Q4 2019 Earnings Call
Instructions will be given at that time, if anyone should require assistance during the conference call. Please press Star then zero on your Touchtone telephone as a reminder, this conference call is being recorded I will now turn the conference call over to the general manager of Investor Relations of Chevron Corporation Mr. Wayne for do please go.
I had.
Thank you Jonathan.
Welcome to Chevron's fourth quarter earnings conference call and webcast, our chairman and CEO, Mike worth and CFO pure forever are on the call with me.
I will refer to the slides that are available on chevron's web site.
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.
Now I'll turn it over to Mike Alright, Thanks Wayne.
Last March I laid out chevron strategy to win in any environment focused on four elements that differentiate chevron from its competitors.
Advantage portfolio, a resilience to price downside commitments to capital discipline.
Superior capacity to return cash to shareholders.
And as we've done in the past we delivered again in 2019.
We generated over $27 billion in cash flow from operations, we executed our $20 billion capital program.
We grew annual production to a record high.
We continue to hybrid our portfolio and we further strengthened our industry leading balance sheet.
As a result.
Earlier this week, we increased the dividend by more than 8%.
And we expect to sustain the increase share buyback rate of $5 billion per year going forward.
And we did this despite the cost increase at Tcl in the fourth quarter impairments, which Pierre will cover in just a minute.
2019 performance delivered on all four of our financial priorities, which I'll cover on the next slide.
These priorities don't change they've been the same for a long time.
For two years in a row, we simultaneously increased our dividend.
Increased share repurchases group production and reduced debt.
Not everyone can see this.
You can see the sources and uses of cash on the slide including the $13 billion returned to shareholders nearly the same amount as our cash capex.
2019 was a good year and we intend to do even better.
During our analyst day in March will lay out our plans to further improve performance in order to continue to deliver superior returns to shareholders.
With that I'll turn the call over to peer who'll discuss our 2019 financial results here, Thanks, Mike turning to slide five.
Fourth quarter results included a net 9.2 billion dollar charge and special items and a foreign exchange loss of $256 million.
Excluding special items NFX earnings for $2.8 billion or $1.49 per share.
A reconciliation of non-GAAP measures can be found in the appendix to this presentation.
Cash flow from operations was $5.7 billion.
This is lower than the prior quarter impart due to higher taxes on repatriated cash.
Including the cash impact for the $430 million tax charge that was accrued in the third quarter.
Total capital spending was $21 billion.
This concludes around $800 million of inorganic spend which we don't budget.
Merely relating to the purchase of the Pasadena refinery.
And acquisition costs for exploration leases and additional working interest in L. trivial.
Return on capital employed was about 7%.
When adjusted for special items NFX.
We're committed to improving returns on capital.
And we'll share more about our plans to do so at our analyst day in March.
Importantly.
Our strong free cash flow enabled us to pay over $2 billion in dividends and repurchased an additional $1.25 billion in shares in the quarter.
As Mike mentioned earlier for the full year.
Returned $13 billion in dividends and share buybacks to our shareholders.
And we end the year with a stronger balance sheet.
And the lowest debt ratio among our peers.
Turning to slide six.
In the fourth quarter, we recorded over $10 billion and impairments and write offs.
These are triggered in December by our decision to reduce funding to various gas related opportunities.
And to lower our long term oil and gas price outlook.
Line item detail is available in the appendix.
While we're disappointed by these charges.
We're confident that we're making the right decisions to prioritize our capital on our most advantaged highest return assets.
These charges are partially offset by $1.2 billion gain from our UK asset sale.
Turning to slide seven.
Excluding the impact of special items NFX.
Earnings decreased $3.6 billion in 2019 compared to the prior year.
Upstream earnings declined primarily due to lower commodity prices, partially offset by higher liftings.
Downstream earnings also were down due to lower refining chemical margins together with lower volumes.
Due primarily to the southern Africa divestment.
The other segment charge adjusted for special items, and FX was modestly higher but in line with full year guidance of $2.4 billion.
On slide eight.
2019 production was a record 3.06 million barrels per day.
An increase of over 100000 barrels a day.
Or more than 4% from 2018.
Excluding the impact of 2019 asset sales production grew by 5.4%.
Right in the middle of our 4% to 7% guidance range.
Shalin type production, primarily in the Permian.
And the ramp up of Wheatstone and other major capital projects increased production by 235000 barrels per day.
This growth was partially offset by base decline and the impact of asset sales, primarily in Denmark and the UK.
Turning to slide nine and our reserve replacements.
In 2019.
Our one year reserve replacement ratio was 44%.
Our decision to reduce capital funding the Appalachian natural gas resulted in a negative revision of about 400 million BOE, we have proved undeveloped reserves.
An asset sales reduced reserves by another 100 million Boe.
Adjusting for these two items reserve replacement was around 90%.
Annual reserve replacement are lumpy by their nature.
Five year reserve replacement ratios are more meaningful and ours is 106%.
Highlighting our continued focus and sustainability to replace the proved reserves that we produce over the longer term.
Moving to slide 10.
Slide 10 highlight some recent commercial developments.
First we acquired an additional 15% working interest in the L. choppy outfield in Argentina.
Giving us 100% ownership of the conventional production and the unconventional potential in this block.
We also recently announced an agreement to acquire terminals and retail sites in Australia.
Allowing us to further integrate our refinery production in Asia, but the strong retail network after the deal closes.
Late last year, we also signed agreements to sell our interest in our upstream assets in Azerbaijan and Colombia.
Both transactions are expected to close in the first half of this year.
And a few weeks ago, we joined the hydrogen council.
Building on our knowledge and experience with hydrogen and our commitment to explore ever cleaner energy solutions for the future.
With that I'll turn it back to Mike.
Okay. Thanks Pierre.
On slide 11, we're maintaining our commitment to capital discipline.
And in 2020, our capital budget will be flat for the third consecutive year.
The stacked bar depicts our organic simi budget of $20 billion, which includes more than $6 billion expenditures by affiliates.
Primarily tcl CP Chem.
And Gs caltex.
In the 2020 budget approximately 5 billion is allocated to our upstream based business.
4 billion to F. GP W. PMP.
Another $4 billion to Permian development.
$3 billion for downstream and chemicals and the remainder goes to other emcps exploration and other projects.
Charles Capital program is unlike our peers.
Our spend profile has low execution risk.
And as focused primarily on short cycle high return investments that are expected to sustain and grow the enterprise for many years to come.
Slide 12 shows our production outlook for this year, assuming a $60 Brent price.
We expect production to be up to 3% higher than last year.
Excluding the impact of any 2020 asset sales.
Our projected growth is largely driven by the Permian.
Partially offset by ordinary base declines and the effects of prior year asset sales.
The range reflects ketones areas of uncertainty in our business as noted on the slide.
After another year of record production in 2019.
We expect a fourth consecutive year of production growth, excluding the impact of potential 2020 asset sales.
Moving to slide 13, I'll share a few closing thoughts.
As I've mentioned before we intend to win in any environment.
We're not making excuses for tough commodity prices or margins.
As a result of our advantage portfolio capital discipline, low execution risk and financial strength.
We're well positioned for 2020.
And committed to maintain organic capital spending at $20 billion.
And return significant cash to shareholders through our dividends and buybacks.
More detailed guidance related to the first quarter and full year is in the appendix.
With that I'll turn it back over to wing.
Thanks, Mike.
I'd like to remind everyone that we have our annual security analyst meeting in New York in early March where we will share more about our business performance long term strategies and five year outlook. We're looking forward to seeing you there for those not attending in person. It will also be available via live webcast.
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 try to limit yourself to one question and one follow up if necessary, we'll do our best to get all of your questions answered.
Jonathan Please open the lines.
Thank you ladies and gentlemen, if you have a question at this time. Please press Star then one on you touched on 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 with the handset before you ask your question to provide optimum sound quality again.
The other question. Please press Star then one our first question comes in the line of Neil Mehta from Goldman Sachs. Your question. Please.
Hey, Thank you very much guys. The for the first question and this might be one for you Pierre is cash flow in the quarter earnings good cash flow light. It did seem like there were some one time or isn't there. So can you just spent some time talking about.
What some of those onetime items are and how should we think about that.
Rolling off as we go into the next quarter.
Yes, Thanks Neal so.
Cash flow was a little little light, perhaps in the third quarter. We did provide guidance that we expected to pay the taxes on the repatriated cash. So if you recall in the third quarter, we accrued in RPM now for that tax effect on repatriating cash, but the cash taxes weren't.
Actually paid until the fourth quarter. When in fact, you saw the cash move. So you saw cash balances go down by from over $10 billion to less than $6 billion at year end and then the second item I would side, whereas lower affiliate dividends. So we had lower dividends from our chemicals affiliates.
Fields Chemical company and no Tcl dividend in 2019, so at times in years past TCOS receded.
Dividend from PC on the fourth quarter, and we Didnt have that last year.
Great and that's the follow up is just on production guidance the up to up to 3% add it and there are a number of variables that you call for called out there, but can you talk a little bit more about how you think about volumes in.
The 20, what are some of the pluses and minuses that we should be focused on and how should we should think about thinking about some of the timing.
Those elements recognizing that you're you're solving for falling value over volume.
Yeah, Neel I'll I'll take that one.
We've had.
As I mentioned three years of production growth over 7% I think two years ago, 4.5% last year, five and a half without.
Asset sales, we continue to be on a good strong program in our upstream that's delivering volume growth and as we set up to 3%. This year the Permian is.
The biggest piece of that and you can see.
Over the course of 2019, what we delivered and where we're at what I would call full factory production mode right now in the Permian and so.
That.
Machine continues to click along very well Jay will talk more about that including not only kind of the near term view, but lay out I think a little bit of a longer term view for you in March.
We've got contributions from other shale and tight where we continue to invest in in both Canada, and Argentina, and and those are beginning to contribute not at the same magnitude as the Permian, but certainly strong growth.
We're going to wheatstone through improved reliability in addressing constraints and an optimization within the LNG plants. So we've got growth coming across a number of those.
And you know as you as you note there we've got some uncertainties on the PC it looks as if we will.
Begin production there here at some point over the next few months, there's still some details being worked out on that but that starts to come back in hard to say how things go in Venezuela really difficult to say right now and then the other one of course is.
Non operative joint ventures and.
We certainly have some expectations for activity there how that trends with.
Funding levels decisions by partners that are little hard to predict but look we're going to we expect to grow production again this year as I said setting aside if we we do anything else with asset sales in the portfolio and fundamentally the underlying drivers that we laid out last March where we sort of 3% to 4% compound annual growth rate over the next five years those those drivers.
And intact.
Thanks, Mike Thanks, Okay.
Thank you. Our next question comes from the line of Phil Gresh from JP Morgan Your question. Please.
Yes, hi, good morning.
This question here others. Some of your appears to be signaling a retrenchment in buybacks.
To protect balance sheets, obviously, you've talked about the strength of your balance sheet.
Willingness to continue the 5 billion dollar buyback here in 2020, despite the big increase in the dividends earlier. This week. So as you look at that I mean is there is there any reasonable scenario, where you would think it would not make sense to do the buyback from a from a macro perspective or is this something that I know a year ago. When you put us in place.
Yes.
We would stay there.
Sure most reasonable cycle. So just your latest thoughts on that thank you.
Yeah, Phil it's Mike.
No change in our expectations. There. We we've indicated we increased the buyback last year. If you look at our cash flow you can see that we certainly can afford this as Pierre mentioned.
That came down.
And last year, and we have the capacity to see this through cycles, which is what our intent is and no change to that guidance at all.
If I can just build off that and I dress Neil's question on fourth quarter cash flow big you'd look at full year cash flow. It was very strong again, we paid.
Hired 6% dividend per share in 2019 covered that we fully funded our capital program and grew production as Mike said over 4%, we paid down more than $7 billion a debt and in 2019, we bought back $4 billion a share. So we're exiting the year confident in our ability to generate future cash we that was.
Expressed with the 8.4% dividend increase and again this expectation of sustaining the buyback through the cycle.
Okay, great. Thanks.
My second question, just a follow up would be.
Sounds like you've been doubling down here on cost reduction.
First it's been a big focus for you recently, so it would be helpful. If you could talk about what's been happening lately on that front do you see this is something that would be material to investors in terms of chevron's ability to.
Reduce costs in the upstream or downstream businesses and the way that we could see thanks.
Yeah, Phil So I may sound like a broken record up on this but in a in the capital intensive business capital discipline always matters, and then a commodity business cost discipline always matters. We've done a good job in taking costs out of our business over the last several years in response to the to the downturn we saw earlier.
Last decade.
You can never assume that you're done when it comes to seeking efficiency.
And driving to an even more efficient cost structure and so.
That is certainly my expectation is we're going to continue to look for ways to do that we've taken cost out of the same post production has grown significantly over the last number of years and so unit costs have come down dramatically and my expectation is we're going to continue to look for ways to reduce both absolute costs and unit costs over time in in March.
We'll lay out a little more specifically what what some of our ambitions are this in the kinds of things you could can expect to see.
Thanks, Phil.
Thank you.
Thank you. Our next question comes from the line of Jason Campbell from Jefferies. Your question. Please.
Yes, thanks, very much on another solid year in terms of execution in the Permian.
I was hoping that you could address rather you still see the Permian as on target for being able to be essentially free cash flow positive.
Capital budget ticked up a small amount for 2020 and I know commodity prices have some influence there, but if you could just talk about what you're seeing.
Yes, Jason the short answer to that is yes, we do we fully expect to be cash flow positive in the Permian. This year, we exited the fourth quarter with very strong production. If you look at the growth Q3 to Q4 and and across all the metrics we continue to see.
Prove performance, we're getting more.
We drilled per rig every year lateral lengths are increasing you ours continued to go up development costs to can continue to come down and and we are becoming more efficient from both the capital and a and an operating cost standpoint, you put all that together with the royalty barrels and.
And the benefit of the fee acreage that we hold and.
In the picture in the Permian looks as strong as ever has some unique just gets better.
Great and then just as a follow up and this maybe something that you prefer to.
Largely defer to March but a lot of your European peers are putting a fairly significant amount of capital into businesses that they they call low carbon which.
Generally look to be relatively low rate of return.
But type of investments can you talk about within Chevron, how you think about.
Lowering the the overall carbon footprint of your portfolio and rather these are the types of investments that makes sense for you.
So let me start with lowering our carbon footprint that'll come to investments Jason.
We absolutely are committed to lowering the carbon intensity of our operations last year, we announced two metrics tied to a methane emissions and flaring.
That are driving significant changes in in what we do.
We have adopted two additional metrics, which I expect to also be included in compensation related a carbon intensity of oil production.
And gas production, we are doing a lot of work around marginal bateman cost curves across our entire portfolio to look at the intersection of technology investment and opportunity to reduce our carbon footprint, we're integrating renewables into our business in a much greater way with green power purchase agreements.
Seeding bio feedstocks in our refineries as soon as this year and and co developing.
Renewable natural gas projects with with dairy farmers for instance, and then the final thing is we are investing in technology is looking for things that can scale up that can provide solutions to the.
These challenges and this includes not only things like carbon capture from ambient air, but other things to try to decarbonize the more difficult.
Sectors, the where energy intensity is high.
Last thing I'll say is.
Just to remind you that we operate.
The largest on purpose carbon capture and storage project on the planet at Gorgon and we have two of the trains running right now the third will start up.
This year that will at full capacity be sequestering, three and a half to 4 million tons per year. So we're absolutely committed to finding ways to to address the climate issue when it comes to investments.
Can be challenging because the returns as you say.
Historically have not been competitive with some of the other things that so that we invest in our portfolio. We're looking for ways to improve that and find things that we can invest in that would offer attractive returns for investors also be good for the environment Importantly can scale and in this a big challenge and we need things that we can do and so.
And so we continue to be committed to that.
Thanks, Jason.
Thank you. Our next question comes on line of Jenny line from Barclays. Your question. Please.
Hi, good morning, everyone.
Good morning Janine.
Hi.
Following up on that question last month's Nike you are quoted by saying that companies that way until changes first upon them sale and we were just wondering are those comments specifically related to the gas write downs and Chevron is longer term view on natural gas versus liquid or was it more broadly speaking to chevron strategy later today.
Sanjay transition or else does something else.
You, probably the final to something else and it really is we need to continue to adapt and in our company has been around for more than 140 years, and we have reinvented ourselves many times over that period of time, we live in a world today with seven and a half billion people 20 years from now.
There will be more than 9 billion people on the planet, there's an expectation for a reduction in the impact of what we do and at the same time, we need to support affordable reliable access to energy for a growing population and growing the standard of living now. We also have technology tools that are available today that weve never seen before and.
And so what we need to do is continuing to evolve our culture.
Our applications of technology, our cost structure, our competitiveness and our discipline to be part of that equation for for many many decades into the future and so my comments really are a message to our employees that we need to change we need to evolve and it addresses all of the things that we've talked about a new dresses.
A more efficient and lower carbon intensity at our operations, but also calls for us to find ways to adopt new technologies and change the way we work in response to them.
Okay. That's very helpful. Thank you.
Second question is on the Gulf of Mexico, and potential upside medium term growth there, especially post 2023, so with tiebacks to existing infrastructure, there being very attractive from a rate of return perspective, and then portfolio can you talk about any technology that you're working on that could potentially extend tieback range.
And then any update you might have an estimate at resource that we can.
The excited about in terms of exploiting through existing facility to infrastructure given the continued focus on free cash flow.
Yes, so we we've sanctioned projects at the end of the year, which is a greenfield projects with anchor at a much lower cost structure, both capital cost and operating costs.
And we've seen before so I think when we find projects where thats. The right answer you will continue to see us do that and we've got a lot of exploration acreage out there in a good track record over time on exploration.
But the concept to tie backs I think is one that we need to continue to invest more in.
We had a discovery last year with with Hess as the operator called the sucks, a low cost high return tie back, which actually will turn a 2019 discovery into 2021st oil it's about five miles away from tubular bells, we've been working on technology to extend subsea tiebacks and.
This includes longer distance pumping of fluids compression and movement of liquids and the ability to avoid formation of hydrates and other things on the C. Pushing the range of tie backs from the neighborhood of 30 miles out closer to 50 miles and and that really expands the opportunity set for us to use it.
Listing infrastructure to improve production, we're working on multiphase sub sea pumps and in a number of these technologies and so I think as we go forward. What you will see is an increase blend of tiebacks and use of existing infrastructure.
As well as.
The occasional large greenfield project that that comes in and and things like anchor for instance.
You've got an initial phase of development and once that's in that enables what we've just what I just described which as these additional a follow on phases of development, which are much more economic and I think technology.
Just moves in one direction and it really builds on my prior comments that we need to look for ways to use technology standardization and and other approaches to make the deepwater even more economic lot of progress has been made on that and I'm optimistic we'll see more in the future.
Great Hi, Andrew saying thank you.
Thank you. Our next question comes from the line of Roger read from Wells Fargo. Your question. Please.
Yes. Thank you good morning.
[music].
Hi.
Yes, if we could ask Ed kind of one that's maybe on the risk side question and one that's on the the upside question. So the good news first you highlighted some of the things that are risks to 2020 production but.
Recent talk has been about restarting the neutral zone you have a position there and then I was curious where else.
Yeah, we could see some upside in the portfolio in 2020, I mean should we be thinking Permian or should we focused on some other portion of the operations.
Yeah, Roger so in the and the partitioned zone after.
Several years of of being shut down there has been progress with an agreement between the kingdom of Saudi Arabian Kuwait.
Memorandum of understanding has now been.
Ratified by the real courts in the Kingdom and the Parliament in Kuwait, and we're moving onto some administrative actions required to to implement that all of that suggests that we should.
Resume work in the PC. This year, it's been shut in since May of 2015, and so we will be careful to ensure that any start up and resumption of activity of safe.
But we really focus on equipment integrity and so it will be.
A careful restart and a gradual ramp and so I think in terms of production this year.
We're likely to see.
A startup at some point and then some work before we begin a gradual ramp so what that nets to is not a lot of impact this year, but if you could be some positive upside I think we'll see more of the ramp completed in 2021.
We eventually we'll have to get some new rigs in there to begin drilling additional wells and so.
It should be on a trend line over the next 18 months or so back toward something that looks like we saw before we shutdown.
In terms of other upside.
The the Permian has kind of continually surprised us the upside even as we raise expectations in the past and so certainly that is that as a possibility I mentioned, the other shale and tight and in those also continued to really showed strong improvement in terms of performance and so I think those.
There's some other areas, where you can see production upside.
Okay and.
And then for my bucket, a cold water on yeah.
We've seen global natural gas prices take quite a hit obviously fairly mild winter across northern hemisphere hasn't helped.
But part of it is your own LNG facilities and everyone else continues to run better than expected or we've seen some start to run above nameplate capacity.
And so as we think about gas and 2021.
Do you feel that is we look at North American forward curves, that's probably a pretty good indicator of the year ahead or is there.
You know reason for optimism at one place or greater pessimism about another just sort of curious how that would fit into your your outlook.
Yes overall, Roger I think the market is as you say pretty pretty tempered on.
On gas pricing and we have had a relatively mild winter both in North America and in Asia, and port markets reflect that inventory levels reflects that.
We're not banking on a recovery in gas prices, we've got an under we're underweight gas as percentage of our portfolio versus others and in a reminder, we've got pretty good term contracting on our LNG with oil linked pricing across a lot of our portfolio there. So.
From a relative weighting standpoint.
We may not be quite as exposed so maybe it was a bucket of coolwater rather than ice water that you don't on me there but.
Yeah. The markets are setting up I think to be pretty flattish and that's why we've got a focus on on self help and.
Things like cost as I discussed earlier.
Thanks, Great. Thank you.
Thank you. Our next question comes from the line, though Doug Terreson from Evercore ISI. Your question. Please.
Good morning, everybody.
Morning, Doug warnings, Mike So integrated oil returns on capital have converge between the companies during the past decade, or so which suggests that could benefit competitive advantages maybe converging to.
And on this point, while you guys have this matter of disciplined return driven cap allocation and Thats clearly.
The appropriate or approach leased in my view, but my question is whether you think that historical advantages and project management multinational experienced a logical superiority cost of capital maybe living something out are still strong understandable for chevron and so they are examples that underscore the strength of the advantages that you've got.
And on the other hand are there areas of historical competitive advantage that you.
Since are being eroded and where you'll need to redeploy capital away from any future.
Well, there's a there's a lot in there Doug.
Number one you're right I think we have seen this convergence of returns.
You know in part by the.
The last cycle, we came through in the high prices, we at a high cost structure with a lot of investment across the industry and we're now living.
In a world of.
More abundant supply and prices for then returns reflect that with the capital sitting on the books of everybody I do believe the advantages that have historically been associated with companies like ours are still strong.
And.
The project attendees, while we wish that the execution was going better than it is and disappointed in the cost and schedule update.
There are not many companies in the world that can do a project like that at all.
And and so I think there are strong advantages there are sour gas handling.
Capabilities are heavy oil expertise continues to be a value and as we get back to work in the PC, we will be doing things there that very few other companies can do and as I mentioned earlier, we've been hanging in Venezuela, which has tremendous potential and in our capability there to help.
Overtime developed that resource in a responsible way as something that is is differentiated. So I think there's some historic capabilities that are differentiators. The other thing I would point to is portfolio and certainly.
As we've talked about many times belabor, it but our position in the Permian.
Both from a size standpoint of quality standpoint.
The lack of relative lack of royalty given the fact is fee acreage and our experience with factory drilling which is a capability that not everybody has and we continue to see the benefits of that a year after year.
Is is another point of differentiation. So I still do believe there are there are areas that we do differentiate yes, I could build up mikes answer there likely we get and I said in my prepared remarks at our returns are too low and we're committed to improving them and we'll share more at our analyst day, but also.
Talk about cash flow, we talked about our strong cash flow in 2019 and.
Call it whichever macro environment, you want to call it a week or whatever but we're able to do all the things increase the dividend fund the capital program grow production reduce debt and sustain the buyback program at our last analyst day, we showed that over the next five years, we're gonna grow cash from ops. We said, we're going to keep capital essentially flat that means we're going to grow.
Free cash flow and so I think one of things that's not fully understood is that the capital efficiency of our program going forward is different than we've seen in the past. So we're able to grow and sustained cash flows at lower capital than than almost any time in the path and certainly better than our than our peers and that's what enables us.
To do the kind of dividend increase that we announced couple of days ago sustain a buyback program and still grow the enterprise for the long term.
Okay. Good points thanks, guys.
Thanks, Doug.
Thank you. Our next question comes in line of Paul Cheng from Scotiabank. Your question. Please.
Good morning.
Good morning, Paul.
My end deal.
You did a impairment charge, which is quite launch and obviously that that means that decision, making at the time.
Some of that Dan Palmer touching on what though so what what have we learn from this process on this on impairments and how your future M&A or punch a sense.
The process has changed.
Yeah Paul.
You know.
To the big.
Drivers of that.
Charge were our Marcellus position, which is essentially mostly dry gas would be a little bit of Utica, mostly dry gas.
And also the Kitimat LNG project, which is.
Canadian gas that is.
Quite a ways away from from the Kitimat.
Sites and both of those at the time those transactions where were entered into we and the world.
Had a different view on.
On natural gas.
I think the Permian and Unconventionals have really been a game changer you look at the.
Prolific gas production in the United States today, the market conditions that that we were talking about earlier with Roger and and we Didnt see those things at the time and so I do think there's a lesson about.
Testing M&A ideas against.
Ill scenarios that are not the then prevailing view on forward markets.
We did that with the Anadarko transaction last year and and there's a there's a reason that we like Anadarko from a synergy standpoint, there's a reason we saw a certain.
Well you level that we we would.
We would be willing to transact at and there's a reason we wouldnt go beyond that and and that's because commodity markets are hard to to predict and we certainly looked at cases that would have stressed and acquisition because we might experience a different market environment than the one that we we promised.
Maybe our central analysis on and so.
You'll give arrow said that predictions I think its yogi berra predictions are hard, especially when they're about the future.
Certainly true, it's not lost on us and.
And I would say that's the big lesson from these two is if you're going into the future with or into a deal with a pretty strong you on commodity price make sure you take a look at what happens if you're wrong and whether or not should be happy with it in the scenario where you are wrong.
On the second question I think now Tia already at just someone I mean return on capital and point last year, you and 7% at a $64 Brent price, which is no what than the S&P Mchenry Tonight thing.
And for most of the investment the Poppy thing 60, $65, Brent said much acetate wanting to keep companies in time.
Longtime.
Some sense so.
You're talking about a improvement you can you.
Give us some idea that we're given that big portfolio you have I mean, when that you see that because opportunity you may be able to we need to myself.
That return I.
I mean, we looking at some of the project what that yes, 10 key to future growth projectile bought the anchor we don't see those pull it yet we'd be able to improve your overall, we tightened idle.
Yes, Paul look Theres no silver bullet on improving returns in a in a flat commodity price environment, you roll up your sleeves and you get to work on all of a little things that cumulatively can drive returns higher and Thats costs, that's margins that's value chain optimization its reliability.
The its technology, there's a whole host the levers that you have to be working on.
This is what we do in the downstream business every day and what we've done in the downstream business for decades is you assume margins going to be worse in the future than they are today and you've got to find a way to get more efficient and productive with your operations in every little thing that you do and.
And that's what that's what we need to do I'm not satisfied with returns at the level that they are we're not going to wait for prices to to be the answer here. We simply have to we have to get after it and you'll hear more about this in March we will talk more about our plans to improve returns then.
But.
Theres a lot of magic wand here. This is good old fashioned hard work and its things that we know how to do we just have to get after it.
Yes, let me just add in addition to the cost and margin in value chain and all those efforts.
The the.
The Permian investments are very accretive to our book returns we showed in the second quarter that even in a growing asset and we are investing and growing in the Permian that returns are heading to 20% and north of that so we do have.
Investments that are accretive to the portfolio I just said earlier, we have some really.
Capital efficiency that is enables us to sustain grow the enterprise at lower capital levels than we have in the past. So when you take the capital efficiency plus all everything Mike talked about we intend to increase our returns over time.
Thanks, Paul.
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Thank you. Our next question comes in line of Jason Gilbert from Cowen Your question. Please.
Yes. Thanks for taking my question I guess this follows what Paul just said specifically on anchor.
It seem like Capex for the project was a benign I was wondering if you could talk about returns you've got a dance around it but maybe talk about returns specifically.
For that project and is that kind of one of the more competitive projects.
In your project Q and I've a follow up thanks.
Yes, Jason.
If I go back to an earlier period of time, our development cost for deepwater projects were north of $30 a barrel.
Anchor is actually south at $20, a barrel and that includes.
Some investment for new technology that we have two.
We have to.
Prove out here because we're dealing with.
Deeper.
Reservoir higher reservoir pressure, so 20000 pound technology.
A little bit of additional export pipeline, which is unique to this project as well operating costs have come down from the high teens per barrel down into the range close to $10 a barrels so we've seen significant improvements in.
In drilling and completions performance and and all of those things come together to to bring the cost down I'm not going to give you a specific return number because frankly, we run these things at different prices and different assumptions around.
Recovery. So we look at a range of potential outcomes, but I will tell you. It is it is competitive in our portfolio. It sets us up for additional follow on development that that will I think improve returns and the technology development on walks.
Resource.
Type that we believe holds a lot of potential as we go forward and so I don't think were done in terms of driving these costs down and.
In the deepwater we're going to continue to look to to make these projects even more economic.
When when you say unlocks a new resource types that kind of a high pressure high temperature.
More further yes.
Got it thanks.
And then it.
There's not a lot of visibility to your project Q beyond 2025, there's there's a couple of Gulf of Mexico projects for Permian, and Tcl and Thats kind of all you've given us.
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I Wonder if if you plan on.
Providing more visibility too.
Some of your projects that you have options around and then kind of.
Attached to that do you see an opportunity to step in to some.
International projects, maybe other companies that are looking to farm down sticks. Thanks.
Yes. So we will end March lay out a longer view to give you. Some more transparency I know that's a question that that a number of people have been asking.
One thing that that I would suggest is we went through a period of time over the last decade, where I think we conditioned ourselves and.
In our investors to believe that are the only path to future was by doing these great big projects and stacking up lots and lots of them because that's what we were doing at the time.
We have a very different portfolio today.
We have large tranches of production that are pretty flat in facility limited in Australia LNG in Kazakhstan.
Our our unconventionals begin to behave this way as you build up the scale there and so.
At the margin we continue to look for the right projects and highly economic projects as pure so those that are accretive to returns, but we're not nearly as reliant on those alone to sustain and grow cash flows into the future. We just have a much more resilient durable long lived portfolio and.
And so grinding away on enormous unconventional positions may not be quite as glamorous as during the big projects in terms of giving you a lot of things to talk about.
But it.
It really drives strong financial outcomes and and its durable I think longer than most people believe and so we'll talk about that more on March will talk about other opportunities. We have in terms of captured opportunities that people may not be paying much attention to it will talk more about or exploration prospects and the question on far.
Our mens that's always something we evaluate and if the right opportunities present themselves.
We look at those.
Thanks, great. Thanks.
Thank you. Our next question comes in the line, which book to Terry from RBC. Your question. Please.
Hi, Thanks for taking my questions. The first one is just on the base decline if I look at the figures on on slide eight.
And to take the base from that looks like the base decline was less than 1%.
Tony 19, and I guess excuse sales, but I'm, just trying to get a sense of.
With that figure is relevant.
And if there's anything funding in the 2019 number that is not applicable going forward just some comments around that would be helpful.
Yes, I mean, our base portfolio as large and Theres a lot of different assets in there. There are some things that now are in the base that are things like.
Jack St Mellow and Perdido and so as we've we've got some of these deepwater projects that are lower new projects. Some of the new investments in there to do net next phases of development in the like give you. Some some growth that offsets some of the underlying decline.
But it also comes back to this point I was just making to Jason and a larger percentage of our portfolio now is facility limited not reservoir limited and so so this mental model that the reservoir dynamics drive our overall production the shape of our production profile is what I think that needs to be.
Calibrated appropriately too.
Larger larger portion that does not behave that way so that results in more stable predictable production. There is modest investment required to sustain that facility investment or some new wells.
But you look at that you look at the brownfield opportunities, we have and the ways, we're using technology to arrest declines and base decline as just less in our portfolio than it was a decade ago and and that's not a short term phenomenon thats a structural change in how our production looks.
That's helpful tax bracket follow up.
Yeah. The second questions just on a slightly different tech but.
As you guys sitting in California, I wanted to ask about renewable fuels.
And the favorable regulation. So what we're seeing is a number of the U.S. refiners announce.
Expansion projects and renewal renewable diesel in particular I was wondering if that's something you're interested in what you think about the economics and then if it's attractive to you what's holding you back from investing in that space.
Well we've been.
Selling renewable fuels in California for.
Better part of the last two decades, a lot of blending.
We're looking at manufacturing, but we really have chosen not to go into the ethanol business on renewable diesel we've got close relationships with suppliers renewable diesel and we are I mentioned earlier in response to a question, we're making modifications at California refining.
Facilities in order to co feed bio feedstocks in order to produce renewable diesel so.
Our view is rather than going into new projects and Greenfield developments, we've got existing infrastructure and kit that we have now proven the way to safely and reliably introduce bile feedstocks and co feed so it's a more economic way to do it it takes advantage of existing.
Segment.
And and so we're working on that so we are and will continue to be growing in the biofuels value chain.
Thanks, Brad.
Thank you very much.
Thank you. Our next question comes the line of Doug Leggate from Bank of America.
Thanks, Good morning, everyone. Thank you for taking my questions, Mike and the guys, hoping you have to all of you.
Mike I Wonder if I could just.
You know we've we've had some concerns about this particular issue for a second and it's part of the Permian I'd like to just get your perspective on it.
Realize what you're seeing about returns and the benefit of royalty interest in mineral interest and so on.
But.
2023, this is going to be 25% of the company and when I think about the underlying decline rates on the skewed towards NGL and gas given the state of the U.S. gas markets.
I understand why the increase of the putting not much of a.
Fully on high decline assays and skewing towards us gas.
Is incrementally positive for the overall.
Cash flow capacity of the company.
Yeah, Doug so.
Look it's an individual well is a high decline asset the Permian basin as you had hundreds and thousands of wells on production.
And you have a infrastructure built the ability to keep that infrastructure fall and have it be a very flat.
Production profile at modest incremental investment relative to the production that you're producing is profound.
Jay ill explain this more in March when we come to New York, but it is a it is a factory and running a factory you've got certain costs and certain investments in a factory and the new push out to the product or the factory and that's how to think about the Permian.
Commodity mix look, it's 75% liquids were 50% oil in our portfolio right now, 25% Ngls, 25% gas as the volumes continue to grow.
We get a lot of oil production and we take a long view on markets. Pierre mentioned earlier that returns on investment there are greater than 20% and growing and so look if we've got something somebody mentioned earlier you know your current returns or 7%.
Those need to improve well you got opportunities to invest and things that are on the 20, that's the way to start to lever up returns and so look we look at the commodity prices on at all we optimize what we're moving commodities too.
Markets near and far to add value to that but these are high return long lived physicians and it is a competitive advantage.
I look forward. So what is what is going to see and and mahler's, but just to be clear those returns are so cycle, including infrastructure and all that plan buildout and so on.
And and fully loaded with costs, including corporate costs.
Thank you my follow up Mike is more philosophical I guess for the broader energy space.
Well, we all seem to be you'll see it seems like there has been.
And then the weakening if you like to SG issues just in this loss plus six months on particularly this year more headlines. This morning about pension funds is divesting out of fossil fuels altogether I'm just I'm just curious how in your position obviously as an advocate the industry. How do you how do you anticipate challenging those kind of questions.
For.
Fossil fuels everything else could kind of thing I was chevron compete for the incremental investment dollar and it's an uncertain looking for some help with because obviously, it's a challenge olefins in this business right.
Yeah, well first of all.
We believe in ESG, we have been a responsible operators across E F and G for a long long long time, and we invest enormously in that the he is getting a lot of attention right now and.
And look over the history of our industry, we have we and others have reduced the environmental impact of our operations.
Time, and time and time again.
We are doing it again today.
And and we have the scale the technical capability the financial capability to be a big part of addressing this challenge and no one company no one country.
No one industry is going to be the one that solves everything but collectively we will respond to the challenge the world needs more energy the world These more affordable energy and people.
Developing economies deserve the opportunity to see their lives improve and affordable reliable and ever cleaner energy is essential to improving the quality of life on the planet, which is better today than it has ever been at any point in history and will be better in the future and we intend to be a part of that solution.
We acknowledge that the climate is changing we acknowledge that human activity in fossil fuels contribute to that and we acknowledge that we will be part of addressing that as we go forward and so we were investing time people money technology in being part of that solution and.
Look I'm, an optimist, where there's lot of pessimism that you can hear out there and as you say over maybe the last six months that drumbeat is even louder, but weve solve big challenges in the past and.
And I'm optimistic that we will be successful again.
Thanks, Kevin will remember thanks, guys appreciate it.
Thank you. Our next question comes from a line of Alastair Syme Citibank Your question. Please.
Hi, Thanks for taking my questions.
With the impairment I guess, you're signaling something about LNG. So.
The question is are you happy to tuck away completely from LNG, and then you being one of the biggest global investors in the last decade.
Correct and lot of competency within the organization.
So are you happy to do nothing.
Correct.
No. We're happy to do things that are that are competitive and economic alister and.
Look we're a big player in LNG the world will demand for LNG will grow overtime and you have to take a long view on these things commodity markets get into physicians, where they get overbuilt demand grows linear fashion supply comes on in us stair steps and so.
We're in a position right now where the near term market fundamentals are or are a bit tough but.
Long term like petrochemicals like refining you need to be in low cost positions that are highly competitive where you've got scale technology operating efficiency and so those are the kinds of things were looking for and.
We'll continue to evaluate opportunities to to add to our LNG portfolio. Our assessment on the Kitimat project is given all the other developments out there in the world that that one was going to be tough to compete versus versus our alternatives and so as a hard hard decision to come too, but it doesn't condemn the asset class.
For us as an investment proposition, we just want to find the very best projects.
Okay. Thank you.
My follow up I, just wanted to get enough to where you're right.
In specifically any discussions you're having with the government.
No show, where the government's been sort of informed on the on the cost overruns and where that leaves us.
Yes, so the discussions are ongoing the government's obviously key stakeholder in this and.
And so our people in country have been engaged Johnson will be there next week and both visiting the the sites and.
And meeting with with people from the government and so when you go through one of these things there's a whole series of engagements and we're in the where in the process on them.
Yes, only thing I'd add to that out or is that unlike other agreements in context on our contracts tax and royalty right. It's not a production sharing contract some production sharing contracts as government reimburses the concessionaires for their cost, which is not the case or tax and royalties of course, there and important stakeholder, but it did the fundamentally different contractual structure.
Thank you thanks Alastair.
Thank you and our final question comes from a line of Jim I'll talk from Tudor Pickering. Your question. Please.
Good morning, guys.
Just wanted to touch on the outsize dividend growth than we saw versus previous years here. So.
Just curious on.
The thought process, there and as you continue to set assets and.
Large emcps roll off.
And capital intensive covenants densities lowered just wondering how repeatable outsized dividend growth could be over the long term.
You know so if you look back at our dividend history, and we were looking back at it not long ago.
Whether you're looking over multiple decades or over the last decade, we've we've grown to kind of a compound annual growth rate of about 6% and and so this a little bit to the upside to that but we'd been lower than that here in recent years, and we're well positioned to peer talked about our strong cash flow in the capital efficiency that we have now in our.
Portfolio.
To sustain and grow cash flows with a much lower level of capital investments that I think people had become accustom to over over the prior period, we would not have increased the dividend. If we were absolutely confident that it's sustainable in perpetuity and.
And just as we said, we intend to sustain our buybacks through the cycle.
We intend to.
Sustained strong dividend distributions, our number one financial priority I'll remind you a sustained sustain and grow the dividend and and so this was a signal of confidence in our portfolio. It's a signal of confidence that we can sustain strong cash generation, even in a commodity price environment like the one we've been in in the weeks.
Venue to be in and then we will we will talk about this more in March but we have very very strong position to generate cash out of our portfolio of very efficient.
Capital profile going forward further efficiencies coming on the cost side and.
And we're very confident in the capacity that we have decisions are made by the board I can't get ahead of the board on what they may do in the future, but I'll tell you the board shares the confidence we have in our cash generating capacity.
Thanks, and then just a quick one on the buybacks.
You mentioned that sustainable nature.
Difficult for us too.
While the impact of the PSC roll offs, but it seems like Barry temporarily there could be.
Thats strip pricing time periods, where in order to satisfy the full buyback maybe you lean into the balance sheet. There just wanted to verify the comfort there obviously, given where you said as best of class on on on your debt ratio.
Yeah. Thanks, a demo no yeah, we if we have to lean on the balance sheet for some point time, that's okay. Right. We said we want to sustain it through the cycle. We've never said the buyback has to be funded every single quarter.
From free cash flow, so thats not our expectation we have the strongest balance sheet in the industry. Our net debt ratio, 13% gross debt is 16% we have to keep the capability to take on some debt.
Knocked about we don't have a target debt range, but certainly I'd be comfortable higher than we are right now, but if were outside of.
For a little bit low that's OK, that's how the math works. So if we generate cash that surplus to our top three priorities, which has to pay the dividend invest in the business and have a strong balance sheet.
And it will devote would turn that in the pharma share buybacks, but we also want to keep that ratable and sustainable. So we just don't want to ramp up buybacks, because we want to be able to essentially dollar cost average and do it through the cycle. So the short answer is yes, there'll be times, a lean on their balance sheet, our balance sheet had that capability and our intent is to.
Sustain the buyback through the cycle.
All right. Thanks, everyone. Thanks.
Thanks Tomorrow.
With that I'd like to thank everyone for your time today, we do appreciate your interest and Chevron and everyone's participation on today's call Jonathan back to you.
Thank you ladies and gentlemen, this concludes chevron's fourth quarter 2019 earnings Conference call you may now disconnect.
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