Q4 2019 Earnings Call
Good day, everyone. Welcome to this Exxon Mobil Corporation fourth quarter 2019 earnings call today's call is being recorded.
Just on how to join the call over to the Vice President Investor Relations and Secretary Mr. Andrew. Please go ahead Sir.
Thank you.
Good morning, everyone welcome to our fourth quarter earnings call.
We appreciate your participation and continued interest in Exxon Mobil.
Neil Hansen, Vice President Investor Relations.
Joining me on the call today is our chairman and CEO Jerry.
I'm trying to cover the quarterly and full year financial and operating results.
There will provide his perspectives.
2019, and a year ahead.
Only dares remarks, I'll be glad to address specifics on the reported results.
There will be available to take your questions on broader seems.
Putting strategic priorities progress on major growth projects.
He was on market fundamentals.
Our comments this morning, we'll reference the slides available on the Investor section of our website.
Also like to draw your attention to the cautionary statements on slide two and the supplemental information at the end of this presentation.
Well now highlight fourth quarter financial performance starting on slide three.
Earnings were $5.7 billion in the quarter.
A $1.33 cents per share, including a positive 92 cents per share impact.
Oh wait divestment and a onetime tax item.
Results were inline with expectations, taking into account the challenging price and margin environment. We had previously communicated.
Liquids realizations were essentially flat refining and chemical margins weaken significantly in the quarter.
The broader margin environment remain challenging.
In terms supply and demand and balances continued to pressure natural gas prices and no based stock margins despite modest improvement in the fourth quarter.
Cash flow from operations and asset sales was $9.4 billion in the quarter.
After adjusting for changes in working capital cash flow from operations in asset sales was $11.1 billion.
Capex for the quarter was $8.5 billion and $31.1 billion for the full year slightly ahead of the previous projection of $30 billion <unk> better than expected pace on the Beaumont light crude expansion Baton Rouge polypropylene projects and of course, the early start up of license.
Phase one and Diana.
Full year P.P. any ads and net investments in advance as a proxy for cash Capex was $26.8 billion.
I'll now provide a more detailed view of developments since the third quarter on the next flawed.
In the upstream liquids realizations were essentially flat all gas realizations improved slightly.
Section was inline with expectations.
Our seasonal gas demand in Europe.
Well I just phase one achieved first oil ahead of schedule at just under five years from discovery.
Just significantly ahead of the industry average of nine years.
We also announced the 15th and 16th exploration discoveries with some Banco.
Walter Wells offshore Guyana.
We closed the sale of our Norway non operated assets during the quarter highlighting good progress to date on our 15 billion dollar divestment program.
In the downstream refining fuels margins decreased during the quarter consistent with seasonal demand.
In addition, weaker high sulfur fuel oil pricing did not fully reflect in crude spreads.
As a result, low and medium conversion refinery margins, we can to more than high conversion refinery margins.
Got a notable impact on our downstream results outside the United States.
And this demonstrates the importance of strategic investments like the recently sanctioned Resis upgrade project at a refinery in Singapore.
Which will greatly improved conversion complexity.
Reliability in the downstream improved in the quarter largely offsetting higher scheduled maintenance.
Although long term fundamentals remain strong and the chemical business polyethylene margins continued to be impacted by supply links from industry capacity additions.
In the fourth quarter higher Napa feed costs.
For the approximately 25% of our polyethylene portfolio produced from liquid fees like NAFTA.
Had a significant impact on our chemical business line results.
On the project side. The recently completed Beaumont polyethylene expansion is running well and producing at 5% above design right.
As part of our collaborative efforts to develop and deploy lower emissions technologies, we signed a two year expanded joint development agreement with Fuelcell energy to optimize carbonate fuel cell technology for large scale carbon capture.
And we extended our support of the MIT energy initiatives.
Low carbon research and education mission by renewing as a founding member for another five years.
Let's move now to slide five for an overview of fourth quarter earnings relative to the third quarter.
Fourth quarter earnings of $5.7 billion were up $2.5 billion from the third quarter.
Upstream earnings increased by approximately $4 billion driven by the gain on the Norway divestment.
Favorable onetime tax item.
Higher volumes and improved cash realizations.
Downstream earnings decreased by $330 million due to lower margins and higher scheduled maintenance.
Partly offset by improved reliability and favorable yearend inventory impacts.
Also included in the downstream results with a sequential 450 million dollar negative mark to market impact on derivative positions.
Essentially offsetting the inventory effect.
Chemical earnings decreased by $600 million driven by weaker margins.
And higher expenses supporting growth projects.
Finally.
Orphaned fin earnings decreased by approximately $500 million due to the absence of a favorable onetime tax item in the third quarter.
Moving to slide six full year earnings of $14.3 billion for down.
$6.5 billion from 2018.
Upstream earnings increased by $360 million.
Driven by the Norway, divestment and higher liquids volumes.
I was partly offset by lower realizations and expensive supporting growth.
Downstream earnings decreased by $3.7 billion due to more narrow north American differentials.
Lower refining margins.
Hi are scheduled maintenance.
And the absence of the Germany retail and agrees to divestments in 2018.
And again here included in the year over year results was a negative 420 million.
Mark to market impact on derivative positions offsetting any benefits from inventory effects.
Chemical earnings decreased by $2.8 billion.
Driven by weaker margins higher expenses supporting growth.
The absence of a onetime tax item.
I'll now provide more insight into a challenging 2019 price and margin environment on slide seven.
As shown here in the top left chart cyclically low prices and margins across our business lines accounted for a year over year earnings decreased $7.5 billion.
All other earnings drivers netted out to a positive impact $1 billion.
The chart at the bottom left of the page provides a view of commodity prices and margins over the past 10 years.
In the relative position of the environment, we've seen in 2019 and 28.
Now as we know here the fourth quarter sell further deterioration in prices and margins, especially chemical margins.
The increase in liquid FICO.
Well margins weakened from 2018 and remain on the low end of the 10 year range across many of our business lines.
It's important to note. These levels are generally consistent with the scenarios, we used to test our investment decisions.
Despite the challenging market environment long term demand fundamentals remain strong in.
In fact growth in demand and 29 team for upstream liquids and natural gas distillate products and polyethylene was at the higher end of the compound annual growth rates experienced over the past 10 years.
Well, making investment decisions based on long term fundamentals as challenging when near term prices and margins are under pressure.
Provides us with the opportunity to leverage our competitive advantages.
Putting significant financial capacity.
It allows us to benefit from the favorable environment that occurs when others pull back.
And the cost of investing declines.
Well now spend some time looking at the full year performance of each are but each of our businesses in more detail starting with the upstream.
Volumes grew by 119000 oil equivalent barrels per day.
With liquids growth, 5%, driven by Permian Hebron and Campbell.
Efforts to high grade our portfolio also resulted in gains on asset sales primarily from the Norway divestment.
And as indicated previously liquids and gas realizations also impacted earnings with declines at 8% and 17% respectively.
In the downstream.
More narrow north American crude differentials and lower margins.
Joost earnings by $3 billion.
The change in differentials shown on the upper left chart accounted for $1.7 billion of that year over year decrease.
Full year industry margins were 19% lower than 2018 pressured by new industry capacity additions that exceeded demand growth by 800000 barrels a day and you can see that on the bottom left chart.
Regarding IMO, we continue to see clean dirty products spread expand in the fourth quarter. However.
Light sweet and heavy sour crude differentials have been slow to respond with lower global supply of sour crudes strong global refinery runs coming out of fall maintenance and the previously mentioned industry capacity additions.
The chart on the upper left of this page shows medium heavy sour crude discounts relative to Brent through 2019.
Well the spread has expanded recently crude discounts or not at parity with high sulfur fuel oil prices.
The marine fuel supply chain fundamentals are still transitioning.
Feed and product pricing have not reach equilibrium, placing pressure on low to medium conversion margins that we would expect us to result in fewer heavy sour crude runs.
Ultimately leading to higher discounts and market parity.
As we highlighted several times over the past year scheduled maintenance in the downstream is higher than normal impart due to preparation prime though.
Back 2019 represented the highest level of scheduled maintenance for the downstream in the past 15 years.
This activity level decreased earnings by $700 million relative to 2018.
As shown on the bottom left chart, we expect 2020 scheduled maintenance to be more typical inline with our historical average.
Moving to slide 11, I'll provide more perspective on the chemical margin environment and its impact on earnings.
Our chemical portfolio is positioned well take advantage of low cost feed and energy costs.
Over half of our polyethylene capacity in North America.
This is balanced with our production footprint in Asia Pacific, which positions us near key growth markets.
However.
The current margin environment remains challenged with excess industry capacity, despite demand growth of 4% per year since 2016.
No relative to 2018 lower margins reduced chemical margins.
By $1.8 billion.
In the fourth quarter polyethylene margins were further impacted by tighter feed supply.
Resulting in a 65% increase and the cost to produce ethylene from nap, though.
Key industry price spreads shown on the bottom left of the chart.
Declined by 40% on average for the year.
Given our product mix this is important.
These changes impacted approximately 60% of our production.
Well the significance of these market factors will obviously varied across the industry depending on product mix.
Growth related expenses unfavorable foreign exchange and the absence of a onetime tax items.
Also decreased chemical earnings by approximately $700 million.
I'll now provide a more detailed overview of the fourth quarter cash profile shown on slide 12.
Fourth quarter earnings when adjusted for depreciation expense and changes in working capital yielded $6.4 billion in cash flow from operating activities.
The 4.3 billion dollar impact from working capital and other related to noncash adjustments for the gain on the Norway divestment.
Fourth quarter proceeds from asset sales of $3.1 billion, primarily reflects the cash received for the Norway asset sale.
Fourth quarter additions to BP, any and net investments and advances were $7.4 billion.
Gross debt was largely unchanged.
And cash ended the quarter at $3.1 billion.
With that I'll turn the call over to there.
Thank you Neil.
Good morning, everyone SPRIX beyond the call with you today.
Let me start by sharing my perspective on last year, beginning with margins.
There's no doubt that 29 teams a challenging year for a number of our businesses.
Thank you will shortly that point near or at 10 year lows on price and margins from gas refining and chemicals.
Fourth quarter was particularly challenging for chemical business.
Of course, it's important understand what's driving this and the implications for our businesses.
Our investment plans as Neal said.
I'll show you later, the product demand underpinned our investments in each of these sectors remain solid.
Yes margins are driven by excess capacity.
Which will be a short term impact, particularly if industry pulls investments back significantly.
Which by the way, we're beginning to see.
No demand will continue to grow driven by rising population economic growth in higher standards of living.
That excess capacity will shrink.
We faster than people think.
The margins will rise.
Then new capacity will be needed.
These are the classic price cycles of capital intensive commodity industries.
We believe strongly that investing the trough in this cycle has some real advantages.
Industries pull back.
Projects costs come down, resulting in lower cost of cat capacity additions.
When available to catch this cycle upswing. This is a win win capturing high margins at a low lower cost.
The downside of course is to grow on cash.
Which we're seeing and responding to.
Organization is very focused on driving further efficiencies and looking for opportunities to optimize our pace our investment portfolio, while preserving value.
And reducing the drone.
Our new projects organization in upstream business lines are giving us a good line of sight on the best options to grow value efficiently.
As I've said before we have an important advantage because of a large opportunity said.
Gives us optionality in these volatile markets.
We also have a very healthy balance sheet.
Built for times like this.
Giving us a significant advantage in maximizing medium to long term value.
So, while we would prefer higher prices and margins.
We don't want to waste the opportunity at this low price environment provides.
Which leads me to our 2019 performance.
Our portfolio integrated businesses helped us and facing the short term headwinds generating 14 billion in earnings.
If you normalize our 2019 results for the industry's price and margin environment.
And looked at them on the same basis, we use last March at our Investor day.
Earnings were in line with the potential we communicated.
Obviously this is a theoretical exercise, but a very important one.
We can't control the short term price environment.
Stripping out the market impacts allows us to judge the underlying progress, we're making in building a stronger business based on a longer term fundamentals.
This is absolutely essential for a long cycle capital intensive business.
In the meantime, lower price environment puts additional focus on driving efficiencies both capital outlays in operating costs.
Also drives us to ensure the schedule and mix of our capital expenditures are optimized.
This is something urbanization is very focused on.
In 2019, we made good progress and upgrading and focusing our asset portfolio with a divestment of our upstream Norway OBO business.
Ron tracks with the plans that we outlined last March with a number of additional assets in the market.
However.
I want to emphasize that this is a value play we are high grading our portfolio.
As higher quality opportunities come into our portfolio, we evaluate other assets for a long term strategic fit.
Moving to asset out you have to find a buyer who can realize more value than weekend.
Otherwise there is no space for deal.
We want to transact.
We remain very excited by our investment opportunities.
Even in the price environment, we saw last year, our investments would perform.
It reinforces our capital investment strategy.
Which is investing a long term fundamentals that test against short term lows.
We made good progress on our projects in 2019 and used our financial capacity to mitigate the price environment.
Resulting in a year end leverage of 13%.
Level, we feel very comfortable with.
We increased production by 119000 oil equivalent barrels per day.
A 3% increase over 2019 2018.
Oh this is a triple to the success, we had in growing liquids, which increased by 120000 barrels per day or 5% relative to 2018.
Continued ramp up in the Permian Basin was a significant driver of this growth.
We continue to like what we're seeing in our Permian development.
Right, but the organizations, making very good progress on maximizing resource recovery.
Officially deploying capital in optimizing production.
In addition, we're making good progress in our logistics refinery in chemical investments that leverage Permian production, giving us greater value through an integrated approach.
For the whole IXYS does some of the parts.
We had another good year exploring six major deepwater discoveries.
Five in Guyana, and one in Cyprus.
YOD discoveries resulted in a 2 billion barrel increasing estimated recoverable resources.
Which now exceeds 8 billion oil equivalent barrels.
In fact.
We had four of the top 10 discoveries in the world.
In five out of the sixth largest oil discoveries.
In recognition of the success for the second year running.
It's on mobile was named explore of a year.
We also made progress in our work to develop new lower emissions technologies to help address the risk of climate change.
While renewables like wind and solar play an important role they don't solve the emissions challenge for every market.
Harbor fee or application.
Deciding these new technologies that will reduce emissions, while meeting the growing demand for affordable and reliable energy.
We're leveraging our research organization to help develop them.
In 2019, we signed or extended eight agreements with a variety of companies institutions to expand research into lower emissions technologies.
This adds to the more than 80 collaborations we haven't place across academia.
Lapsing energy centers to scale up advanced Biofuels.
Carbon capture technology.
Less energy intensive manufacturing processes.
These efforts address sectors that account for 80% of emissions.
Rotation power generation and industrial.
In summary, looking at the year in total.
I'm pleased with the progress we've made.
Particularly in light of the challenging market conditions.
Almost two years ago, we outlined and plan to grow the value of our corporation robust that price cycles inherent in our industry.
Two years down the road.
Delivering on those plans.
Doing what we said we would.
With increased supply and corresponding drop in margins, we've increased our focus on efficiencies.
We continue to optimize our investment portfolio.
Again, taking advantage of the Optionality that comes with a large number of opportunities.
Which I'd like to turn into next.
In the upstream.
I've already mentioned, our success in Guyana, which I'll come back on a few moments.
One of our deepwater portfolio in Brazil, another key asset remains on track with exploration activities planned over the next couple of years to better quantify this high potential resource.
We're also making good progress in the Permian, which I'll talk more about when we get to slide later in the deck.
In the downstream.
Three of our major projects are online and contributing to earnings and cash flow.
Even in last year's challenging market.
These projects position us well for the growth in demand higher value disciplines, and lubricant base stocks.
The remaining projects in our downstream portfolio progress consistent with our plans.
These projects have all been tested against the margin environment, we saw in 2019, and all would be earnings and cash accretive.
And our chemical business eight of our 13 growth facilities are online.
And we reached final investment decisions on another four last year.
Which again remain attractive even when tested against between 19 market environment.
Across the board, we remain extremely confident in the value of our project portfolio.
Each project Leverages, our competitive advantages.
It is underpinned by growing demand.
Which is shown on the next chart.
Demand fundamentals remain strong supported by growing population economic expansion in higher standards of living.
You can see these fundamentals reflected in historic growth in demand for the energy and products that we provide.
Including demand growth in 2019.
Of course growing demand is only part of the equation in our business large capacity additions can come online in overwhelmed the growth in demand in the short term.
Postage margins down.
Historically 19.
Built into the pining basis for our projects.
Our investment strategy builds on long term fundamentals leverages, our competitive advantages and delivers projects robust to down cycles.
This will structurally improve exxonmobils capacity to generate earnings and cash flow.
We laid out at last year's Investor Day.
This approach has resulted arent most attractive investment portfolio since the merger 20 years ago.
There's also generated portfolio with an average return of 20%.
We've seen no market developments over the course of 2019 change this.
However, we are using between 19 price environment to challenge ourselves to further optimize the portfolio and drive greater efficiencies.
Well, we expect to benefit from this effort has led us to change our 2020 Capex guidance.
The projects remain advantaged and the economics are robust industry price cycles.
Let me use our most recent startups to demonstrate this starting in the downstream and chemical.
Leveraging the capabilities of our organization.
Our scale in our technology are essential in developing industry leading projects.
The benefits are only realized execute efficiently.
Another exxonmobils strengthening.
You may recall that we shared a version of the chart on the election during our Investor day.
Great area represents our estimate of the net cash margin for every refinery in the world at 2019 prices.
The Blue line represents our Rotterdam refiner prior to our recent investment.
Second line represents the yield improvement, we executed with the first ever deployment process and catalyst that we developed.
This final lines, where we actually realized after a year run time.
No different than what we planned.
Now this would be expected for an industry standard proven technology.
However, significant accomplishment for a new to the world technology.
One that significantly improved our dams earnings last year.
This next line shows the accurate margin before Coke and investment.
Let me show the expected margin improvement assumed in the project basis.
Finally, the actual margin improvement.
As you can see the project is performing better than expected in a very low margin environment.
Well my polyethylene expansion started up ahead of schedule and is exceeding design rates by 5%.
While the new Baytown steam cracker in polyethylene lines are operating 10% of design rates.
Combined.
These projects contributed over $600 million and 29 teens very low margin environment.
Markets recover their contributions will be even more significant.
Bottom line of this chart, we delivered these investments in line with our commitments.
Our meeting or exceeding expectations.
Adding value and extremely challenging market conditions.
We turn to the upstream in Guyana.
Reaching first oil in Guyana was a major achievement for all stakeholders.
And it's a combination of years of hard work and dedication by the people in Guyana and our project team.
First oil was achieved ahead of schedule.
Five years faster than the average timeline for the industry.
And industry, leading development cost.
Decent phase one we'll continue to ramp up production to 120000 barrels a day over the next couple of months.
While these a phase two is progressing well with the startup in early 2022 in line with our commitments and Thats, a leading edge of industry.
Turning to left provides a perspective, I mean should cost and schedule.
We're continuing to work with the government towards half idea phase three by our.
This targeted startup in 2023.
Looking more broadly.
As I've already mentioned, we've increased the estimated recoverable resource from the Stabroek block to more than 8 billion barrels an increase of $2 billion oil equivalent barrels.
We've now had 16 successful wells out of 18 drilled.
Including our recently announced discoveries at Nico.
<unk>.
Resource size and cross the 16 successful wells equates to an average of more than 500 million barrels per discovery.
Well the equivalent of a giant for each discovery.
We recently brought in the fourth Drillships the basin are making plans for fit.
Significant potential remains beyond these first few phases as we move to test.
Sure and Con Jay blocks to the North and East State Road.
Increasing the scope of our exploration activity.
Element and appraisal drilling when cost or low relative to recent years enables us to increase the value of the substantial resource.
Good news for the country.
The investors.
Let me turn now to another major growth play or integrated Permian development.
Which made significant progress in 2019 again.
In line with our commitments.
Let me start by saying that we're still in a relatively early days of this development, particularly in the Delaware Basin.
Or perspective, we've developed roughly 20% of our resource in the Midland.
The only around 3% of our resource in the Delaware.
We're continuing to learn as we delineate and develop this resource.
Having said this we're making very good progress.
Production for the year increased by 120000 oil equivalent barrels per day or nearly 80% relative to 2018.
As we've said previously our development program is driven by balancing production rates resource recovery in capital efficiency to maximize value.
We are seeing continued improvements in drilling and completions significantly improving cost.
While our Delaware well performance is that to the leading edge of industry.
We are continuously optimizing or cube development drilling.
And our sub surface technology is enabling us to tailor well spacing.
It is resulting in higher production improved recovery and capital efficiencies.
Last year, we made considerable investments in above ground compression separation and logistics infrastructure.
This not only supports the current drilling program.
That is building cost efficient infrastructure for future drilling.
This follows the comprehensive development plan that we laid out last March and captures the capital efficiencies of scale development.
I know that Neil Chapman and his team are excited about potential.
Looking forward to discussing the magnitude of the improvements we are seeing.
Coming Investor day.
I do want to touch briefly on our expectations for 2020.
Again.
We'll have more detail in March as I mentioned before agana assays Warner ramp up in phase two construction will continue and we will broaden or exploration efforts as we work through the considerable undrilled potential in the basin.
Five additional wells planned.
We expect to made considerable progress in the Permian with completion of the Cowboys central delivery point.
Execution of the first large scale cube development.
In volumes growth of 200000 oil equivalent barrels per day by year end.
We're anticipating F.I.D. for the next wave of our major growth projects, including Guyana phase III in Brazil.
We're also planning for significant exploration activity over the next two years in Brazil.
Began to test a tremendous potential of our acreage position.
In the downstream our recent project startups will capitalize on the margin uplift associated with higher value products.
And coming off a year of significant scheduled maintenance, we expect higher refinery utilization in 2020.
And the chemical business, we will continue to grow sales of performance products.
And even with the near term margin pressures, we expect our recent project startups will continue to deliver earnings and generate positive cash.
Across the corporation will maintain a sharp focus on improving our base businesses driving efficiencies in optimizing the value of our investment portfolio.
We'll continue to actively market less strategic assets in an effort to high grade our portfolio through value accretive divestments.
Of course will continue to leverage the key competitive advantage.
Financial capacity, capturing industry, leading value across the price cycles.
Given the attractiveness of our organic investment opportunities. This was an important advantage last year.
As you can see initial chart as the margins in the downstream and chemical business dropped at historic lows.
We utilize our financial capacity to foreign projects that improved our competitiveness and positions us to capture the eventual upswing.
The fifth our leverage increased slightly during the year for remains well below our peer group in the broader energy sector.
To give you a sense of our scale advantage, 1% of incremental leverage equates to about $4 billion and additional debt.
Well our financial capacity is an important advantage is one we use very thoughtfully.
Given the volatility of our industry and the opportunities that come with it we strive to maintain a significant buffer to preserve optionality.
Now before I hand, it back to Neil offer a few closing thoughts.
As we've demonstrated over the past two years, we're committed to delivering our investment plans in high grading our asset portfolio to strengthen the earnings and cash generation of our business.
Across the broad range in price environments.
In a very rich set of investment opportunities and as we work to develop these opportunities.
We remain focused on optimizing total value over the long term.
2019 price and margin environment, we've increased our efforts to drive further capital efficiency and optimize pace without compromising value.
We will remain fossil and utilizing our financial capacity, but would take full advantage of it to capture value accretive opportunities.
Not compromising our flexibility.
Finally, we will continue to focus on improving our base business and driving efficiencies across the entire corporation.
With that on things back to Neil.
Okay. Thank for your comments, there and we'll now be happy to take any questions you might have.
Thank you Mr. Hansen and Mr. words. The question answer session will be conducted electronically if you'd like to ask your question. Please do so by pressing star key followed by the digit one on your touched on telephone.
Request that you limit your questions to one initial with one follow up so that we may take as many questions as possible.
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Additionally, please lift your handset before asking your question will proceed in the order that you sickness and we'll take as many questions as time permits.
Once again that star one if you'd like to ask a question.
Well take our first question from Neil Mehta with Goldman Sachs.
Good morning, and Darrin again, we appreciate you jumped on the color and given these with that so I guess my first question is around the capital spend and so.
I think what you're signaling is its capital spend in line with the prior guidance, we can't if I remember with $33 billion to $35 billion and can you just talked about the framework, if the environment based challenging especially across downstream and gas.
He is there downward flex on that spend or Exxon framework that you spend through the cycle with the long term orientation.
Oh good morning, Yeah. Thanks for your comments, yes.
So as I said, we have with the price environment and the cash draw it really taken advantage of some of the organizational changes that we've made last year.
We formed a corporate wide projects organization, bringing together the experiencing capability in that space into one organization that can then be deployed across our entire asset portfolio.
The upstream reorganization has given us a a real good line of sight across the business is one that wasn't is clear in the past with the functional organization. So we're using.
Those changes to take a real hard look at the opportunities we've gotten of course, the chemicals and downstream businesses. During the same thing and looking for.
Additional efficiencies to shake that portfolio. We're also looking at options to pace and to move projects around and out if we can do that without compromising the long term value.
That we've built those projects on the basis that we built this projects on so I think there's opportunity that space.
And if we continue to see very low margins and.
Cash draw that we want to address we got Optionality to do that we can move some things out and we can also slow down the pace in the Permian, we don't want to compromise the scale of the development in the Permian So were theres a balance to be structure, but we've got Optionality and you know I think as we go through the year to calm, we'll keep a real close eye on.
Kind of how the market develops and then keep.
Hand on the lever to make sure that we make adjustments as we need to think is one of the great advantages of having a very large portfolio. We've got lots of optionality here and so I think we're comfortable with it and you had a warrant criteria is that we want.
We may differ some value capture but we're not going to we don't want to eliminate or pass up any value capture.
Yeah, that's very clear and then just a follow up on your comments on the Permian.
We're looking at the Red line versus sort of the green bars, if you will in the Permian slide and and hard to extrapolate too much quarter to quarter, but the.
Production was a little bit more flat.
Q4 versus Q3 is that yes, that's just the timing of completion associated with the acute design and should we expect that acceleration at some point. The early earlier. This year and then just how do you think about Midland versus Delaware I think one of the comment.
That was made on this conference call couple quarters ago, West Midlands, going really well, the Delaware and it's not performing as well as you would like on the drilling sites on color there would be helpful.
I think I think not with respect to the first point you made around the difficulty of extrapolate from any one quarter is exactly right.
You know when we introduce that and and Neil Chapman talked about it.
We.
We said it wasn't going to be a smooth development in that we would see.
Lumpy.
Progress with respect to the volumes growth so I don't I.
I wouldn't draw a whole lot. We're not we haven't seen anything in that development, which would suggest anything other than continuing on that path, but again, it will be lumpy and I think you look back.
That red line, you'll see that Lumpiness.
Has been playing out historically, so I think you're going to see that as you continue to go forward thinking you know really important point. If you look at the volumes that we delivered in the Permian were above what we said we were going to do last year at the Investor day by about 20000 barrels a day. So that's clearly on track.
With respect to a the Permian and the Delaware.
Of course, as I said, the Delaware as much earlier in his development cycle.
The organization continues to to learn as we're going through that development I would tell you are making really good progress and what we're seeing there did talk about.
Oh are being more difficult and in the Midland, but I would also say again another advantage of the reorganization that we did last year in bringing kind of the best of Exxon Mobil with the best of our Exzeo organization into this space is that we're making really really good progress.
With respect to that and like what we're seeing and as I said.
I'd say, the guys and neo or real real excited by the potential here and I know, they're anxious to spend some time in March taking you through some of the proof points of that but I would tell you know we like what we're seeing in the Delaware and while it is different than the Midland.
Nothing to suggest that that the opportunity there is not as great if not better frankly.
Thanks, very much there.
Thank you.
Next question comes from line of Jon Rigby with Us.
Thank you and held on.
I just wanted to go to.
Fourth bullet points and we'll keep messages you do.
Driving efficiencies and improving the base business and although I think of over the focus does fall on your investment program I mean, you need to fund it and it seems to me.
We haven't been suggests that we may have been from shortfalls in.
In generating the earnings and cash flows from the base business too to fund that.
Investment, we've got a fair observation is difficult to.
Your guide.
Underlying performance from the.
The cyclical conditions, but.
Are you able to identify where there have been.
Unexpected shortfalls and.
Whether there were a business improvement plans et cetera to go after.
Changing that into Twentytwenty.
Yes. Thank you John good morning.
I'm just on that with respect to the shortfalls.
As I said in my prepared comments, it's really a function of.
The margin environment that we've seen out there and.
The.
The sectors that we've invested in terms of our production capacity in the configuration of that capacity as you look around the different chemical businesses in downstream businesses, where you typically see quarter on quarter and year on year and the big drivers of change in movement is how a the margins very impact each of the configure.
Operations in the investments so as an example, as it is your Hansen mentioned, we have liquids cracking and the chemical business in the quarter of the charts that he showed that was clearly had a clearly had an impact on the quarter and so there's a lot of structural changes that we look across the businesses. That's basically what we're seeing.
Thing is the.
Spreads that have changed across both the chemical and downstream business and given our configuration has impacted us that doesn't worry us, particularly in fact, if you go back in time and chemical that configuration was very attractive and made us a really good money over a number of years. We've had some significant investments in that space here recently, which has created this ambac.
Alan supply and demand, but the business is growing fast and we'll come out of that so we expect to see the chemical business and our base business returned to where it was in the past as that demand growth continues and that supply capacity in excess of clients by capacities coming down.
Don't forget to in the downstream a significant turnaround here last year as Neal said.
Highest level turnaround spend.
Last 15 years. So a lot of capacity was off arent line last year, you can't overcome capacity the shut down so this year.
Back to more normal levels, we should see.
The business returned to where it's at so I think you couple that low environment with some of the growth projects that we've gotten placing the expenses that come with that you see the impact with that.
But beyond that I think.
The business is running sound, we've always had a focus on efficiencies and becoming.
Better operators that.
When we find in margins environments like this and just.
Sharpens, our focus and makes it even clear to the organizational why that is so important so thats what I referenced.
I'd tell you are folks are motivated.
To roll their sleeves up and dig deep and hard and support the growth plans that we've got going forward I think a final point I'd make there just in terms our operations and execution you don't look much further than the projects and the the points I tried to make and what we delivered across our entire portfolio that was in refining that was in chemical and it was in the upstream.
Team are the things, we talked about two years ago.
For very large projects basically delivered as we said and working as we said so that's significant and I would just again reemphasize the project in Rotterdam, which was a brand new technology and process never before implemented in any refinery around the world. We brought that on came up into operating today.
Exactly as design, that's a pretty astounding accomplishment that I don't think gave our competitors could make today.
Alright.
Thank you and just a quick follow up you mentioned definitely the full Guiana in Brazil in 2020, the could we expect Mozambique as well at some point India.
Yes, Mozambique, we're working with our partners all we're making progress.
With respect to that but.
I would think.
As we make per as we make progress, we'll we'll f. idea that when we get to the right stage I think right now we're working towards.
Timeline that would give us production somewhere back in 2025, something like that.
Okay.
Okay. Thanks, a lot you.
You bet. Thanks, John.
Next we'll go to Doug Terreson with Evercore ISI.
Good morning, everybody.
Our Doug Doug.
Darren declining dispersion of returns on capital for the big oils suggest that competitive advantages maybe converging between the different industry players over 510 years.
At this point you guys. It's historically indicated and I think you did a few minutes ago in technology and scale and integration, where key advantages that differentiated Exxon Mobil and will lead to value creation over longer periods. So my question is whether this premise is still Ed salad in your view, meaning while your portfolio of opportunity.
He does arguably the best peer group, maybe the strongest in a long time are you still as confident as ever about the strength of your competitive advantages and the returns profile and that was also approved this over time or has it changed if it has changed which areas are becoming more difficult the sand.
Right.
Yeah. Thanks, Doug I appreciate the question I, you know obviously competition.
Always makes it challenging area and you got to continue to innovate if you want to try to maintain a premium above and beyond what the rest of competition is doing and we remain convinced that.
That premium will be driven by technology and technology developments I would also tell you. We're convinced that does that premium will be earned to our other competitive advantages.
I've talked a lot about their project execution that we've gotten place I think that is a huge competitive advantage. So I'm I continue to believe that we will have returns on capital employed that.
Our higher than our competitors and driven by those advantages I think though yet because you've got to step back and look at that over a broader timeline. If you look at where we're at today in the investments that we're making those projects are very accretive and very high returns, but we're in the early stages of the capital without realizing the benefits of those.
So I think as you go through time, you're going to see that move in any one year, but over the longer cycle, you're going to see the advantage of those begin to accrue may look at what we're doing in Guyana and the comments that made around the discovery. This enormous amount of resources that the organization has found in our bringing on with leading edge to.
Developments, that's got to drive better returns I mean, the chart that we showed demonstrates that look at what we're doing in the downstream business historically low margin low return business one of the reasons why we haven't invested.
Heavily in that business in the past as we couldn't find advantage investments to change that yield profile with the breakthroughs that we've had in some of our process technology work and catalyst. We're now unlocking some of that as you've seen with Rotterdam again, there's technology, that's giving us an upgrade and value added capital cost much lower than what the rest of.
Industry could achieve we're taking that same process technology into Singapore, and upgrading even lower value streams to higher value products. So again.
The lower capital costs were going to see.
Those at a higher returns and if you look at the on the chemical side, we're very focused in the investments, we're making are all driven by performance products.
Do you start with large scale facilities.
You fill them initially with commodity and then you grow performance products and eventually those products.
Those those plants and switch over to all performance products and so again higher return so each one of the businesses. We have a clear line of sight of how we gain advantage of crossed.
Competition and the question is when will those manifest themselves will be want a function of where we're at and that investment versus.
Production cycle.
And and where that any one years, those margins or add but ultimately I don't see a change and the recipe or the dynamics that would change where we've been historically.
Okay.
And also the integrated business model has been the most productive model in the energy sector for several decades, although I guess changes to competitive structure can always change that and future. So consistent with the points. I think you just made about technology and execution multinational experience et cetera.
Do you still consider the integrated model to be optimal and the one that LT grinders potential for superior returns and shareholder outcomes and also there and if you're thinking changed any on this topic over the past several years.
I would tell you I still believe this is an area of value and the only change in my thinking is.
How much more potential there is to be realized in that process.
You know I think you're aware Doug that we brought the entire organization together on the Houston campus.
Starting in 2014.
First time in the history of our company, where we had all of our businesses on one location, which we don't know it allows that those organizations to continue to explore and look for synergies and I would tell you that were in the early stages of finding a lot of significant opportunities. The projects organization is a great example of that first time.
In our history that we had.
Our upstream chemical and our downstream projects organization together in a lot of opportunities to take advantage of each of the strength of those organizations applied to the other parts of the organization. So we like what we're seeing there I tell you if you want to look to a.
Concrete example of what integrations brought to the company look no further than the logistics that we started investing in to connect.
Our upstream developments with our downstream and chemical assets in 2018 as the differentials opened up we've made $1.8 billion.
On that that disconnect, which I think only an integrated company could capture and those that comes and goes as we talked about 2019, those differentials weren't there, but we anticipate that they'll be back and.
The final point I'd make with integration.
If you look at what we're doing in the Permian and the investments that we're making and chemical end to end refined goes are geared towards the barrels coming out of the Permian and some of the opportunities we see with those barrels that would have been hard to do if we were a standalone downstream company or standalone upstream companies only having both of those and being able to under.
Dan what's happening in each of those areas that you can find some unique value. So I am convinced over it we have a lot more advantages to bring to table that overtime begin to manifest themselves as we continue to exercise the organizations that we've put in place down at the campus.
Got it sounds like projections and strong as ever at least for you guys and thanks again for joining us Darren.
You bet, Doug nice talking with you.
Yeah.
Next we'll go to Roger read with Wells Fargo.
Yeah. Thank you good morning, welcome to the call Darren.
Drink.
Well I guess, so much of what we've heard from Exxon and from some of your peers is.
It's definitely at on favorable call it.
Yes, generally cyclical downturn here across all the various pieces, but the one area I was kind of curious about.
Yeah.
This week as anything else seems to be on the global gas side, you're one of the major players in the LNG markets, you've got several different locations, where you're looking to expand over the next couple of years I'm. Just curious how you see that sort of playing out its way out and whether or not there any issues on advanced side.
There.
Yeah, I would you look at I think.
Separate out maybe the LNG business with with domestic gas business, let's have some some slightly different dynamics associated with them overall continue to see very good growth and the gas business LNG I think we are seeing projecting about 4% growth annual growth in LNG I think both stories, both domestic and LNG.
He is again, it's very similar to the discussions that we are having in the downstream in chemicals, which is fairly solid and good growth.
But we're seeing short term over supply and therefore lower margins and our expectation is that that demand will continue to grow.
In part driven by.
Concern to climate change, replacing coal for gas, but also.
Just as economies grow and people standards of living grow and more powers needed gas is a very.
Reliable and secure source of supply for power generation. So I think that dynamics going to continue to happen I think the LNG oversupply overtime will work itself out and I.
I think investments in that space will probably slow and eventually.
The demand will catch up to the supply and things will improve as again, it's the same dynamic of a capital intensive long cycle investments and as those come on in the market adjusted.
And compared to demand. It just takes some time for those two to reach unbalanced be typically see that I don't think thats that dynamic is going to change.
Why of course, we're very focused as we look at these investments are making sure that as you look across the global supply curve that we're on the left hand side of the cost to supply curve.
The projects that we're investing in.
Have advantages and be lower costs than the broader industry and competition. So that as that oversupply impacts margins were on that left hand side and can see still see advantages to having those.
Investments, yes, same dynamic that I've talked about in our downstream and chemical investments large investments that we brought online and yet we can we're making money in bottom of cycle conditions, why because they were advantage and we wouldn't invest in those until we found a way to get them advantage same is true and the LNG business.
Great. Thanks, and then come along the lines or somebody else. Thank you talked about on potential for deferring capex if needed to keep things about this we think about the dividend Corrado said I know you can't give us number or whatever it goes to the board, but how should we think about dividend growth.
It's in a kind of cash flow constrained environment with the larger commitment here to the Capex cycle.
Well I think as I've talked about before as we look at the business from a macro standpoint and allocation of capital.
Capital, we start with in order for this business to maintain.
How long term value proposition, we have to continue to invest and we have to continue to.
Developed projects and opportunities that are advantage versus industry. So that's a priority making sure that we invest in this capital to and certainly in the upstream to offset the depletion that we know occurs in both the crude and gas side of the house and in the downstream, making sure that we're we're using technology to improve yields as.
Aside these demand patterns change and those yield profiles change on a barrel of crude.
Then in chemicals to keep up with the pace of high performance products that meet the needs of growing economies and populations where their standards of living are improving and so that's kind of job number one and we got to make sure that we continue to do that to keep pace and to have a long kind of prosperous business as we look into the future. We also feel.
Very.
Firmly that we've got a commitment with our shareholders to provide reliable and growing dividends. So we would continue to look to do that and.
Right through these price cycles, given the long string to the long term fundamentals, we think thats an appropriate thing to do and so we'll look to continue that trend of steady and reliable growth.
And then of course is maintaining.
The balance sheet, and our financial capacity with where it needs to be to ride through the cycles and to take advantage of the opportunities that we seem to down cycles and into also mitigate managed volatility that we've seen in recently experienced so that's kind of as we think about the primary criteria for how we use cash and at the end of the day, we met our criteria.
And we've got additional cash and then go back we go into buybacks and return excess cash to the shareholders. That's that's been the model for a long time.
And I would tell you that that model remains.
Pretty effective as we think about what we need to do in this business.
Thank you.
Q.
Next we'll go to Phil Gresh with JP Morgan.
Hi, there.
[music].
Thanks for taking my question. So as we look at where you are on the asset sale plant.
You talked about 15 billion over three years 25 billion longer term, there's been some reports out talking about maybe.
The plan is moving faster than that in terms of in terms of three year plan. So I just wanted to get your latest thoughts as to relative to the risks plan.
That you laid out there how you're feeling about that now just in terms of.
If it does come in better business first to use asset sale proceeds basically going to be to fund any dividend coverage gap.
To this investment phase if we're at the bottom of cycle here again in 2020 or.
To your point on buybacks since that studies.
Cards and that type of stereotypes.
Sure fill.
Good morning to I would tell you you know.
As we introduce the.
A divestment program and they'll chairman talked about that.
Last year.
I always said it was a risk program and the intention was to put we would have more assets out.
Because we didnt expect to transact on all those opportunities and so I think the reports that you're seeing reflect the fact that there are no we are.
Looking we've got a number of assets out in the marketplace. Today again, we don't expect to transact on all those and so we've made some risking judgment.
And whether or not we exceed the numbers that we've talked about or in fact fall below this will be a function of the buyers and.
The deal space, we find with those buyers clearly.
Last year, we found an opportunity where.
Our heads so a value higher value than we thought we could realize with our Norway assets that resulted in a transaction I think a win win for both of US if we find more of those more than we've anticipated and I think will be above on the other hand, we've had deals that we've worked and couldn't find the deal space and Didnt transact. So.
That was the point I'm trying to make in my comments.
This is really around a portfolio high grading the only way I can convince myself that we're upgrading the portfolios. If we realize a value for an asset that's higher than what we think we can realize by keeping it in our portfolio and so I would just tell you.
How fast that goes and how far we goes it really going to be a function of the buyers and the opportunities that we find and we're going to look at it that way I'm not.
While we try to estimate what were what we think will bring in I'm not going to sacrifice the value proposition to hit any particular number and I'm not going to pace. It.
I'm going to worry about the pacing as much as on my end around the value proposition associated with it and then with respect to the proceeds as I mentioned when we rolled this out it's all it really a function of the broader environment if.
We see margins improve.
And our businesses, if we see prices rise in the upstream.
And we bring in more revenue, we'll look at those balances, we certainly want to keep our.
Our projects funded we weren't we're going to continue to grow reliable dividend. So those are going to be the first calls on that cash and then we're going to make sure that we keep the balance sheet holes and where we needed to be in so I think those will be the priorities and at the end of the day, we'll see where we're at with that and make decisions on buyback after it.
Sure Okay.
Second question just.
I think probably the standard one we ask every quarter, but just it seems like the energy sector valuations continue to deteriorate here and this for the.
Public companies are looking on our screens so.
From your perspective. It is this is this an environment, where you think valuations.
Our getting more compelling to you in terms of potential M&A opportunities or just how you think about that.
Thanks.
Yeah. Thanks, So I think you know.
First I would say I am.
I believe that the highest value opportunities are the ones that you can generate organically because almost by definition, you're not paying a premium form and so I think we've got a really attractive portfolio, if you've talked about and that's what anything that we do has to compete against is those organic opportunities and so that's my starting point and then we.
Look to see if.
There are opportunities out there that we can transact on that compete or better or better than those organic opportunities.
While the short term market fluctuations are moving around and you see that valuation change obviously.
The ability to capture that will be a function of people, who in the market selling and there longer term views of their business and whether or not what position there and whether they are forced to take the current valuations or whether they think longer term and look at devalue.
Somewhat differently. So I think again, it's kind of.
Difficult to talk about generically it'll be a very specific case by case.
Basis, we just as we're active in the divestment side of the house and they've got.
Assets after after marketing, we keep vary from finger on the polls of the industry and the opportunities and keep our eyes open for opportunities that can bring additional value to the company.
Okay. Thanks.
Good talking to Phil.
And next we'll go to brush broker carrier with RBC.
Hi, Thanks for taking my question.
Question going back to the financial capacity.
The numbers you reference in China, I think when net debt to market cap.
We milling and is either net debt to capital employed on that net cash flow.
When you think about the capital employed number with the equity I.
I guess investors need to be confident indeed, the value of equity and what we've seen in the last year. So the number of your peers unknowns impairments due to low price takes it could you are you willing to share what price ticket using.
Oil and gas.
Test for impairment that'd be my first question.
Yes, thanks barrage.
Now we don't we don't typically put out.
A price deck and I wouldn't I don't have any desire to kind of start doing that I mean, maybe tell you a little bit about how we think about pricing going forward and the first thing I would say is I don't think any of our peers and certainly within Exxon Mobil, we feel like we can predict prices I think there just way too many variables involved.
To me developments to occur over time to really I think it from handles on where short term prices are going to go.
We do though what we do new though is looking forward in the future.
We start with kind of building up what I would say is a very fundamental approach to where what will drive oil and gas demand, which comes back to economic growth in policies in all of those assumptions and how we think about how the world will evolve.
With respect to our industry, we publish in our energy outlook. So if you if you're interested in understanding what's driving our pricing assumptions I would start with our energy outlook, because zach forms the basis.
Everything that we do with respect to how we think about the future and how we make investments decisions.
Again since that's our basis and then since our businesses commodity we continue to believe that in the medium to long term that market prices will be set by the marginal cost and return criteria of the marginal barrel.
Yes, and needed to needed to meet that demand and so.
You know classic.
Nomics supply and demand marginal producers such that the market price, we try to take a kind of a high level view of added what will be the resources that come on and meet that last barrel of demand.
And that is the view that we take around what will kind of be the price setting mechanisms in the market and of course that evolves over time and that's what sets generally our price outlook is the economic and demand side of the equation, including advances in technology, including.
Additional regulations in policy around the world and we look at where technology could go in what what supply sources will come on and what we set to.
The cost of supply and instead, our pricing when we finish that exercise, we stepped back and compare our view with other published we use third party abuse and check for reasonableness.
To the extent that other companies published their numbers, we look and compare to make sure that are our estimates at least appear reasonable in general there always within the range, maybe perhaps on the low side of what we typically see out there but.
That's how we do it and you can imagine that process does not lead to huge changes year on year simply because.
The fundamentals that are referred to don't dramatically change year on year. They do evolve obviously, certainly if you think about.
The tight gas or that the shale revolution that wasnt evolving in developing story and that obviously had impacts on the marginal tiers of supply which had impacts on on pricing, but that that has been kind of an evolution. That's been built into the price deck over the years is pretty constant now so that's how we do and that's how we.
Think about it and.
They will make our investment decisions based on that and then test.
Really on the low side in high side to make sure that investments that we're putting in place our robust two cycles that we know we're going to see.
Okay and netted the second question I, just wonder if you could give them up and pumping beginning on notice. Some article this morning about.
Okay stations with government melting according to time for the expansion because you just update is on where that project is and what that means the f. I'd.
Sure well, let me just start with maybe the bigger picture of Papa New Guinea, obviously, where the operator of the PNG LNG project, which was a $19 billion project is bright brought employment to about 3200 people and Papa New Guinea.
Since 2010, we spent about over $4 billion on Papua New Guinea in services, including about $2 billion spent with land or companies, we've invested almost $300 million and community and infrastructure programs focused on education health women's empowerment and number of other areas.
So the established business that we have there I think has been a real benefit to pop and again, a and obviously have been a for a benefit for us. We're looking at this expansion and we're looking at bringing in.
The pop what project with total.
Along with paying Yang and had been in negotiations with the government. We're disappointed here recently that we weren't able to reach agreement with the government on paying Yang, but we're very hopeful that that those discussions can can move forward and continue I think you know from our perspective.
We've got to find a way to get to a win win proposition.
We've got to big portfolio of opportunities as I've been referring to here. This morning, and anything that we decide to F.I.D. and move forward. The has to compete within that portfolio. So that's the basis on which were looking at this negotiation and working with the government needs to be a win win.
I think we'll continue to try to establish that with the government, but I also think we've got some time given all the other opportunities in front of us.
And frankly, given where we're at today in the supply demand balance of LNG I think we can you guys on the working with the government.
I'm hopeful and I'm fairly confident at some point, we'll find a way forward with them.
Very helpful. Thank you.
Next question comes from the language.
Your next question comes in light of Jeanine Wai with Barclays.
Hi, good morning, everyone.
Our engineering for engineering.
So I guess my first question is on the Permian its dovetailing off from Neil's question.
And then specifically on the rig count. So can you provide a little more color on how operations are dying and if theres any change in the number of rain your prior to make that million barrels a day on that you laid out earlier. So when we looked at the data the rig count has been trending flat to down over the past six month and I noticed the rig counts can be pretty good.
Eating given improving efficiencies and all but have you encountered anything unexpected in particular, we're referring to the sub servicing the dollar.
Yes, let me I'll talk a high level I first of all I'm, not a big believer and.
Extrapolating rig counts into kind of.
What we're doing in the business and the approach that we're taking in the progress we're making in the development I think it's a fairly crude as a measure, particularly for the work that we've been doing there as you recall.
What we laid out in the in the Permian and particularly in the Delaware was a large scale approach, which is was unique to industry.
That leverages the scale that we have as a corporation leverages the technology.
Some of the resources that we have within the company and we have been developing.
The tools to model and.
Develop that resource that we think is pretty unique in the industry. We used a lot of rigs to help delineate what we're doing in that space as we collect that information build those models and optimize I think you're going to see movements around what we're doing there.
So I would not again.
Take too much.
Draw any conclusions from strictly speaking that rig count and it with respect to that work that we've been doing as I mentioned in my prepared comments, we feel really good about the progress that we're making in seeing significant improvements.
In the initial production across to 365 days and.
No longer we like what we're saying with the the recovery rates, we like what we're seeing with the DNC cost and those are coming down.
We like what we see around some of the well performance, particularly in the Delaware I think if you look at the results that were getting were.
Leading industry I think.
It's fair to say so.
Good progress there. It's just really a question of how we want to continue going forward and pace that and I know that Neil and his team are looking at that in light of.
The environments that we've come out of in 2019, and when we get to March I think the folks will spend some time kind of share and some of the proof points of the data with you to help you can get better picture that and then we'll talk more about kind of how we see path going forward here, but bottom line.
The potential that into value propositions that we've talked about.
Haven't changed if anything we like it better.
Okay, Great. That's that's really helpful. Thank you and then dedication guarantee or quickly.
As far as the light sweet heavy sours spreads being slower than expected to MAGEC and exclude discounts maybe not being at full parity with the product pricing you indicated in your prepared remarks that ultimately you expect you to improve our rivers.
So my question is could this be a potential tailwind for as early as one Q and any additional comments you have on this timing and how you see that developing.
Thank you.
Sure I I don't we said developing slower than predicted I don't know the we ever had a real from prediction or how this is going to play out I mean.
The markets you've got a lot of variables that go into at this was a known event that was going to happen and so a lot at different players very fragmented market lots of different actions with storage in inventory and so I think.
Really difficult to predict exactly how all those variables and all those independent actions come together and results.
And what we're seeing in the marketplace I can tell you. What you see is explainable you certainly put a rationale behind how how long it takes could play out and get back to what we think eventually will be more market parity I think it's really a function of where the different inventories and how people are choosing to optimize around the new requirements.
With respect to IMO reason, why we're convinced that.
That eventually we'll get back to parity is because the fundamentals.
Associated with IMO are pretty pretty clear and the.
Kind of the economics of refining aren't real hard to.
Figure out.
He has this as youve taken sulfur out and the valuation of high sulfur feedstocks and products have dropped down.
That's got to make itself back into the crude and crews that are higher sulfur and heavier they're producing more of those lower value products ultimately have to reflect the fact that their product the yield profile off that barrel of crude.
It's less attractive so I think that's a pretty foundational element of crude markets in refining and eventually those will hold and then the short short term depending on different actions at folks have taken and what their position is and what moves it did earlier and what inventories look like it's going to take time to.
Work itself out I would tell you from our perspective we.
Manage this based on the longer term fundamentals, we made investments based on the longer term fundamentals, we didn't make any.
Investments that assumed credit.
For this transition and the benefits that might come along with it given in particular investment. We just recognized it would come but to the decisions that were made were based on more of the longer term fundamentals.
Okay very helpful. Thank you very much.
Good morning, and operator, I think we have time for one more question.
Alright, great, we'll take that question from Ryan Todd with Simmons energy.
Thanks.
Maybe a quick follow up on some of your commentary earlier on the LNG markets are you seeing.
Can you comment on whether you've seen any pressure on existing are currently negotiating contracts.
And also some of your European peers have been successful and offsetting some of the ongoing price weakness in the medium term price weakness the.
Active portfolio trading globally, I believe you look to increase those capable capabilities across the organization globally can you maybe talk about.
Progress in that direction, and how you may be able Dan.
Mitigate medium term weakness in global LNG prices.
Yeah fix Ryan I think you're right your observations are.
Pretty solid in terms of there are opportunities with portfolio trading to try to mitigate.
Some of that short shorter term weakness.
I think as you look at the markets.
You see the Mark is kind of slowly evolving along those lines at the same time.
You know out of the buyers in LNG market.
Our interested in ensuring long term deliveries in certain surety of supply and so there's still a desire for the longer term contracts as new projects are if I didn't develop often times a fan financing requires.
Secured outlets and terms of on that so there are a lot of underlying dynamics with it fit Keith what I would say is the more traditional longer term.
Transactions in place and so while I think the markets will convene continue to develop and there'll be more trading on top of that I think they'll still be a layer of.
I would say is the historical approach to tell LNG and that'll be a very slow moving transition overtime.
With respect to the.
LNG trading or we have.
It's been widely reported I've talked about at the last time I was on we have been gun looking in moving more into some of the trading as that market evolves, but our intention is to kinda evolve with the needs of the market.
And that will just become a.
A bigger piece of our business as that becomes a bigger piece of the market and more relevant to the market.
Okay.
Perfect. Thanks, and then maybe maybe one quick follow up on chemicals, obviously, it's been a tough environment and you talked about.
Thank you a rebalancing from a supply demand part of your.
Can you talk about I guess, if you look over the next.
12 to 18 months.
What you've seen in terms of some of the market dynamics and the recovery from that point of view and.
You highlighted in your presentation growth related expenses of $160 million.
And we've done a delta bases in the quarter.
Pretty active growth program any help on maybe the direction the magnitude of those growth related expenses going forward.
Yeah sure I think so maybe start with your last point around growth related expenses, I mean, obviously as large capital projects, a large manufacturing investments as.
As you progress those there are costs come along with them I think you can think about those growth related costs and three.
Basic buckets. The first is as you bring on new investments. So the steam cracker is that we brought on the polyethylene lines that we brought on those different investments that are up and running obviously there are cost associated with those new investments and.
The first bring those up we categorize those in as growth expenses, because their new facilities and we want to make sure as we look at those we think about those different than what the basics expenses are since we are driving based cost down. We've got same time recognize that more cost will come in from operating new facilities. So that is.
The one bucket other projects that are in and construction. So as an example, our cracker on in Corpus Christi area. There are expenses associated with in progress projects, which is another bucket to think about with growth that's not off oftentimes not as large because a lot of the costs associated with that development gets capitalized.
But there are expenses to go along with it so thats with.
And the bucket.
Third growth expenses as we look at further into the future and look at opportunities project teams are working the next project to fill the pipeline further out that growth expense and so.
And the chemical businesses. That's that's how you should think about those growth expenses and obviously, we keep a pretty close eye on those and are making sure that as we grow we're growing as efficiently as possible, but also recognize that at that activity has to be funded and therefore, recognizing except those expenses.
With respect to the.
When the cycle or how we see things playing itself out you know, it's really a function of where growth goes I mentioned, you know really strong growth.
In the polyethylene business polypropylene business, we continue to see that had to see how the world economies evolve your China. Obviously has got some challenges here in the short term.
That may manifest themselves in the quarter, so difficult to see how long and what impact that will have on where China goes that's obviously, a big player and the chemical business.
Our perspective is.
While we are interested and try to look at where that cycle is how long that cycle is going to last and where it goes too.
We recognize we don't control it and so focusing on things that we can do to make sure that as we're in that down cycles that were successful by making sure we're running efficiently keeping our cost down really ensuring that all of our production on the margin is profitable is what the organization focused on.
This year, we'll continue to be a challenging year for our chemical business, but I think as we get in the year further out we'll start to see some things improve and then it's just the slope of that improvement will be a function of a lot of different things and frankly, it's hard to predict that far out.
I'll come back to though you know we know these cycles, you're going to happen and we know it's the impact on our business is driven by the sectors that we choose and chosen to invest in and marketing.
If you go back in time, those decisions have proven to be very beneficial to the company and in fact, one of the reasons, we find the margins where they are is because that's attracted a lot of additional investment.
Growth will will take us out of that was just a function of while we're waiting for that growth to catch up and exceed that capacity, we got to make sure that we're managing this business as tightly as we can.
So that we can stay as profitable as we can.
Thank you.
Great. Thank you for your time and thoughtful questions. This morning, we appreciate your allowing us the opportunity to highlight a fourth quarter and full year that included a number of key milestones and continued progress across our portfolio and we look forward to seeing every one of March 5th at our Investor Day in New York. We appreciate your interest and hope you enjoy the rest of your day.
Thank you.
That does conclude today's conference we thank everyone again for their participation.
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