining up the.
The logistics system has been flawless.
Performance is exactly how we had planned and it's delivering modules to the site very effectively and we've been able to complete the C lift for 2019.
So we're happy on all those fronts.
Scheduled delays a disappointment in that.
That has to do a lot with the quantity growth we saw in engineering and as we've said we've been unhappy with the overall engineering performance on this project.
Not only the engineering costs themselves, but the impact of pad on fabrication and construction.
We need to do better in this area and it's an area that we're going to continue to learn our.
Lessons from this and build it forward, we don't have any other very large mega projects like this that are land based anywhere in the world at the current time. So we've got time to take these lessons learned and really think about how we approach this differently in the future our commitment remains on capital discipline our commitment remains.
As to execute this project to the best of our ability when you look at the improvements taking place on the ground and Thingies in 2018, we've talked about productivity that we needed to improve and we saw 40% to 50% improvement in the productivity across the sites in 2019. This year, we've seen another 30 to.
40% improvement in productivity. So we're seeing great improvements with the production the construction management system production management systems.
And we're going to continue to stay focused on productivity on completing work and moving it to mechanical completion, and then getting it through systems completion and into.
Startup.
And if I changes build off of the Jay's answer Paul you know just to put this in an enterprise perspective, the additional depreciation after tax to Chevron is less than 20 cents per share or less than the cash flow impact of the dollar change in oil prices. So as Jay said, we own this and we need to do.
Do better and Trust me, we're fighting for every dollar, but I did want to put in perspective, what this means for a company like Chevron.
I understand but I think Jay when you're saying that you are unhappy about the engineering on days. So yes, it's not to ponder thing, but is it the uinta no issue on it yes and external.
The contract that you guys you issue.
You are asking how should we think.
Hi, Thank you really going to be able to mitigate future I mean that what I mean, you say you know from that but expanding what we learn and what does that change will be.
From an engineering standpoint.
Point, Paul I think we have a couple of things one is we're doing more to bring the early engineering back in house and do more focused.
Design development with our own capabilities and we're trying to minimize the amount of variation that we see in in terms of each project.
Teams decisions that they make around engineering.
I think thats, a key part of it and I think looking at the total project in the context of the environment, it's going to be built. Its also important I do think there were also opportunities for the industry to improve on engineering I don't think this is necessarily isolated to.
Our.
Anthony So there's there's work to be done as we really understand how to better define and prosecute the engineering programs that are necessary for these projects.
And if I can just like Jay said is we don't have.
Logics like this in our key if you look at our capital program a lot of base business capital.
Alan tight capital, we are going to have some major capital projects to the ones that are coming up our deepwater projects in the they're very different than these.
A lot of the spending is in drilling and completion were very good on the facility size. It tends to be standard design seen on fabrication yards as Jay said, it's not land based projects and remote.
And we have a better track record in the.
Yes, we need to do better we're learning from it from the enterprise perspective, the portfolio. The investments that are at least in front of us.
Our hitting a different place and then where this project has been.
My final question, Jamie and tier.
I think in 10 key even before the close increase.
The full project, we turned on capital.
Hi coal in Tenda, we are we talking is actually pretty low.
And with this though of course is much lower but the cash full we'd be quake once that they come on stream, so which is on a more important effect when you guys determined whether.
You want to go with a certain projects as it begins on the will return on just the cash flow.
And thats something that cash flow say for how long so trying to understand that the decision making process.
Yes look I'll I'll start and maybe Jay will add some comments I mean, you've heard Jay and Mike and myself, we're all talking.
Looking about increasing returns on capital.
So we are focused on the return on investment and so we are looking at at once once you have a cost increase I think its.
Stating the obvious at that.
Loose the returns and we're taking a lot of actions to offset that both end tank ease and across the rest of the portfolio I tried to give.
Again, some financials that kind of characterize.
What the impact is again on a company like Chevron less than 2020 cents per share, but we are looking fundamentally at returns on capital, but we also know cash is important and helps pay the dividend and support the share buybacks.
I would just say this.
Particular project Paul.
No no your views on had been the same for a long time, but this is an important project for 10 days. It does lower the back pressure on all the wells and addresses the declining reservoir pressure that we see there it provides excess gas handling which will unlock oil production in our existing facilities as well as for.
GP and it helps maintain reservoir pressure in the platform, which isn't Gordon aspect of the overall performance of Thingies not just the incremental performance.
There are also peer said, we're looking at ways that this can be offset in one of the key milestones that was achieved was the decision to de bottleneck CPC pipeline.
So that's going to open up some additional export capacity, which will improve realizations and help boost returns and help mitigate and offset some of the increases we're seeing on project cost.
Thanks, Paul.
Thank you. Our next question comes on line that Devon Mcdermott from Morgan Stanley . Your question. Please.
Good morning, Thanks for taking the question.
So good morning, I wanted to.
Wanted to follow up on some of the exploration discussion from earlier, you talked a little bit about Brazil, but you also highlighted in the release and slide some additional blocks in the offshore Gulf of Mexico, I think you've been fairly active in us Gulf of Mexico leasing as well as we.
Going to step back and look at where you're seeing the most opportunity from here can you talk a little bit more about that and the overall strategy here in the desire if any to diversify growth options away from from shale and tight but I think you mentioned there were some.
Larger capital project offshore potentially in the pipe so a little more color on that would be great.
Yes, thanks for the.
So in addition to deepwater Brazil, we have been very interested in some of the.
Deepwater in the Mexican areas of the Gulf of Mexico, and this plays on a lot of the knowledge, we already have in the U.S. sector of the of the Gulf of Mexico.
So we've recently farmed into some additional blocks in these complement nicely some.
Alex we acquired in an earlier bid round.
One of our strategies has been to move out of more the frontier highly speculative areas and really focus our exploration initiatives in the areas that we consider to be highly prolific basins and that really increases our probabilities of success at the.
Same time, we're doing that we're trying to balance the amount of capital that we goes in early and really.
Use the fact that some of this is only.
Only under two d. seismic or lightly explored to open up new opportunities for development.
In the U.S. Gulf of Mexico, we've been very active and one of the key.
She's in the U.S. goals is to focus a lot of our new blocks.
Right around existing infrastructure, and we're looking to push that envelope of how far we can tie back.
Exploration opportunities are discoveries to existing infrastructure and avoid having to build brand new greenfield.
A couple of.
Samples of that would be for example, you recently heard about the Essex discovery.
With another operator that'll tied back to tubular bells, it's very close brings new production in at very low capital costs and with a very short cycle time. So those are kind of the low cost high return subsea tie backs that are being enabled.
And supported by our exploration strategy in the us Gulf of Mexico.
We're also talking about.
Extending that reach as I said through some of the new technology, we have used quite successfully.
The single Phase.
The floor pumping at Jack in St Malo, and really proven that technology and we've now.
Finished the technical certification to move to multi phase pumping and this can really extend that radius of which we can pull production back to existing homes that have ullage.
So it's entirely in line with our theme of exploring in prolific basins, but also utilizing existing infrastructure and getting more out of our.
Facilities whenever possible.
Got it great and my second is on some of the comments around incremental efficiencies you're realizing across the portfolio is one of things you mentioned in response to the tingey is cost pressure and Peter I think you mentioned it also is.
An area, where you've seen success across the portfolio in your prepared remarks.
So I was hoping to get a bit more specifics on where within the portfolio you're seeing that is capital efficiency improvements and then also to the extent you are cutting back capital a more gassy areas in response to 10 geese pressure any additional detail on on where that is it.
North America gas elsewhere in the portfolio.
Additional color would be helpful. There as.
Well.
Sure you know the increased efficiencies quite honestly are happening across the board all of our units are really focused on how to continue to drive better performance out of the investments we've made in the past we've seen some great improvements in.
Particular for example in Angola.
Where they have develop some new opportunities by using our existing installed base. We saw very strong cash flow coming out of Angola, and there's been a lot of good co-operative work with the government of angle to unlock many of the marginal reserves that can be tied back to our existing facilities, but.
It really is happening around the world.
In terms of the Gulf of Mexico, We've seen our unit development costs come down to where we're now targeting 16 to $20 a barrel for new facilities and projects like anchor and whale certainly we're targeting in that range.
The opex in the Gulf of Mexico in the deepwater.
Her has come down to just under $10, a barrel, which is a significant reduction from where we were in 2014.
We're taking these lessons learned we're sharing them across other areas in the company to make sure that it's one thing to share. It's another to adopt these best practices, but we're seeing great cooperation between our business.
So we're going to be really focused on doing that even more as we move forward. All of this isn't just in response to 10 geese, but rather it's the context of Thingies in this environment, that's allowing us to do this and I think do it quite efficiently.
In terms of the specifics on where in our capital program will be making changes thats not something.
Thing that will discuss at this point in time, but we'll give more color on that potentially in December with our capital announcement and of course in the Sam.
Security Analyst meeting that we do early in the year each year.
Understood. Thank you.
Thanks.
Thank you. Our next question comes the line of be rich buckets.
From RBC your question please.
Hey, Thanks for taking my question I sort of another one on Ting Thingies.
Jay you mentioned the significant productivity improvements in 2018 2019, but.
Taking the onboard that would suggest the capex increase.
Coming quite long tunnel Tonga.
So I guess.
I want to settle the square that comment.
This increase today and the timing of that but.
Taking a step back you look in the last few years and you've had your fair share of issues.
Some of these major projects.
Yeah.
You will signing off on these days I just wonder if these experiences and make you think twice about embarking on these types of projects of this scale in the future.
First question.
Thanks.
So on the productivity.
The contracts that site thingies in the construction are largely.
Right. So we pay based on the quantities that are being installed but the productivity is important because it relates to the underlying schedule and the ability to to finish the work and execute the work in that timeframe that we've got and with the numbers of people. We plan because there's a lot of indirects that come with having to added.
Additional direct labor.
So while the unit rates have been in place. It's really the complexity that has increased on on some of the man hours, we've talked in the past about the unit rate costs that were in our bids for the mechanical electrical and instrumentation work, but really the surprises and the increasing quantities because when you multiply.
The quantities times those rates, that's what's resulting in the higher cost and as I said this shift in schedule.
So that's how a square that with what we've given you in the past and really what came out of the detailed cost and schedule review that we just completed.
And the rise in terms of I think I addressed this I mean, we don't have other projects.
Like.
CPW PMP in our Q.
Matt is being work, but it's not ready what we have is a lot of base business capital a lot of shale and tight.
And hopefully some deepwater projects here over time, so I understand your question its or as theoretical I'm not going to speculate about it.
But as I look at our portfolio right now we we don't have that choice that said, we're it's going to be in the business along time, we're going to learn from it we have to do better, but we don't have any immediate capital decisions that are in this kind of a large.
Scale land base that construction project.
Okay understood understood.
Just just to follow hopefully an easier question, but the tax on repatriated cash.
Are you expecting that to be a one off or is it should we expect more of these in the future and can you confirm whether that was cash tax will just a piano charts. Thank you.
Yes. So thanks for that question. So no we completed a.
Global cash management review in the third quarter and decided to repatriate this cash which was previously unremitted. So prior to completing this review these earnings were.
Expected to be invested outside the U.S. and Thats why we didn't accrue for that for the state and forward withholding taxes. So when we made the decision to.
Yeah, that's when we accrue the tax so the it is a cash tax but the cash the tax payment will be in the fourth quarter. We accrued the PNM was in the third quarter and the actual cash movements. So this will bring non us cash.
Into the U.S. it will allow us to lower our.
Cash balances will lower our debt balances were doing it because it's the right economic decision.
And this is for prior earnings we do not expect other types of.
Repatriations of prior earnings like this.
At the same time, there will be could be some current earnings that.
Of course, our repatriated and that's in the normal course of business I know this is a one a one off it's over $8 billion of non us cash being brought to US you won't see our us cash balances go down by that full amount because some of it had been lent into the U.S., but we expect our our year end cash.
Balances to be $3 billion to $4 billion lower than where we ended the third quarter. We ended the third quarter, a little bit high because we were preparing for some of these moves to to repatriate the cash.
Got it makes sense.
Thank you. Our next question comes on line of Doug Leggate from Bank of America.
Merrill Lynch your question please.
Thanks, Thanks, everybody good morning.
Jay.
No you don't immediately.
Are you guys wouldn't normally want to talk about.
Full terms both in light of the 10 geese cost increases I just wonder if you could.
Just to remind those will walk us through.
Well the implications off for cost recovery, because I'm guessing that.
With existing production on lots of ring fencing and so on.
The net impact of this may not be as severe as though obviously the headline coastal runs suggests that just wonder if you could walk us through what the cost recovery ramifications.
Please on a go full up.
Well this is a tax and royalty contract and Thingies and so it's really going to be through the DNA.
And the way that flows through the books in terms of the recoveries. So it's impacting returns more than it will the actual cash flow once we get past.
The startup of the.
Yeah.
I was under the impression is that accelerates the DNA is another case.
As I said, we're not going to discuss the.
In terms of the contract, but it's the tax and royalty contract and okay.
And just to be clear, what I referred to the less than 20 cents I'm talking about book DDNA book depreciation not tax.
In addition, which obviously is different.
Okay.
Sorry, I thought it was an accelerated piece to that thanks.
My follow up is really more going but to the Permian.
Obviously the plan you've laid out is continuing to continue to perform against at least the production profile, but.
When you leave those upon.
It's about.
When you would expect the Permian so be cash breakeven.
In terms of capital and cash flow and obviously loyalty contribution and so on obviously NGL and gas prices of the CD rates it quite materially. So I'm wondering if you can just update your thoughts on thoughts on specifically on the TQL solutions that you've announced.
So over the last several months what is due to your ability to improve gas and NGL realizations are those lease line or are they going to uplifts to realize issues with more looking at Gulf Coast type.
Metric to I'll leave it there thanks.
Well, we went through a lot of this Doug as you know in the second quarter call on that.
Guidance still stands in terms of the crude takeaway capacity, we have sufficient capacity not just to produce it into the basin, but to take into Houston and now we have export capacity opening up.
As well, 35% now and 40% in 2020, so that's the crude side of things.
Ngls are sufficient through 2020 and in terms of gas our primary focus was to make sure. We have evacuation capacity in the basin and we have a 100% that covered our view and our practices that we have no routine flaring of gas to enable production.
We've been able to honor that in terms of.
Moving gas out of the basin right now we have about 25% capacity and that's going to vary based on how these different pipelines come on stream, but by the second quarter of 2021, we're expecting to have about 80% of our gas flowing out of.
Out of the the basin.
We are external expecting.
To have free cash flow positive next year.
Just to be clear this is.
60, 65% gas and NGL. So it can you I know you talk about liquids, but can you split the oil versus NGL portion and I'll leave it up thank you.
We see roughly half of our total mixes in crude.
About a quarter of its in gas liquids and about a quarter butts and natural gas.
Helpful. Thanks Fellas.
Thanks, Doug Thanks, Sir.
Thank you. Our next question comes from the line of Dan Boyd from BMO capital markets. Your question. Please.
Thanks, Good morning, guys.
Hey.
Actually fall off again on.
The the TCOS spend and if I recall correctly last year, you spent about 600 million more than you. Initially budgeted. So what I'm wondering is how much of the sort of overrun is going to be already spent or in the budget by.
We ended this year at that sort of the first.
Question and then.
There's a follow up is when I look at your total capex budget in order to be below the 20 billion for next year, given that affiliate spending will still stay high.
Are you implying that your cash capex.
Could potentially be down next year and I'm, just wondering if there's a potential production.
And impact of that or if the Permian is.
Running ahead of schedule enough to offset any that.
So a couple of things Dan first of all it take you to slide 10, and that kind of shows our production or our spending profile for the FTP project and we see 18 and 19.
I mean as our peak years.
Spend and as we look to 2020 will start.
Spending at a lower rate as we move and consolidate really the activities largely into site construction work.
We have one more year of fabrication to go in one of the for original yards.
And that work is currently about 73% complete in terms of how to allocate the incremental spend over the the.
The total project I would say roughly it's about half of that behind is half of about $4 billion to $5 billion in front of us, but as we look at it.
Really in that increased construction costs, where we see the majority of the of the increase in the surprise.
The part that we did in the first.
Engine or the engineering and fabrication was more directed around the consumption of contingency the increases we've really seen have been in construction and schedule.
So so again again just to build out Jay's comments I mean, we're coming off of reaffirmed that guidance for next year between 18 and 20 billion.
I will be coming off as as Jay said and so we have.
We're doing we're finalizing our plan and our capital program right now, but we have.
Between the efficiencies that Jay.
You talked about and choices, we can make around deferring low return projects, we absolutely have the capability of lending a capital program in that range.
Okay, and the production outlook more than offset that another areas.
Yeah, I mean, we haven't given production guidance, you know year by year, we'd given.
And then a 3% to 4%.
Production outlook to 2023, so no change to that.
Again some of the examples some of the offsets do not impact production clearly if we defer some lower return natural gas investments or we did decide to flex down some of our shorter cycle.
And that could have a modest impact on production, but there are other things, they're drilling better like the Permian and other offsets that we're trying to manage so we will give our.
You know usual at one year outlook on production guidance on the fourth quarter call. Then late January Okay. Thanks, guys.
And.
Thank you our.
Next question comes on line of Roger read from Wells Fargo. Your question. Please.
Yes. Good morning, Thank you.
I guess maybe.
Been mentioned a couple different times the weakness in gas maybe as you think about global gas markets LNG, what you're seeing.
Shows any additional risk we should think about on those spot markets side or on the contracted side for LNG and then as a little add onto that just kind of an update of how gorgon and wheatstone are performing here and.
Planned and unplanned maintenance.
Okay.
Gorgon and.
Stone or actually performing quite well Gorgon train one is currently under a scheduled turnaround the planned turnarounds, but as you saw our third quarter production and there's a slide in the back was very strong out of both Gorgon and Wheatstone and we continue to stay focused on enhancing the reliability and the.
As a nation of those facilities as well as creeping that capacity.
We have a turnaround schedule that is going to be planned for both of those and it'll be a.
Annual event.
Those will be we'll talk about those as we get closer to them.
We have another train for Gorgon next year that.
Has been announced.
And these will be done to allow us to get into a regular rotation of turnaround. So they can be done safely and efficiently just as we do and our downstream facilities and places like 10 games.
We do see the.
The potential for spot to be higher as we increase production.
As we hit stronger production, we will have more cargos available for spot.
That's a good thing because we actually have more production than we planned for but overtime as the reliability continues to strengthen we would expect to try and term of some of that anticipated spot cargos and reduce the amount.
Got it.
In any given quarter relative to either long term or.
Im term contracts that we've put in place.
Yes, the only thing that and Jay mentioned this in second quarter, we have seen some customers downward flex on the long term contracts.
This is something that.
Within contractual limits and within the contractual.
They have to do at almost a year ahead is tied to the annual delivery schedule, but we have seen some of that and that as a result in a little bit more in the spot market than we otherwise would have.
And any particular.
Weakness and the spot markets that you're seeing at this point or are we pretty.
Well past that for the summer Todd.
Oh in terms of calling and look at looks.
Yes, the macro on on spot LNG looks sort of structurally oversupplied of course, a cold winter, Ken can certainly fix a fair amount of that but storage levels in Europe .
Our.
Our full Asia seems to be well positioned.
So.
Look at it right now.
Again, it looks oversupply and is more LNG coming on but markets surprise us all the time and in the take away for US is we're just not really exposed in the spot market. We are primarily selling under oil linked long term contracts.
It's Roger.
Thank you.
You are next question comes on line Sam Margolin from Wolfe Research Your question. Please.
Hello.
Sam.
So my first questions on on the Permian and it's probably for Jay I think it's well understood that.
You are leading edge wells perform better and better I'm interested.
As the base gets bigger and.
Is more important to the overall production targets how your first generation wells look if you're you ours that you projected look like they're intact or are growing or changing in anyway.
If there is sort of rigless activity work Workovers stuff that you have to do that.
You had modeled or maybe it's less than what you modeled but just any update on kind of your older wells and how that component of the of the Permian is shaping up today would be great.
That's good question Sam. Thank you when we look at our production performance out of our wells the early horizontal wells have actually.
As we expected them to performance. So are you ours have been consistent with expectation.
For the wells as we as we move through.
As we have continued to evolve, though our basis of design and our completion strategies, we've seen higher and higher you ours and the new wells.
Of course are meeting those expectations as well. So overall the program is working as planned the newer wells as you point out are much more productive than some of the older wells, but they're all meeting the expectations that we'd set for them at the time in the aggregate, obviously any individual well, maybe higher or lower than planned but as a portfolio.
It was a program we've been overall pleased with the performance and that's really what's underpinning our ability to deliver the production profile you can see on the chart in the appendix.
Okay. Thanks, so much and then just a follow up Pierre you get this question all the time about leverage profile on the balance sheet, but the net debt continues to fall.
The ratio of your free cash flow annualized and not a great year to net debt is like one and a half times.
Is there a level of.
Net debt that you think is under levered or or.
Sub optimal for the business, especially in the context of tend to use if the biggest impact is.
Return impairment you.
Enhance that to the equity with some leverage deployed some somehow so just your thoughts on how that's trending and.
And what optimal leverages.
Yes, Thanks, Sam and look yes, we are generating good cash in a in a challenging macro environment. I think you know our for financial priorities I'll go through.
Them quickly the first is to sustain and grow the dividend and we increased at 6% earlier. This year. The second is to reinvest capital in the business and you heard Jay reaffirm our capital guidance. So we're not going to add to our capital program. The third is to maintain strong balance sheet and that's what you're asking I'll get to that in the fourth is our buyback program that we.
And the sustained through the cycle and we have that at a 5 billion dollar annual rate. So what happens in the short term clearly if we generate more cash than those three requirements in particular, the dividend, which we increased earlier this year, the capital program, which for holding flat.
And the buyback program.
Then it goes the balance sheet, that's where it's going to go in the short term. That's just that's how the math works, but over time, we expect if those conditions continue without speculating about future dividend increases our share buybacks over time that cash should be returned to shareholders in the form of higher dividends and a sustained by.
Back program, because as you say, we don't need to be.
And even stronger credit we have the leading balance sheet in the industry of the strongest balance sheet in the industry.
And I've talked about a gross.
Debt to capital ratio of 20% to 25% were well below that.
Well being below that because that's again the outcome of our cash generation profile.
Depending on where the macro environment, obviously that can change, but we are very well positioned to grow dividends sustain the buyback invest in the business and and maintain a strong balance sheet.
Thanks, so much.
Thanks Sam.
Thank you.
Final question for today comes from the line of Jason Gammel of Cowen Your question. Please.
Yes, thanks for taking my question.
I just want to firstly quickly confirm that 29 key capex hasn't changed as a result of.
Overspend and then secondly, just wanted to get your thoughts on M&A.
I'm going to address this call I think in the past you've discussed.
Wanting to kind of expand or potentially acquire some company that operates in multiple arena is not just one that operates in.
You asked shale.
Wondering if that's still a you're thinking about M&A and how the opportunity set looks right now thanks.
Yes, Thanks, Jason on your first question on on capital for this year, our capital budget on an organic basis is 20 billion year to date, we're at 14.5 billion.
And so we're basically on track we've had some modest inorganic capital year to date, that's been the Pasadena refinery, primarily and we guided to a little bit for the Brazil exploration bid round. So again.
We're on track for delivering an organic capital program in.
And with our budget of $20 billion in terms of M&A I'm not going to speculate on that I think Q.
Hurt heard us talk about it we have a very strong value proposition.
In the 4% dividend yield the 2% share buyback or the buyback equivalent to 2% of the shares of free cash flow.
Well, the 7% an advantage portfolio that Jay has been talking about with strong resources and reserves that allow us to grow cash flow and grow production overtime. So we don't need need to do a deal all that said at times in the past we had been opportunistic when we think it's in the interest of our shareholders.
It is difficult to make M&A work for our shareholders shareholders and right now we think we have a very good value proposition on our own for our shareholders.
Thanks, Jason I appreciate the question. Thanks.
Okay Jonathan.
Yes, and I'd like to handed back to you for any further remarks.
Well that concludes our prepared remarks, we're now ready.
Really.
Now that's the ended the call. Thank you very much.
Ladies and gentlemen, this conclude.
Bronze third quarter 2019 earnings Conference call. You May now disconnect everyone have a great day.