Q1 2020 Earnings Call
I will begin momentarily once again, please standby your conference call will begin momentarily. Thank you for your patience and police continued to hold.
[music].
Hi, My name is Jonathan and I will be your conference facilitator today welcome to Chevron's first quarter 2020 earnings conference call. At this time all participants are in listen only mode. After the speaker's remarks, there will be a question and answer session to ask a question. During this session you'll need to press star one on your telephone if.
Anyone should require assistance during the conference.
Please press Star then zero on your Touchtone telephone as a reminder, this conference is being recorded I would now turn the call over to your host for todays program. The general manager of Investor Relations up Chevron Corporation Mr. Wayne bridging. Please go ahead.
Thank you Jonathan.
Welcome to Chevron's first quarter earnings conference call and webcast, our chairman and CEO, Mike worth and CFO, Pierre Braver or on the call with me.
Well refer to the slides that are available on chevron's website.
Before we get started please be reminded that this presentation contains estimates projections and other forward looking statements. Please review the cautionary statement on slide two.
Now I'll turn it over to Mike.
Alright, Thanks Wayne.
Before we get started I hope you and your loved ones are safe and healthy our thoughts are with all the families affected by Cobiz 19.
And especially with the healthcare workers on the front lines battling everyday to contain the outbreak.
So incredibly grateful to our employees, who show up every day, particularly those out in the field operating critical facilities to provide the energy that supports the pandemic response and keeps essential goods and services flowing in support of the economy.
They too are heroes.
During our security analysts meeting in March we discuss chevron's resilience and now it's time for us to demonstrated.
No one for saw these specific market conditions, but we were prepared for them.
We know what to do and we're doing it as we execute this five point action plan.
First and foremost we're focused on the safety of our employees at our operations.
Next we're exercising the flexibility in our capital program.
Today, we're further lowering our full year guidance.
In addition to capital costs always matter in a commodity business.
We initiated a major company restructuring last year.
And we expect to drive additional savings this year ends next.
Capital structure also matters.
We came into this crisis with an industry leading balance sheet.
And we're taking actions intended to maintain financial strength.
Lastly.
Well the dress and current market conditions, we're preserving long term value for shareholders employees and other stakeholders.
Ill speak to each element of this action plan in the following slides beginning with safe and reliable operations on slide four.
We've had fewer than 50 confirmed cases of employees with the virus.
Nearly all cases appeared have been contracted outside the workplace.
Most of our office based employees are able to work from home.
For those who continue working at facilities are in the field, we've implemented multilayer screaming distancing hygiene and PPD protocols.
Our coded 19 testing capability is ramping up.
Finally, we're helping our communities with donations of money PPD and other things we can manufacture like sanitizers in our plants in threed printed faced shields.
In downstream.
Refineries are running well below capacity to meet significantly lower product demand.
Where possible, we're prioritizing equity crudes into our refining system and re optimizing our plans for turnarounds.
In upstream.
Rig count will be down by about 60% by the end of this quarter.
In May we expect to curtail between 200000 in 300000 barrels of oil equivalent production.
And we expect curtailments to continue in June.
LNG contract sales have been unaffected.
Despite some logistics challenges our supply chains have been functioning with no major disruptions.
We're closely monitoring financial risks to our suppliers and working with them on win win solutions.
Now I'll give an update on our major major project underway in Kazakhstan.
Despite the early cobot outbreak in Korea.
Module fabrication and shipments out of the fabrication yard remain on schedule.
In fact, only seven modules remain in the yard.
Oh are scheduled to depart this quarter.
Restacking or the modules intend to use is progressing well and was ahead of schedule at the end of April.
That said the pandemic is presenting challenges.
Restrictions on the movement of people on goods.
And positive cobot cases in six of the more than 100 residential camps in 10 views have triggered changes.
Well critical path construction activities proceed.
Temporarily demobilizing non critical path personnel.
As a result, we anticipate some degree of impact to project cost and schedule.
But it's too early to quantify this in any meaningful way.
Our forecast of 2020 capital expenditures for the project has been reduced by about $1 billion our share.
Due to deferred activity.
Cost of Mitigations and expected currency benefits.
Turning to our overall capital outlook.
We're further lowering our full year 2020 organic capital guidance to as low as $14 billion down from $16 billion announced in March.
Second half capex could be as low as $6 billion or a run rate up to 40% lower than our original budget.
The incremental reductions since our March press release are primarily focused on Tcl and short cycle investments.
Turning to slide seven.
In response to current market conditions, we expect to reduce operating costs by about $1 billion. This year relative to 2019.
Due to reduced activity levels, lower fuel costs and curtailment of other discretionary expenditures.
Beyond the current year.
Our initiative outlined at the security analyst meeting to lower Opex by another $1 billion next year is progressing well.
A portion of these savings will come from restructuring.
Where we expect designed to be finalized this quarter with the streamlined organization in place by year end.
Costs often leg during market corrections we.
We were already working on further cost reductions before these conditions began and intend to keep pace with today's realities.
Turning to the next slide.
Turned on the left shows our estimated sources and uses of cash under a two year stress test with sustained prices of $30 Brent.
Our decision to suspend the repurchase program.
Costs flex capital down will reduce the pull on our balance sheet.
Chart on the right shows we have the debt capacity to whether this stress test better than our peers.
All our actions are consistent with our longstanding financial priorities number one is to protect the dividends, which we know is vital to our shareholders.
Turning to slide nine in the fifth element of our action plan preserving long term value.
Well, we have the flexibility to take capital even lower.
We're focused on the right spending.
To ensure that existing assets are safe and reliable.
Projects already under construction or efficiently completed.
Operational and technical capabilities are maintained.
Investment options are preserved for the future.
And we maintain our commitment to SG priorities.
During a market downturn the playbook in our industry isn't a secret.
The key.
You executed.
The winners or the one that make the right choices.
Best balancing short term cash flow and long term value.
We made the right choices coming into this crisis.
And we intend to exit in the best position among our peers.
With that I'll turn it over to peer.
Thanks, Mike turning to slide 10.
First quarter earnings were $3.6 billion or $1.93 per share.
Adjusted earnings, which excludes special items, and foreign exchange were $2.4 billion or $1.29 per share.
A reconciliation of non-GAAP measures can be found in the appendix Dennis presentation.
Cash flow from operations was $4.7 billion and total capital spending was $4.4 billion.
In the quarter, we also increased our dividend and repurchased $1.75 billion a shares before suspending the share repurchase program.
Turning to cash flow.
Excluding working capital cash flow from operations covered the dividend and cash capex and the first quarter.
Adding a dividend breakeven under $50 Brent.
Proceeds from the sales of our interest in Mylan Paya were offset by loans to Tcl.
Given volatile market conditions were holding more cash.
And ended the quarter with a net debt ratio a 14%.
Turning to the next slide.
First quarter earnings of $3.6 billion increased about $1 billion versus the same quarter last year.
Included in the current quarter was a gain on the sale of upstream assets in the Philippines and favorable tax items.
Adjusted upstream earnings decreased due to lower prices, partially offset by higher production.
Adjusted downstream earnings increased primarily due to favorable timing effects and higher marketing margins.
The other segment decreased primarily due to lower corporate charges.
Turning to slide 13.
Compared to the fourth quarter.
First quarter adjusted earnings decreased by about $400 million.
Adjusted upstream earnings decreased due to lower prices.
Partially offset by higher production and lower Opex.
Adjust the downstream earnings increased primarily due to favorable timing effects and lower opex.
On slide 14.
First quarter oil equivalent production increased over 6%.
Higher shale and tight production primarily in the Permian.
And higher intense entitlement effects are partially offset by asset sales and normal base declines.
Turning to the next slide.
We're nearing completion on the asset sales program announced in 2018.
In April we closed the sale of our interest in Azerbaijan and Colombia.
Resulting in almost $1.5 billion and before tax proceeds.
This brings our total asset sales proceeds to about 6.5 billion since 2018.
In the middle of our five to 10 billion dollar guidance range.
Turning to slide 16.
With cash on hand.
Access to the commercial paper market.
And our backup revolver.
Severance liquidity position remains strong.
We have limited long term debt maturing over the next two years.
And as a double a credit we have ample access to the debt market.
Now looking ahead.
And upstream we're not changing our full year production guidance, although were clarifying that excludes the impact the impact of curtailments.
As Mike said earlier, we expect curtailments or production during the second quarter.
In the U.S., primarily due to economic choices that balance cash flow and long term value.
And in certain countries outside the U.S., mostly due to the OPEC plus agreement.
Planned turnarounds in the second quarter, primarily at Gorgon.
Our expected impact production by about 70000 barrels of oil equivalent per day.
Based on our current price and capital outlook Tcl co lending is expected to be modestly higher this year.
And downstream turnaround activity in the second quarter.
Affected to have an estimated after tax earnings impact of $200 million to $300 million.
Both equity affiliate earnings and distributions are expected to be lower in 2020.
The net negative effect to cash flow less than $1 billion.
With that I'll turn it over to Wayne.
Thanks, Pierre that concludes our prepared remarks, we're now ready to take your questions keep in mind that we do have a full Q. So please try to limit yourself to one question and one follow up if necessary.
Our best to get all of your questions answered Jonathan Please open the lines.
Certainly as a reminder, once again if you have a question. Please press Star then one our first question comes on line of Phil Gresh from JP Morgan Your question. Please.
Hey, Phil you may be muted.
We're not review.
Mr Grass, you might you might have.
Can you hear me, yes, now we can okay.
Colleges.
So first question here just as we as we look at that Slattery talking about the $30 oil case.
And.
The funding of the dividend the priority of the dividend and adding debt to cover capital spending.
At the end of that period, you in the sense of.
Phil you cut out right. When you said at the end of that period do you have a sense of.
Yes. Mr question, we're not hearing you right now.
I'm not sure if it's your your connection your phone.
Okay, Jonathan we can move onto the next question, Okay hold back and if we can clarify that we've got a good connection with him Oh, yeah. He disconnected.
Our next question comes from the line of definitely Mcdermott from Morgan Stanley. Your question. Please.
Devon odd to hearing you either.
Yes.
Jonathan could there be something going on in the bridge there.
Hi.
Yes, there as we've been.
Discussing there does appear to be an audio problem is what we're hearing over the line the last few minutes Jonathan.
What kind of audio issue or are you.
Hearing about what is it can can you hear me now this is.
Yeah, we can hear you all right yes.
Okay I wasn't on me, but there, but it seems like it was going through what did you hear me now with the I'll try to pick up where I think Phil left off on the on the stress test for $3, Brent we think about.
Where this stress test takes you from a leverage standpoint or debt to capital standpoint over that two year period, you talk a little bit about about where you'd end up at the end a 2021 and also where you you'd be comfortable in terms of taking leverage to it or what.
Yes, we I think we got the essence of it which is where do you end up at the end of 21 and how comfortable are you there's pure while.
Respond to that yeah. So thanks for the question that the chart on the left we.
Gives an indication of the negative cash flow that we expect under a stress test that $30 Brent.
And and then the chart on the right shows our rail our debt position relative to peers and relative to the zero line, which is a net debt ratio of 25% and when you put the two together, where the negative cash flow or that incremental debt. It keeps us we're still to the right of that zero line. So in other words, we can have two.
Two years at $30 Brent.
Invest in the business sustain our dividend and still exit in at the end of 2021 with a net debt ratio less than 25%, which we think it's still a very strong balance sheet.
Yes, I might just add Devon, we're protecting the dividends because we are set up to do so one we've made it a priority.
As Peter said, we enter with balance sheet strength that is second to none and advantage portfolio with a low breakeven.
Capital discipline, that's part of our DNA, we've demonstrated through way with managing capital spending our discipline on transactions and we've got the capital flexibility and all of this is because we're committed to the dividend and you can see that while we do lean on the balance sheet to to fund the capital program.
Over this period of time, we can support the dividend comfortably and still remain.
In a very healthy position, we've set ourselves up to do so.
Thanks, Dan did you have a follow up.
Yes, so a follow up just on the on the capital spending side building on that a little bit. So you talk a little bit about how you think about the tradeoff between some of the near term cuts in capital spending, which really skewed more toward short cycle versus one of your priorities of retaining long term optionality continue to support longer term growth that preservation of long.
Term value point, so how do you think about that tradeoff and also how much additional flexibility. If any is there as you look at the budget where it stands today.
Yeah, Devon so.
A few years ago, we really had a budget that was skewed towards the long term.
End of the spectrum and we've consciously shifted that now to have.
The short term awaiting much higher within our portfolio because it gives us the flexibility that you talked about ends underpinned with the longer term projects, but it's not dominated by those so weve built a more flexible portfolio that allows us to slow down the short cycle investments when the mark market signal.
Indicates that those are not being rewarded in the marketplace and yet we are maintaining the ability to ramp those up.
And we have.
We have a longer term capital projects that are earlier in the phase and we'll be very disciplined in bringing those.
Forward. The other thing this is different thats really important as a much larger percentage of our portfolio now is facility limited.
Versus reservoir limited and characterized by.
The kinds of declines that you can see in a different portfolio and and that enables us to hold production with with more modest capital spend and.
And preserve the cash flow is associated with that so look we're conscious of things like leases were conscious of.
The way, we're developing our resources, but we're trading those things often when the markets not calling for near term production, we shouldn't be a investing to deliver it we should be conserving the cash for another day and that's that's really how we're balancing this.
Thanks, Devin right. Thank you.
Thank you. Our next question comes from a line of Doug Leggate. Your question. Please.
Doug we're still challenged here with this audio situation I'm afraid we're not hearing you.
I apologize for this.
Jonathan can we try to.
Jonathan why don't we pivot to the next question the next in the Q.
How can you just one moment.
Mr. Like in your line should be open actually at this time are you.
Hello.
Are you on mute.
Okay. Our next question.
Comes from the line of Neil Mehta from Goldman Sachs. Your question. Please.
Okay Theres repeating pattern.
Little frustrating I am sure forever to the line and certainly for us.
Yep.
We are not hear me okay.
Got you are right I'm not sure what they are.
Yeah.
Little bit of a pause in the works at all right well. Thank you.
So I guess the first question was around curtailments.
And can you walk us through that a little more depth about.
Where they are magnitude.
And as we think about production shut ins what gives us confidence that there won't be any structural damage to the assets and we have confidence that supply can return when the market ultimately Anita.
Sure and so let me just frame it up a little bit Neil.
I was just talking to Devon about.
Balancing.
Cash flow and long term value and that's that's certainly.
A key driver here as we're looking at curtailments.
We we are avoiding.
We are trying to avoid the need for abrupt shut ins. So these truly are in broadly speaking curtailments, rather than the shut ins with a very conscious effort to preserve reservoir and well integrity. We do these things for turnarounds for storms in the like so we know how to do this quite well and we really don't expect any issues as we wrap.
Backup.
Curtailments in April were relatively modest as Pierre outlined with the forward guidance may and June looked like they could be more significant about 50 50 between the us and rest of the world and.
And certainly in the us.
The Permian and the short cycle piece of it is is the predominant part around the rest of the world that tends to be related to OPEC and OPEC plus commitments and the way those are translating into local conditions, but we're very cognizant of where and how we slow production and.
I expect to be able to return production when the market changes in relatively short order without.
Putting reservoir well integrity at risk.
Good yeah. Thanks.
A follow up.
Yes, I can you hear me.
Yes, yes.
Great.
Yes.
We see that you put a pause on the project currently slogan spending so let me just status check.
How far you've gotten so far.
And.
How is progressing what the ultimate plan is around.
Around execution from here.
And in any early thoughts on what that slowdown could mean for the full project budget.
Sure. So Ah so the projects about 75% complete right now Neal construction.
56, or so percents logistics are are working very well as I said other only seven modules left in Korea and all of those will have have departed by the end of this quarter we've got.
A number on the water additional ones at the trends shipment locations in some moving through the waterways. So.
So the logistics are moving quite well.
Since late 2019, we've got all of the.
Pipe racks in the gas turbine generators and utility modules on foundation and and we continue to work on the critical path.
Locally I mentioned, we've seen a cobot cases in.
A number of the camps, there's over 100 different residential camps, there and as a result, we are demobilizing non essential staff to minimize the risk of spread.
That means we are demobilizing about 17000 people to 20 different locations. Most of these are contractors not employees of Tcl, but we are helping to manage the logistics.
The there were moving people back to other parts of Kazakhstan, Turkey, Russia, Singapore the UK.
We need to provide context tracing material information for anybody who would be mobilizes, we've converted a fire station and awareness.
Test Center, we're testing 1500 people a day, we've got 29 nurses that are working around the clock so a very.
Thoughtful effort on how we'd be mobilize the people that are remaining are working in essence under a pod strategy where.
Workforces isolated by shift and by crew, we've got box meals digital.
Permits, we get dedicated drivers and cleaners and things to really reduce the risk employees are all outfitted in proper PPD and the like.
We actually are maintaining pretty good scheduled progress on the critical path in spite of all of this which allows us.
To focus the workforce on critical path and end to demobilize some of the non critical path activity, our power and control work the gathering system. The sour gas injection system are all several months ahead of the critical path and and that enables us.
To to slow down and mitigate some of these risks the biggest challenges are in the area of crude changes. So we have people working on some extended rotations transit in and out in the labyrinth of travel restrictions of each level cities countries et cetera is something we're managing aggressively and carefully.
Testing people as they arrive to minimize quarantine on arrival, so a very focused and and thus far I would say a very successful effort to respond to this are the main focus is on the pressure boost facility in the utilities in the processing plant, which are on the critical path.
In terms of the actual.
Reduction in see any our share about bought $1 billion about half of that is deferral of activity.
About a third of that is mitigation of cost growth through aggressive creative measures and in the balance is really related to foreign exchange.
So hopefully that gives you a sense of where we are in certainly as we go for every call. We'll know more we'll see how things have unfolded there and we will provide you additional information as we have it.
Thanks Neil.
Thank you.
And our next question comes from the line Janine way from Barclays. Your question, please that might be a slight delays.
Tony.
Your line is open.
Ill Jenny.
[music].
Janine can you hear us.
Okay.
I guess, Jonathan why don't we go to the next question Tony I believe your line is now there.
Yes, okay. So the delays getting longer longer go off for us is going to go the other way.
And for your patience.
No. Thank you by the way there's been some feedback that the webcast isn't working as well so just right now.
Right.
So my first question that you can hear me is on sustaining Capex and we know Mike that you don't really talk about sustaining capex on a linear basis at all but can you comment on whether the new 12 billion annualized Capex run rate is enough to maintain what you consider acceptable reserve replacement.
Reserve replacement ratio over a longer term period.
Whether this can also allow you to achieve your corporate objectives of increasing our E shareholder returns and all that but maybe at a different rates on what you thought before.
Yeah.
And you are correct. This really isn't a way that we.
We.
Think about the business, it's not something we rely on or or plan.
A round to measure the business.
So.
It's not an simple question.
To answer because it's just not how we think about things we do understand it's a question among some of the investment community.
There's been thinking about how to try to help you guys understand this a little bit better and translate from how we run the business to how these questions come in so pure maybe you can help training with the yes, thanks, Janine and as Mike says, we don't think about the business as Les and add to the earlier question.
Not sustaining short term production right. That's a very deliberate choice Mike talked about that the price signal says, we don't need a short term production and we're prioritizing capital on long term value. So again, if sustaining short term production as part of the definition then it's just not how we manage the business as we're trying to balance.
The short term in the long term, but if we think of sustaining capital is as kind of an analytical construct that's really the capital to keep upstream production capacity flat from existing fields for a number of years and so in that definition I'd exclude exploration I'd exclude capital to develop new fields are for expansions like.
10 geese.
Exclude assets that are sold or contracts that are going to expire and that exclude downstream and chemicals and so if you. If you go through that and you know we talk about $11 billion for upstream base business and shale and tight total capital and that results in some growth about $10 billion would be a reasonable estimate.
Of the capital keep that production capacity flat.
I'm existing fields for a number of years again.
We are below that right now right, we started with base in shale and tight at 11.
As you if you roll through the reductions will be under eight so again short term production, we do not expect to be sustained at that you're kind of notional $12 billion capital, which includes downstream and chemicals with some cuts and exploration, but long term value is preserved.
Thanks Jenny.
Did you have a follow up Janine.
No no follow up Okay. All right next question.
All right. Our next question comes from the line of Paul Cheng from Scotiabank. Your question. Please.
We'll be patient here, because it seems like haptics.
They are 26 for this to start so Paul hang in there and.
We're waiting on you.
We are promoting you can speak.
Okay. This change your line should be open at this point.
Hello can you hear not great. Yes, we've got you Paul.
Hi, Thank you.
I think that seems that potentially that we'll cut off so I will hop both questions.
Yes.
I think the first one might.
In the.
Not that you will have a talk and now but.
The second is being compressed and long enough Pierre just on that the stress.
Yes, that's why you feel.
How.
How much is the father understate, you're willing to race and this comment but pull into white deal at all.
And second question.
Maybe I may ask about that.
That's just in case I got cut off.
This is for P. it.
You have a strong balance sheet, but it looked like you're going to have substantial cash burn for this year next year, and a pretty depressed pricing and mom and that we see.
You wait that that's it makes sense for you.
On to that market is actually opened that and of course is quite low put you at this point to raise even more debt to fund that put 10, so cash burn or that you think the commercial market yes.
We now have meaningful and you don't need to do that.
Okay, Yeah, Paul a year and experienced multipart question here. So I think that was good to get both of those in let me. Let me give you a quick response than peer I'm sure. We'll have some thoughts he'd like to add there.
The reason we showed this low price stress test Paul was to give you a sense that we really can endure.
A couple of years of really tough pricing and are gearing would move back.
To a level that is is not an uncomfortable level to be at in fact.
Pure as said frequently that overtime, we would anticipate moving our during back into the kind of 20% to 25% range anyway. Now this isn't necessarily the way we thought we would get there, but thats not an uncomfortable place for us to be so leaning on the balance sheet through this period of time is something that's very doable will maintain a strong credits.
Rating as as we do that and so we're certainly willing to go there and as you know.
Years gone by you go back a few years ago gearing was was above that 25% and and so I think we're in a range. That's that's we've demonstrated we can manage and we know how to.
In terms of going to debt markets at low cost I I do think that it's it's prudent to look at that and.
That is.
Attractively priced right now and it wouldn't be surprising for us to to look to add to that so Pierre maybe can comment yes. I think there was an M&A question to their about using our balance sheet for M&A, but that I think I can just address.
You can also use equity as part of it transaction. So we don't view.
The balance sheet as the only means to do M&A, because equity makes sense and an oil deal, where there's price risk and obviously price volatility and you wouldn't want a winter and lose or between the buyer and seller on an M&A deal in terms of.
I think Mike might get dressed the debt question I mean, yeah as we as as we consume cash we will lengthen out that are the maturities. We'll look at when there is a good window to approach the bond markets. We do have access to a lot of commercial paper that was shown on the liquidity side.
Oh paper still remains the lowest cost and the net most flexible all source of funding for us, but under these kinds of conditions and if they conditions persist we would want to have some more longer term debt that would be appropriate and I think as Mike said, you shouldn't be surprised if you see us approach the market.
Thanks, Paul I'm, sorry, I missed the M&A angle on your first question.
Okay, Let's go to next question.
Okay. Our next question comes from the line of Paul. Thank you from so your question. Please.
Hang in there Paul for some reason, we're still working through the delay.
Paul we were ready for your question.
Oh right you should be opened in life now.
Okay, but we're still not hearing you are you might be on mute.
Hello can you hear me yes.
We've got your Paul Hallelujah.
[laughter].
Okay.
So to answer the confusing I was indeed on you believe it or not pulling.
I think experienced a color like you.
Good sorry about that.
My question is how is the will change for you post this thing.
Obviously, we can see the seats strip this pressure for 2021 and I think youve.
Address that a little bit I think it's clear that you will mega projects, Australia Kazakhstan.
So to continue as they were.
Ultimately has very low breakevens when they are running.
I guess the question would be firstly on the Gulf of Mexico is we'll do you think differently.
Most importantly, obviously fuel company.
No that you.
Once it's by Anadarko for the acreage in the Permian.
Do you think that the world has changed as regards the Permian given what's happened. Thank you Mike.
Okay. Thank you Paul.
Well you know its.
I think when you're the depth of something as as unprecedented as this it's.
It's hard to say exactly how the world will change on the other side of it and as much as it feels like this has been gone for a long time, we're really.
Just a couple of months into it and so.
I think on the other side of it.
An optimist I have great confidence with all the resources being dedicated to.
Vaccine development, and therapeutics and testing capacity I'm, an optimist that.
In time, the health risks will be successfully.
Mitigated and managed.
I believe that.
The World will return to some post krona virus form of normal and that means economic activity. It means growth that means travel.
The pace and the patterns at which that reemerged as I think are still open to a wide range of views.
No that anybody can predicts that exactly.
But when you translate that back to our industry.
I think it plays into some things that we have long believes which is.
Low cost of supply matters.
Operational excellence and disciplined in.
In project execution matters capital discipline matters cost discipline matters and all of those things will become very apparent as we recover in some form with.
Inventory lengthen the market with OPEC production off and with the opportunity for shale and tight to come back in relatively.
Rapidly and so I think.
The term lower for longer has been used for a while to describe conditions I think that is even more appropriate today.
And that has been in.
Tons, what has been used I think we need to be very focused on.
Efficient use of every one of our resources to operate well and to drive the cost of supply down in a world that looks like it'll be pretty well supplied so you get to the Gulf of Mexico, and the Gulf of Mexico has been resetting its cost structure to compete in a world like this I think it means we got more work to do.
To make the Gulf of Mexico compete even more more focus on tie backs in fill drilling utilizing existing infrastructure and finding efficient ways to develop in the Gulf of Mexico and.
And so that trend is one that we need to stay on we've made a lot of progress and I think theres more work to be done there in the Permian.
Our our.
We're not done improving in the Permian our results even as we sit here today continue to improve and and so well costs come down drilling efficiency improves completion design and execution improves and in the hydrocarbons haven't gone away. The rocks don't go bank.
Yup.
Companies might but but the rocks won't and I think that that's a resource that.
We will continue to be very important in the in the overall supply picture and certainly it will be for our company and so we'll look to invest in the very best projects, but we'll look to acquire assets and opportunities be they through exploration.
Or or other means that will compete in our portfolio and continue to be attractive at a world where.
Low cost to supply in the ability to generate good returns matters. So in some ways. Those fundamentals are only more important going forward when than they have been Paul and beyond that I think its speculation on a lot of the other things that are people talk about.
[music].
Thanks.
Thanks, Paul.
Okay. So we're going to pull inaudible here I've actually got Doug Leggate. His questions keyed up he had trouble dialing back in so he texted me his questions, Mike and I'm going to feed them to you that way.
So the first one was for Mike.
Well, thanks, the whole industry needs a reset a change in long term supply et cetera. They just cut the dividend to adapt what do you think of the Big picture at this point and then the second one will be for care okay.
Look I think everybody is.
It's interesting Doug and apologies, we couldn't get you on the phone directly I wish we could have the conversation directly.
I think we've actually seen more of a divergence in strategies and thinking among companies in our industry over the last few years than we have in a long time.
And and everybody's got a slightly different take on where they're going and where their strengths are and so I can't I can't speak for for another company I.
I will just tell you it's very similar to what I was seeing in response to Paul Sankey question.
I think the companies that can be reliable efficient low cost providers will continue to have a very strong position as leaders in our industry.
And the world is not ready to transition to another source of energy in large part anytime soon and so the resumption of economic growth will require the sources of energy that we know today and that fuel the world today and and there is there will be a need for for what we do and I think.
I have to be very honest with yourself about where years, where you've been in where you're not and you've got to focus on improving.
Closing gaps, where you need to improve and getting even better where you have strengths. So again it kind of gets back to the fundamentals capital disciplined cost discipline project execution and the ability of say if we haven't set of clearly enough.
Your balance sheet is a great assets and oftentimes, we think of our upstream or downstream assets as has the most important assets and they're very very important in our business.
The balance sheet is also very important asset you have to treat it with a priority you have to be prepared for the day when you need to rely on that asset.
And and I think that also becomes very very important as we report weve been.
Prudent in the way we've managed that.
We were positioned differently than others as we went into this and I think you can see as I said, while we wouldnt have predicted this exact.
Market scenario, we were prepared for and environment like this and and we will navigate our way through it with our shareholders in mind.
Second question, Yes second question is around cash Capex of the $14 billion guide how much of that cash capex.
And how much further can that go down without.
Impeding cash flow in production.
Yes.
Again, sorry, Doug we can get beyond so that 9.3 billion is the cash capex equivalent to 14. So it was it was 10 five at 16. So it went down 1.2 of the $2 billion. Additional reduction is in cash cash capital I think Mike has addressed that I address a bit.
Sustaining capex again that the Capex levels Entergy needs question, when we're at $12 billion. When you back out reduce downstream and exploration we are below the level to sustain short term production and again thats a deliberate decision because there's not a lot of value and putting capital that results in.
Production at current prices, we are investing and I said has set the jeanine dancer, although or below the 10 billion lets call sustaining capital on base in shale and tight which will have some decline we are investing in tcl CPW PMP, which will come on in 2022 in 2023 and.
And provides that kind of long term value. So again, the choices that Mike and leadership team are making are really balancing the short term in the long term and being thoughtful about where the capital reductions are and where the capital investments are.
Thanks, Doug for your questions Jonathan will take the next one in the Q.
Certainly our next question comes on line of Paul Matson from Raymond James Your question. Please.
Thanks for taking the question on.
Along the lines, if what you said about.
The energy transition not being as realistic perhaps as as what a lot of folks are are saying.
Youre Seo two targets assumed pretty cold production rate given that across the board volumes will be coming down are you looking to upsize those decarbonization targets that you put out last summer.
Yes, Paul.
It's interesting everybody in the industry has define their targets just a little bit differently.
And we haven't actually put out absolute targets, which you would.
Expect absolute greenhouse gas emissions to come down if people are restricting activity we put out.
Intensity targets, so greenhouse gas emissions per unit of production target for per barrel of oil in the in the upstream we had a target per.
For for gas production.
And then we've got flaring and and methane emission targets all of which our unit targets that drives down.
Unit emissions and so we have not reset those we would expect that we will continue to reduce our greenhouse gas emissions irrespective of cobot or any of these other circumstances. These are commitments, we've made weve tied people's compensation to them and and we intend to continue to reduce our emissions footprint.
And just the other add to the other distinction is that we've done it on UBS equity basis, so whether we operate or don't operate our whole.
All the barrels are all the Mcf Saar in those intensity metrics that Mike talked about not just our operated barrels.
Thanks, Alan if I may.
Is there any change in the historical linkage.
Between Asian, LNG prices and Brent crude given what's happened in the last 60 days.
Pobl the contracts.
I have not changed and of course, we saw most of our volume on contract.
Our contracts typically are linked to.
Not linked to Brent directly but links to.
JCC or Japanese crude cocktail.
In other words linked to a J Cam index.
Which is a gas related index, so I think.
Commodity prices.
I have some sympathetic.
Relationship with one another but they're not always.
Perfectly correlated and so I think you would you would certainly say that our crude linked contracts will reflects crude prices and to the extent Brent has come off eventually are accrued linked contracts will reflect that they tend to be on a lag basis and so.
They don't always reflects current month pricing, but but broadly speaking, yes, you'll see you'll see a connection between those two.
Thanks Pavel.
Thank you. Our next question comes from the line of Doug Peterson from Evercore. Your question. Please.
Good morning, everybody.
Hey, Doug.
Mike you guys were on early and power adopter of the disciplined capital management model and that is obviously, Serbia shareholders well during the upturn and now the downturn too. So so first kudos to you guys for that.
And then.
The points about industry stress I think Paul and Paul brought up earlier, which often lead to consolidation.
My question is that while financial benefits are often available on a variety of transactions strategic benefits on the scale that you guys received from golf and Texaco and Unocal Bakken today may or may not be this time around and so.
Want to see if you'd Brian the strategic condition today, how you think it's similar or different from prior downturns given your history and also any other notable color philosophy that that you want to share on this topic.
Yes, so up.
I guess, if you go back.
All the way to golf.
And that takes you back to the Eightys.
The industry was.
Highly fragmented even amongst the largest players.
And and so there were as you say financial benefits of consolidation and there were strategic benefits as you brought together portfolios that had.
That had gaps in them and and we certainly saw that with with golf. We saw it again with Texaco I think today, we've got fewer large players and so the impact of any single transaction that is not amongst large players and those are pretty hard to do as you get down to small numbers.
They are less profound both from a financial standpoint simply because you are you don't have the same scale that you're consolidating and and it flows through to the asset portfolios and so the players like ourselves and our big peers.
I have exposure to many basins around the world to all segments of the value chain and I think everybody has worked to try to optimize their portfolios.
In a way that anything fits with their strategy and so.
I think your point is a good when you can do kind of rifle shots.
That would be maybe smaller bore both on the financial and the strategic.
Dimension that could fill in nicely.
But things that would be transformative the way we saw back around the 99 2000 period.
I think you're right I think thats, a lot harder to envision today and everybody has become more efficient and so even though the synergies that we saw back then technology was different information technology was difference of productivity was difference and so I think competition has made everybody sharper and more efficient that's within those.
Financial synergies are harder to capture.
Okay. Thanks for the color Mike.
Okay, Doug Thank you welcome.
No we're going to Jonathan we're going to keep going a little bit pass the top of the hours since we had the problem, which seems to be resolved now so that's well be sure. We can kind of a little more time getting the questions.
Absolutely. Our next question comes from the line NAV barrage book could Harry and from RBC. Your question. Please.
Hi can you hear me.
Sure Camber US yes, perfect also.
So I'll I'll get online two questions just in case.
The first one is on the Permian and shut in standard economic side, I guess, you mentioned that 50% of the curtailment isn't the U.S. and then merchandise I mean I was wondering if you could talk about the process.
How you got to the number you are looking to curtail and why that is the appropriate number for the environment you see.
That would be just last question and then second question is on the on your Capex reduction obviously parts of this is economics.
As another element, which is not necessarily choice. So you mentioned slowing down and then send Geeze I was wondering says.
Element of the Capex. So could you quantify the element of Capex is simply Capex that you couldn't spend even if you wanted to so logistical reasons or otherwise just trying to get a sense of that would be helpful.
Yeah Okay.
Well on on Permian Curtailments.
As we've said we've pulled capital down significantly so we're not putting capital into bring new production online.
And as you look at flowing production.
Not every barrel is created equally we've got.
We've got some older vertical wells for instance that that in this kind of an environment have pretty marginal.
Economics, we would look at those.
We've got a barrels that have a difference oil gas.
Ratio, we would look at that we'd look at Netbacks logistics and.
And value chain cash flow of storage cost future prices, a whole host of things and then as I mentioned earlier the desire to avoid a future need for abrupt shut ins, if we receive logistics and flow.
Curtailed. So there are a series of things that we've got a team looking at across the entire basin and and factoring into decisions that we think our prudent decisions.
From a value standpoint, and an operating standpoint.
And it's a moving target we actually this is something that our senior leadership team is involved in.
Multiple times, a week and and so the models to do this to understand markets and to stay really in touch with markets to be sure. We're making good decisions continue to be informed by new information and.
And so it's a very dynamic process that we're engaged in right now.
On the capital side on the kind of non.
Discretionary non our choice capital pure can you just yeah I think the vast majority are our decisions and choices, we're making but it gets into how you define to for example, and 10 gies, we're choosing to demob the non critical.
Pat project personnel, but clearly that's that is covered related so I don't know if you call that a choice we have a crisis management team that is overseeing supply chains and all.
The whole system, but the bottom line is the vast majority our decisions that we are making in some cases with partners were seeing.
In almost all cases partners are very aligned on actions that retaking now we do have some currency effects right. So the dollar stronger so they're out there is part of the capital reduction. It's also very modest that's a reflection of currency effects, but I would look at the vast majority of that 30% reduction as.
Being choices that we're making to flex capital pace.
Capital defer capital that is largely driven by our decisions to balance cash flow and long term value.
Thanks Ross.
Understood. Thanks.
Thank you aren't next question comes from a line of Jason Gammel from.
Your question please.
Thank you.
Okay.
Jason Your line is open.
You might have your phone on mute.
I, we're still not hearing but.
The thing on for one more second here see if.
Jason.
If you can hear us we're not hearing you.
Okay, I guess, we see it looks like maybe he has dropped off okay. Let's go to the next question Jonathan Certainly our next question comes on line that Sam Margolin from Wolfe Research. Your question. Please.
Hi can never going to any.
You can Sam.
Hey, Dan.
Good so I'm just sort of focus question, we've gone over a lot to high level stuff, but.
Yes, because your downstream footprint pretty good look into Asia. Some other operators have been talking about some interesting observations they've made about.
The timing disparity between Asia emerging from.
Good crisis versus the rest of the world and kind of using it as maybe a soft proxy around.
The slope that demand might recover or what that might look like on the other side of this.
Could you share whatever observations or thoughts you have around what you're seeing.
Yeah, you know.
Sam.
As a great quote from Lee Kuan Yew that Asia is figment of the Western imagination. He said it was more of a cultural quote but its Asia is a big area is the reason I bring that up and what's happening in China is different than what's happening in Indonesia, right now and what was happening in South Korea is different than what's happening in time.
Land and so broadly speaking I would say.
Asia and other parts of the world.
It would appear the demand has found the bottom and that we're kind of bumping along the bottom right now and the big biggest it has been on aviation fuels.
And then you've got gasoline, which is off 50% give or take around most of the world diesel more like 25% and and so these numbers generally hold in most of the places where we're doing business right. Now and then you have regional signals and signs that things are starting to move China clearly.
As come off the bottom.
Some other markets in Asia that have seen kind of a second wave and they've reinstituted. Some of these lockdown type policies.
The green shoots seem to have pulled back a little bit.
So I would say is highly specific to the market in Asia, where you are but there are certainly signs in a number of markets of resumption of activity in a resumption of demand growth and they tend to correlate pretty well with when the policies are relaxed and people can begin to get back to work and start to move around again so.
I think there there are small positive signals.
Meeting earlier this week, where we've talked about it being done at the beginning of the in the beginning I think I think it feels like we're finding the bottom right now and then the path up out of this is likely to be different in different regions of the world as it ties to the health status in those parts of the world.
But.
I think this quarter and perhaps next quarter feel like we're about in the.
As I said bumping along the bottom and going to begin to emerge out of it here at some point over that time.
Thanks, Sam Thanks, so much.
Thank you. Our next question comes from the line of Ryan Todd from Simmons Energy Your question. Please.
Good Thanks, Kevin can you hear me.
Unclear Ryan.
Great.
Morning, and everybody maybe.
A couple of quick when the $2 billion of additional Capex cuts on the fuzzy charts. It looks like it's coming from.
Kind of spread across all businesses.
Any additional color where the cuts are coming from in the Permian I think the exit rate at the end of year was still the same.
So maybe any any thoughts on how we think of the trajectory there.
In the Permian.
One follow.
Yes, so so the 2 billion.
Broadly you can think about a little bit less than a 1 billion coming out of a major capital projects and that primarily.
TCOS, so we'd already factored in a little bit of reduction in Tcl in the first reductions under 16, but not nearly as much as we're seeing now call it 800 million or so.
On major capital projects.
About half a billion each on Unconventionals and on other base business and the Unconventionals would include not only.
Permian, but also Argentina in Canada.
And then about another 200 million coming out of downstream and chemicals. So I think if you take those and rack come up that gets you to the to the 2 billion on on the Permian.
Our guidance still is that we'll exit the year at roughly the level that we came in or 125000 barrels lower than what we had initially indicated if you were to look at the chart, we use at the Investor Day meeting and.
Notwithstanding the fact that we're seeing some curtailments, there and we're pulling back on the rigs.
The momentum coming into the year has been strong and Permian production growth in the first quarter, which largely were.
Reflects wells that were put on production last year, and and we had more pops in the second half the year than we did in the first half the year.
First quarter Permian production was strong and so that'll that'll that'll peak out here over the the middle part of the year and come back office, the effects of the capital reductions and curtailments or.
Roll through the system, but our expectation is that we'll exit roughly.
Where we entered which is about 125000 to less than the the numbers. We showed you in early March.
Thanks, Ryan Thanks.
Maybe the.
Sorry.
Good morning, and here you get a follow up.
Great maybe when I know, there's a huge amount of uncertainty right now is.
Clear.
But maybe thoughts and implications as we think of the recovery coming out of this and a very specific sense on.
On curtailments, what's the what's the signal that clearly.
Just.
Price that will drive the resumption of those volumes at least on the ones that you operate and control and then as we think about the budget as we move.
Out of the current level of spend.
And you start to work your way back towards maybe the $20 billion level that we run before I mean, how do you whether this sort of signal that you see that will I guess first allow you to turn on you know curtailed volumes and then allow you to put rigs back to work in the in the Permian.
Yes so.
On the first one on curtailments that was that they're going to be market signals are on the economic.
Well, you those barrels and Netbacks will be an important part of that.
We will also because we can pull some of these things through the value chain.
Into markets weaken.
What export markets look like what are you know we've got a refinery that we pull some of our Permian production into so refining margins and the value chain opportunities will play into our thinking there as well. So we look at these things across.
The entire value chain, but it'll be an economic signal that says these barrels are been called for by the market.
Contribution is is more positive.
In terms of the capital spending those are longer cycle decisions than than curtailments, and I think you can expect us to be.
Thoughtful and.
And not rush capital back into the market prematurely.
But it will be our view on where markets are headed so curtailments is kind of more or less where markets are or where they are likely to be in the relative short term capital spending is going to be more of a medium term kind of a view and it's because this flexible asset class, we don't need to really look at the long term signaling.
We always factor that in but but the medium term given the production profile on on.
Each individual unconventional well, we'll we'll be looking at signals that suggest that that strengthening and.
And that the band is there and you get to watch OPEC, you're going to watch inventories. There's a whole series of indicators I think that will will help us informed decision making there.
Thanks Ryan.
Okay.
This does have one more question the Q.
No I think Oh actually I think I apologize it was Jason gave them in and it looks like he dropped again, we were going to try to get Jason back and.
Jason gave them and sorry about that.
With that I'd like to thank everyone for your time today.
And we do apologize for some technical and audio challenges.
Rest assured the transcript will certainly be be posted shortly after the call today, Yeah. I appreciate your patience and I apologize for the technical difficulties I'm not sure what happened, but not only with the transcript we posted but this will be investigated and corrected.
Please stay safe unhealthy Jonathan back to you.
Thank you ladies and gentlemen, this concludes chevron's first quarter earnings Conference call you may now disconnect.
[music].