Q2 2020 Chevron Corp Earnings Call
Good morning, My name is Adrs and I will be your conference facilitator today.
Welcome to ship on second quarter 2020 earnings Conference call.
His time, all participants are in listen only mode. After the speaker's remarks, there will be a question answer session and instructions will be given at that time.
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As a reminder, this conference call is being recorded.
I will now turn the conference call over to the General manager of Investor Relations Chevron Corporation Mr. Wang.
Please go ahead Sir.
Thank you Andrea.
Welcome to Chevron's second quarter earnings conference call. The webcast on the call with me today, RJ Johnson GDP of upstream and tier Braver CFO.
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.
I'll turn it over to Pierre.
Thanks Wayne.
Second quarter was a challenging one for the company.
The natural results included $4.9 billion and special item that charges.
Foreign exchange loss or $400 million.
Excluding special items NFX the quarter resulted in a 3 billion dollar loss or dollar 59 per share.
A reconciliation of non-GAAP measures can be found the appendix of this presentation.
Actual from operations was about $100 million.
Total capital spending was $3.3 billion, including about 300 million for the Puma Energy Australia acquisition.
That's a sale proceeds for the quarter about $1.5 billion.
The sale of our Azerbaijan in Colombia upstream businesses.
Our dividend was flat with the prior quarter.
We maintained a strong balance sheet.
Turning to slide four.
The second quarter, we recorded over $5 billion, an impairment and other non cash charges.
The charges were triggered by the uncertain operating environment and outlook in Venezuela.
A lower oil and gas price forecast due to the anticipated economic impacts of Koby 19.
And severance accruals, resulting from a transformation initiative.
While we are disappointed by the impairment in Venezuela.
We intend to maintain a presence in the country and resumed normal operations one day.
The prices they didn't impairments were primarily related to stampede.
Non operated field in the Gulf of Mexico.
Financial operations in the Permian.
Various producing assets in Asia and Africa.
These charges were partially offset by gain on asset sales and various tax items.
Turning to slide five.
We remain on track to meet our revised guidance for 2020 capital and operating cost reductions.
Organic capex in the second quarter was $3 billion already at a run rate, 40% below the original budget.
Full year capital guidance remains unchanged at $14 billion.
We will need to see sustained economic recovery and much lower inventories before considering raising activity levels.
Operating costs are also trending lower inline with our expectation of 1 billion dollar savings compared to 29 team.
Organization design firm or transformation efforts is complete.
Employee selections are underway.
We expect to be operating under our new model in the fourth quarter.
Living additional run rate savings next year.
During the next slide.
Our financial priorities remain unchanged.
We're on track to grow the dividends for the 30 threerd straight year.
Cash flow from operations in the second quarter was low due to the market environment.
This was partially offset by lower cash capex and asset sale proceeds.
I read yet this quarter included our successful bond issuance in May.
Our balance sheet remains strong.
The net debt ratio below 17%.
Well ahead of our competitors.
Turning to slide seven.
Second quarter earnings were low were lower due to a swing of over $6 billion and special items and FX versus the same period last quarter.
Adjusted upstream earnings decreased primarily due to lower prices.
Including greater differentials to benchmark crudes due to market volatility.
And reduced liftings volumes, primarily to curtailments and prior upstream assets sales.
Adjusted downstream earnings decreased primarily due to lower sales volumes to match decreased demand and unfavorable timing effects.
Turning to slide eight.
Compared to the first quarter second quarter adjusted earnings decreased by over $5 billion.
Adjusted upstream earnings decreased by about $3 billion.
Primarily due to lower liquids realizations.
Lower sales volumes, mainly due to curtailments.
And an unfavorable swing in timing effects.
Adjusted downstream earnings decreased by almost $2 billion.
Primarily due to an unfavorable swing in timing effects lower margins and lower sales volumes.
Chevron's refinery system ran at reliably during the quarter.
With crude utilization well below capacity due to lower demand.
The other segment decreased primarily due to an unfavorable swing in accruals for stock based compensation.
I'll now pass it over to Jay.
Thanks Pierre.
On slide nine second quarter oil equivalent production, excluding asset sales was flat compared to a year ago.
During the quarter increase Permian shale and tight production and higher entitlement effects were offset primarily by curtailments and turnarounds.
The curtailments with the low end of our guidance range as prices recovered from historic lows late in the quarter.
I'm really proud that our employees have kept our upstream operations running safely and reliably during this global pandemic.
With all of the challenges of moving people and equipment.
And of course personal concerns at home our employees have risen to the occasion to deliver the energy needed in recovering economies.
Turning to the Permian.
We're making disciplined choices to balance short term cash flow, while preserving long term value.
In response to the current market conditions, we quickly reduced our flexible capital program across the portfolio.
And then the Permian expect quarterly capital spend in the second half of the year to be about 75% lower than the first quarter.
As of July we've reduced our operated rig count for with one completion crew.
Although the level of activity in the Permian is rapidly changed our focus on efficiency has not.
Why they ended this year, we expect to double the lateral feet drilled per rig compared to 28 team.
With lower capital investments and are proving efficiency.
We still expect to be free cash flow positive this year at strip price.
As shown on slide 11.
The short term outlook for Permian production has changed as a result of the lower capital spending.
After curtailments in May and June we're back to full production and expect second half production to be in line with the first half.
At current activity levels, we expect production to decline about 6% to 7% in 2021.
Early next year, we'll update 2021 production guidance for the Permian and the rest of chevron's upstream portfolio.
As stated in our first quarter 10-Q, we expect lower capital spending to result in the demotion proved undeveloped reserves primarily in the Permian.
These barrels maybe rebooked as proved reserves when funding and activity levels increase.
The near term production profile for the Permian has changed what our long term view of the assets attractiveness has not.
With our scale.
Efficient factory drilling and royalty advantage, we believe we're well positioned to maximize returns.
And deliver value.
Turning to Tc go.
Despite the challenges posed by the pandemic, we continue to make progress with our future growth wellhead pressure management project at 10 gig.
And the project is now 79% complete.
Oh, sorry fabrication is complete and all modules have now departed Korea.
Our logistics system is working well and we expect to receive all the remaining modules in 10 games this year.
The remaining project scope is primarily the construction and commissioning work in 10 days.
We made excellent progress on site construction through the end of last year and the first quarter. This year.
The second quarter as a result to the cobot pandemic, we reduced our construction workforce to 20% of plan.
As a result overall construction progress has been impacted due to the limited construction workforce.
Let's turn to the next slide.
CCOH is working hard to mitigate the risk from the pandemic like closely coordinating with health experts and regulatory agencies to implement safeguards that protect our workforce.
Looking ahead to the second half of 2020. The project team is focused on Remobilizing. The 10 geese construction workforce and completing the final see list.
They returned to work plan for about 20000 F. G P construction personnel.
Set to begin in August and we will continue as conditions allow.
Critical path activities, such as the delivery and installation of the first two pressure booz compressor modules remain on track.
Foundations and access roads are complete and the team is preparing to receive restack and installed these modules.
With the hartsfield productivity and progress over the winter. We were ahead of schedule, but now have limited scheduled flows remaining.
Our ability to complete the remobilization and sustain the construction workforce through the pandemic is key to limiting further impacts to the project.
We're focused on safely progressing the project and we expect to be able to provide more specific updates to project cost and schedule early next year.
Now I'll give it back to disappear. Thanks.
Thanks, Jay Slide 14 highlights some recent announcements.
Until late on July 1st we safely started up production in the partitioned zone and completed the first exports this week.
Also we closed the acquisition Puma Energy Australia.
These assets will integrate with our refining and marketing value chain in Asia Pacific.
And extend the valued Catholics brand in the region.
Earlier this month.
We signed an agreement with Algonquin a leader in renewable power generation.
To co develop renewable power projects that will support our operations.
Initial project assessments, we focus on the Permian, Argentina, Kazakhstan and Australia.
Turning to the next slide.
Last week, we announced we had reached an agreement to acquire noble energy.
That's necessary regulatory and approval steps progress. We've also launched our integration planning efforts.
Representatives from both companies are meeting today to kick off the planning discussion.
I look forward to integrating noble's complimentary assets people and capabilities into Chevron.
Looking ahead.
We anticipate a straightforward and fast integration.
Our internal transformation efforts should help us efficiently integrate the new organization and achieve our synergy targets.
Now looking forward on slide 16.
In the third quarter, we expect for touching production curtailments of about 150000 barrels of oil equivalent per day, primarily due to the OPEC plus agreement.
Planned turnarounds, primarily in Australia, the Gulf of Mexico, and Canada.
That could impact production by about 110000 barrels oil equivalent per day.
This includes an extension of the turnaround at Gorgon until early September.
In Australia, we expect LNG contract pricing to be lower due to the three to six month lag with oil prices.
Based on our current outlook full year net production is expected to be roughly flat the 2019 2019.
Including the effects of curtailment.
And Tcl co lending is expected to be about $2 billion for the year.
And downstream turnaround activity is estimated to have an after tax earnings impact of 100 $200 million.
We expect our other segment earnings and distributions less affiliate income to be inline with prior guidance, excluding the impact of this quarter special items.
Turning to our last line.
With health economic and social crises all happening at the same time.
This was a challenging quarter for chevron and its stakeholders.
As a reminder of the importance of of the S. In U.S.G.
We're proud of the work, we're doing with social investments in our communities.
Hey equity for our employees and our supply chain chain spend with women and minority owned businesses.
You can read about this and more in our sustainability report, which was published in the second quarter.
So with concerns for the health of our loved ones.
Economic uncertainty in our communities and expectations for racial justice and equal opportunity, we know that there's more work to do.
On the right of the slide is the company five point action plan in response to current market conditions.
We're proud of hire employees are executing this plan and delivering on what we can control.
We entered this crisis in a better place than our competitors.
And we intend to exit stronger and more valuable for all of our stakeholders.
With that I'll turn it over to lane.
I think scared.
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 is necessary.
Do our best to get all of your questions answered.
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My first question comes from cell crash at JP Morgan.
Yes, hi, good morning.
First question is just tying together the commentary in the Permian for next year being down 6% to 7%.
With your Capex commentary that you provided which I think the past you've said 3 billion quarterly run rate for second half.
Capex on a see any basis not on a cash capex basis. So.
Is the Permian commentary consistent with just keeping that capex at that type of run rate.
The second after the year.
Yeah. So we had an approved budget of $20 billion.
When we announce or market response plan and then updated at earnings call. We reduced the full year 214 billion average a better run rate of UBS.
12 billion essentially for the second half year, we achieved that a quarter early so if you back out the whom energy Australia acquisition, we were at $3 billion already in the second quarter and that's obviously got that 12 billion annual run rate, which is a 40% reduction and embedded in that are the reductions that Jay referred to in the Permian and.
Operating at a the current four rigs in one completion crew.
Okay got it so you keep it at that level in 2021 for 6% to 7% decline.
Well, yes, I'm sorry, so yeah, we haven't given a capital guidance for 2021 or in the middle of our planning process, we'll do our normal.
Disclosure and sharing of what our capital budget is for 2021 in December when we've completed our plan and the board has approved the plan. What we are showing is is just an outlook based on current activity level. You know we early on guided to a Permian production being about 20% lower on the exit.
Rate from relative to our Investor day guidance, and and actually we're doing a bit better than that so that would have taken us.
Sounds a little bit lower than what you're seeing on that chart, a and then executing this plan and staying at this activity level, Yes, we project that kind of guidance, we're not giving a production guidance. There's a lot of time between now and then we're just we're just sort of showing what the outlook looks like if activity levels stay that say, it's the same.
It'll it'll depend on what the heck economic recovery as well, but inventory levels and a number of factors will determine what our activity level will be in the Permian going forward.
Okay got it.
A question just would be on Gorgon there've been some media reports out there talking about some OCC or operational hiccups on train two and getting that restarted I think you're planning in mid July it sounds like maybe it's early September at this point, but could you just elaborate on what's happening there what's the root causes this delay.
His and.
What it would mean for being able to meet contractual obligations.
I think you're about 80% contracted at Gorgon Gorgon, but just any color there would be helpful. Thank you.
Yeah, So I'll take that one so you know our fundamental concern as operating safely and reliably and we're always going to take decisions in alignment with that as part of our normal operations. We take trains down for turnarounds to do inspections and maintenance and during the training to turn around what we found in the train two.
Propane heat exchangers or kettles on call them.
We saw some well defects.
So we developed a repair procedure and are progressing well on those repairs, we expect them to be fully accomplished here in the near term and we expect to have the train up running in early September all the other planned work for the turnaround has already been completed so the focus really is just on completing these repairs to the pro.
Okay and heat exchangers.
We're going to use the findings from what we saw in trying to the plan the appropriate actions for train one and train three but at this point train one in three run normally as expected and we've actually seen a good stable operations out of them. So at this point there have not been challenges and delivering on our on our commitment.
And I don't anticipate that as we look forward.
Okay. Thank you Phil.
Well move next to Jason Gammel at Jefferies.
Well, thanks very much I.
I guess nurse first question I have for pure is there's obviously a pretty tough quarter.
But I wasn't necessarily expecting cash from operations, that's working capital will be negative.
So you can can you address if there's anything in the quarter that is sort of a one off on them.
That affected the cash number or is this just purely the results led the core.
Pricing margin environment.
So look it wasn't challenging quarter, you know we did dependent perspective, we had a big beat last quarter and we had a miss this quarter in one of the primary drivers.
We talked about last quarter and I already talked about this morning, as our timing effects and as you know Jason.
As our effects that benefit us in a falling oil price environment and reverse in the rising oil price environment, and we saw that obviously prices declining in the first quarter and rising in the second quarter and some of those effects do roll through cash because it's essentially going through our Cogs and it's a timing difference between.
When Cogs are being recognized relative to the underlying margin.
In addition to that look we had very volatile industry conditions. As you know we at historic historically low prices at times very volatile pricing and there were times, where we did not capture but the benchmark crudes are indicating that was true in the U.S. and certain times with the calendar.
Calendar role and the physical differentials, which are adjusting very quickly, but it was a very fast moving.
Situation that was true outside the U.S. for certain crudes CPC blend at times was being discounted more heavily versus Brent some or West Africa crudes also were being discounted more heavily versus Brent than is typical in a normal trading pattern and then we ran you know a much lower utilization on the downstream and instead.
Nickel again, we had unprecedented.
Demand decreases rapidly changing demand decreases we were managing our refinery system to be in sync with that with them demand in the U.S. we ran.
Our crew utilization was 55%, which as you know well well below what the capacity is and it just point out how.
Extraordinary the conditions were in the second quarter. So that that result in much lower volumes than we typically would sell and resulting impact on margins.
The last thing I'd point out on earnings and it's not a cash effect is we do make accruals for stock based compensations for all employees that have stock based compensation and in the first quarter that was a favorable and there was a slaying so theres no doubt, there's some noncash elements in the earnings, but the realizations volumes and asked.
Thanks of the timing also roll through cash there was nothing I would say that was unusual except the industry conditions that were of that were very unusual on extraordinary.
No. Thanks, I appreciate that here hopefully we won't ever see another quarter like this past one.
Second question is for Jay Jay That's first time Weve been able to speak with you since the noble acquisition was announced I was hoping you might be able to give us your view of.
The quality and said it goes assets into the shoveling portfolio and specifically interested in the Permian acreage and your view on.
You said and the potential for future extension.
Yeah. Thank you Jason.
We're obviously excited to have these assets join our portfolio I think there a really nice set of assets and they have an excellent fit with us.
Syndicate to the eastern Med and the DJ Basin, we see two news scale operations of scale that fit quite well into our capabilities.
Weve worked for many years and the Middle East and this is a nice addition to our current portfolio.
In Colorado, we're excited to have an entry into the DJ that has such a long running room and good returns in the Permian, It's a nice add on to our existing Permian operations in the Delaware Basin, and about 90000 acres coming into our portfolio. So we see good synergies there.
And then there are other assets in the.
No go portfolio that will be nice assets to have will continue to start.
Evaluating their performance and.
Just on balance I'm happy with with what's coming into the portfolio I think it's going to be a really good said and there's a lot of good people in the noble organization as well, we're looking forward to bringing them into the family.
I appreciate it cluster.
Well go next to Devon Mcdermott Morgan Stanley.
Hey, good morning, Thanks for taking the question.
So.
My first one is on a CCOH and just following up on some of the prepared remarks trade the had and when we think about the critical path here for the back half 2020 and really into the next few years. You noted that you have all the materials on site to achieve that critical path.
I wanted to ask specifically on the remobilization of the workforce and how you're planning that to continue to achieve execution on the critical path items that we think about the overall project timeline any any risk of delays just little bit more detail on how you're thinking about the interplay there with the a critical path and remobilization of workforce.
Yeah. Thank you well that's it said we made great progress over the winter time, and we're actually building a ahead of schedule with the modules being completed on time and coming to us they're coming to us complete with good quality dimensionally accurate. So they're meeting all of our expectations and we expect to have the C. Lift finished this.
Year, those are all key elements and maintaining schedule on the project.
From the workforce on the ground standpoint in Kazakhstan like many other countries is going through a significant impact from the Cove and so as part of our precautions, we do mobilized to about 20% of the planned workforce in the second quarter. That's about 20000 workers that we need to bring back during June and July we've been.
Doing a crew change on those people that were remaining and 10 days and that's given us a chance to test the systems that we've been putting in place and those involved testing people at their point of origin before they returned to thingies once they get to attendees. We have isolation camps set up so that we can put people in isolation, even with negative tests, we still put them at ISI.
Relation to effective quarantine period, then read test before they're allowed to progress to 10 games, we're using a pod strategy, where we keep groups of workers together, but isolated from other groups and that includes where they live transportation.
How they take meals trying to make sure we have sufficient mitigations in place to protect that workforce. Our fundamental a concern is the safety of the workforce and making sure that we can sustain operations as we rebuild we expect that mobilization to take place over about a four month period. The clearly that's gonna be depend.
And the upon the environment in Kazakhstan as well as just the.
Difficulty moving people internationally for project of this scale and we'll take the learnings as we've done the crude change and continue to adapt as we move forward into the remobilization.
Our focus continues on critical path activities, but we've got to also work off a large volume of work that didnt get done in the second quarter and so to really we expect some degree of impact but to really be able to give you any kind of an updated forecast on costs toward schedule, we need to see how this remobilization goes we need to see how we're able to.
Sustain people that work within the pandemic and we'll be able to update you I think more effectively probably in the first quarter of next year.
Got it thank you very helpful.
Second question is one relating to the U.S. selection.
Short term at a longer term part and the short term parties, there's a lot of discussion around potential permitting or leasing changes specifically on federal lands and waters and one just how you're thinking about managing that that potential risk given the large presence in the Gulf of Mexico and the second part of the question in the longer term piece. There's also some discussion around.
Things like clean energy standard or investments from the federal government into things like clean hydrogen overtime, and just how you're thinking about managing the business from an investment strategy longer term to position Chevron for this potential shifting regulatory environment. Maybe we then the recent announcement on the renewables partnership with.
When and how that fits into longer term strategy as well.
Sure David I'll start and the J address the question on federal leasing I mean at the highest level, we worked well at the federal state local levels in this country with governments of both parties and of course, we work with governments different parties all around the world with energy is essential as the economy and the world.
Economies recover from this pandemic and jobs in oil and gas are good paying jobs and our big part of the economies and the number of states in the U.S. and a number countries around the world, We think whichever governments in the U.S. or another other countries. The economy will be a priority coming out of this and we think energy will be a big part of that.
We're very responsible company, including our commitment to easy, which I referred to the actions, we're taking that to reduce carbon intensity. So I think you know our approach and energy transition has three focus areas things that we can do to lower carbon intensity, we have a greenhouse gas intensity metrics out to 2023, how we can increase renewables in support of our busy.
Yes, so the I've got Algonquin partnership, we just announced.
It's just the way to scale up but we didn't to doing previously we had some wind and solar to our operations in the Permian and in Bakersfield and this gives us.
In the Lions can partnership to accelerate that and scale it up.
Globally.
Can you do in the renewable space.
All natural gas renewable liquid fuels actions that reduced the carbon intensity of our products in particular in California, a consistent with the low carbon fuel standard and then our third focus areas investing breakthrough technologies that includes a carbon sequestration hydrogen batteries. You know we are operating the world one of the world's larger.
Its carbon sequestration projects in Australia. So that's a long answer to say we've been a business a long time, we intend to be in business a long time.
Elections in this country in a number of countries that are occurring and we intend to be a constructive force wherever we operate to be a good partner with whoever is governing at that time, and we think there's a lot of common ground that we can find between what we do as a company and what governments aspire to do.
So with that I'll turn it to Jay.
Thanks.
I'll build on that but just saying I I think there's actually a lot of common ground with where the potential administrations want to go because we've already been focused on reducing flaring and methane emissions are greenhouse gas intensity in producing oil and gas.
We've had a head start on this and we continue to stay focused on reducing the impact that we have as we produce these essential products.
We think energy plays an essential role and economic growth and these jobs in the Gulf of Mexico in the Permian are important jobs to the economy.
And I think the emphasis on natural gas is a bridging fuel continues to support our operations in both the Gulf of Mexico, and Permian. So we'll continue to focus on reducing emissions and lowering our footprint carbon footprint.
But at the same time.
We're going to continue to work with whatever administration is in place.
And.
Work to make sure that the there's a good understanding of potential regulation and the impacts that it may have as we move forward.
Thanks Devin.
Well go next 10, Neil Mehta at Goldman Sachs.
Good morning team. It said, thank you for taking the time here because the first question I had is around cash flow breakeven.
In in the past Pierre you've talked about cash flow after capex breakeven. After 40 at 50 at the dividend and that 60 the buyback.
How do you think about that math there now there are a lot of moving pieces, particularly with downstream and there's a lot of flexibility on the capex side, but any mackie can help us think about your rent breakevens would be helpful for us lining models.
[music].
Well Neal I mean, you're exactly right when we talk about oil Breakevens. We're just talking about one part of the portfolio and not everything else is held constant. So you know we've had.
We've shown breakevens and ER and the 50 the actions that we're taking is to get it down in the 40 that has an assumption around downstream performance and you won't see that in the second quarter, but you'll see that certainly over time, you know I guess I'd just its first step back and just say we're in a different place than almost everyone else in our industry.
We have one of the strongest balance sheets, we exiting the quarter here with a net debt ratio of 17%.
We've got excellent capital discipline, and the ability to flex our capital program down on you saw that we took it down 40% in one quarter, you know with an extraordinary change in the circumstances reserving the capital not spending capital to add barrels that are just aren't needed a right now.
World is you know contracting and then coming out of it and hopefully recovering in a sustainable way. We've been ahead of others. We started our asset sales and signed asset sales last year and you saw those close this this quarter generating cash and again, we started our restructuring well before.
You've been in Enron play and we had that work on track and of course, we signed an agreement to acquire noble energy last week. So we'll all of our actions are designed a consistent with our financial priorities. The first is to sustain and grow the dividend. We showed our stress test last quarter $30 that I think was made very.
He clear that we have the financial capability in the flexibility in our capital program the ability to manage our costs.
To sustain that dividend through what is a stress test and.
And you know, we're continuing to sustain long term value the business. So although we're taking activity back in the Permian because it brings on production in months and and not years.
Capital, we'll we'll come back when the world needs the energy and the value inherent in that resource is still there and of course, we're making investments as Jay has talked about in Thingies, which will come on.
In several years and again, we're maintaining a strong strong balance sheet. So that's the high level framework. Our goal is to get our breakeven.
Obviously as low as we can we're planning for lower for longer it's a very uncertain environment to Jason's question, we hope to second quarter or was the bottom it sure feels like it things are definitely better.
Then they were in the second quarter in particular in that April may timeframe, but we've got a plan for lower for longer show, our downside resiliency, we know how to manage the upside that won't be a problem, but make sure we lease support the long term value. So that we can not only just pay the dividend now, but a sustained and grow that overtime.
Just to build on that a little bit pier one of the things I really like about the assets as well coming from noble is that they also have great capital flexibility. So it fits our strategy quite well and about 75% of the proved reserves have already been developed so the big capitals largely in the past and now we're looking at the run opportunities for these assets.
I appreciate it and that's all up here is around impairments at $4.8 billion in the quarter.
Can you talk talk about the framework by which you look at impairments. Obviously, a your system is a little different than the IRS system or something your competitors.
You think you through the bulk of set impairments and just talk about your approach to calibrating them.
Sure well, but let me start with a fourth quarter. When we took a large impairments and those were primarily related to capital decisions right decisions that we made that were primarily a natural gas related.
And this again of course is pretty cold, but in a capital disciplined way and trying to drive higher returns being really ruthless about where a capital is invested and making difficult choices and that was primarily the impact of the impairments that we saw in the fourth quarter. This quarter. It was primarily for two reasons one unique situations.
As well, which I'll comment on and I'm sure Jay will add too and we did lower our price outlook based on the economic impacts from the global pandemic. So we don't know.
What the impacts will be but clearly with the economic contraction and and assuming economic recovery clearly, but it just result in lower demand for some time period, and we reflected that in lower prices. So you know in Venezuela, it's been a difficult operating environment for a while each quarter, we've been assessing our investment.
While you in the second quarter.
Environment became even more difficult as an example, our net production our share of net production in June which is 7000 barrels a day, so it really fallen off and so under the accounting rules in the U.S. GAAP accounting rules, we have to assess whether the loss and value is other than temporary and if we view it as other and temporary we take in impairment and unlike the IRS. It's a one.
The only goes one direction.
The other ones, where we're tied to the oil price and I talked about a few of those and then we had a severance so again, where we follow U.S. GAAP, we're going to look at it each quarter of what I can say is the impairment this quarter for the most part had a different nature than last quarter and maybe one comment on the price related ones, then I'll kick it to Jade.
Talk about Venezuela.
The price related ones are really hitting either a mature assets late in life assets, where the remaining production a term I just gets impacted by the lower price outlook. The long lived assets you know all of our we're not impaired it was really mature remaining short life direct.
And duration, where a lower price impacts the carrying value that maybe Jay can comment on Venezuela.
Thanks, Peter you know Venezuela, we took the impairment there, but our fundamental approach has not changed and that's what we're still committed to.
Being present in Venezuela, and we look forward to one day resuming full operations. Our license was extended to the first of December 2020, and that license allows us to take on the activities for safety and maintaining asset integrity and our focus is on keeping people and the assets and operations safe we support communities.
In Venezuela, we believe were forced for good we'll continue to be compliant with all laws and regulations, both U.S. and Venezuela, and we just take it a day at a time, but our commitment still remains and we think the underlying asset value is still there.
Thanks.
Well move next to Paul Sankey Sankey research.
Hi, everyone can you give me a good.
Yeah I fall.
Hi.
Thanks.
A couple of things firstly, well look problems that you had in the core to the couple of the other mega oil companies.
That's very good trading results was it fits card started you guys is having a smaller trading operation appetite.
As a result of.
Let's not seeing a whole lot of benefit in the quarter of its just wondering on the second the follow up is.
You mentioned breakeven I think Jay I'm sure that you have as Colin Salsa mentioned, a breakeven about full you said breakeven at strip by the end of year.
Pete you were talking about getting down towards 40.
Did I, if I got that rolling but could you just clarify what's in those various moving parts it might be downstream or about a miss so to pull the too, but if you could just.
Bring that's going to fully expect flow.
Okay I'll, let me just address the breakeven question so and.
That was Neil.
Seven asset well anyway, whoever asked it so again our breakeven.
And last year and early this quarter was low fiftys and the actions we're taking.
Again to reduce capital and reduce costs, which are right on track with our guidance and are going very well.
Everything else held constant that would take our breakeven into the fortys, but not everything else is held constant in particular downstream and chemical as we've talked about a weaker weaker margins and lower much lower volumes, so well have to see as that shakes out, but as that as downstream stabilizes overtime than than those reductions you know should flow through to a lower.
Breakeven, we talked about Permian being free cash flow positive.
At strip pricing. So this year a in the Permian and remember we had that also as guidance in our Investor day. It was at a much higher.
That's meant level.
As we run a different trajectory, but even that now this investment level and all the changes that are going on we affirmed that will still be free cash flow positive, but that was only specific to the Permian and that was that strip pricing.
If we go to trading I, we don't disclose our trading earnings separately I wouldn't exactly characterize our trading or station the way. The way you said, but we've been pretty clear that the priorities for the trading organization our flow ensuring the flow of our upstream barrels and in and out of our refineries to optimize around.
Positions and then to trade and certainly at times in the quarter the market had steep contango, which created a trading opportunities for our organization.
And you will see those results you know in the upstream and downstream segments this quarter and in future quarters.
Great. Thanks for that so policies for the misunderstanding. Thank you.
Thanks.
Well go next to Jimmy Dean way at Barclays.
Hi, good morning, everyone.
One is getting my first question.
Good morning, Oh, My first question is on the overall business and I guess understanding that growth. He is an outside of capital allocation decisions.
You really hard to materially reduce the cost structure is there an opportunity for chevron to meet its higher Irish sea and sequencing cagar targets that you laid out at the analyst meeting.
All right below the former $60 that you talk to that or are those targets. Just cut is no longer the right way to think about the business given your updated you on the Mac now I know you just mentioned.
Thanks.
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Well, let me start and Jay and I want to add I mean, yes, certainly the.
Ability to deliver that kind of production volume is there because all of the resource and the opportunities whether it's in the Permian whether it's the other opportunities we showed during our Investor day, they're all their now there's no doubt we had our investor day on March Threerd and by that weekend.
And we showed a $60 Brent nominal flat pricing for five years, which everyone agreed was a reasonable assumption I think and by the weekend oil was in the Thirtys when the Russian Saudi agreement fell apart and then a few weeks later.
We're in a massive economic contraction. So there's no doubt that the world has changed from that and Investor day, and we're in the middle of our planning process and will provide a revised up updated guidance, but our ability to deliver that kind of production is absolutely. There. The question will be as that is that still the right strategy I think we have to.
Step back and and look at a sector that is underperforming the broader.
Equity markets and were underperforming primarily because of low returns and a lack of capital discipline. So when you hear us talk about capital discipline in our organic portfolio on the actions that Jay is taking to be disciplined with our capital and in our downstream to being disciplined around the capital to approach the energy transition. That's a devins question we have to.
To that and disciplined way and then organically or Inorganically, we have to be disciplined capital the only way to increase returns and retain favorite with investors, it's not by its not by outgrowing and it's not by having capital flowing back into into opportunities by being very disciplined and generating high returns by being really Rufus and our allocation. So.
I think that's all the way to say is we're going to you know and we're going to revise our plans all the opportunities are there whether that's the most optimal outlook going forward, you know will decide but our commitment to capital discipline, our commitment to raising returns it's going to continue in its essential for us.
To be able to deliver higher returns overtime.
Yeah, I think to build on that we were we have very strong performance last year and coming into this but well before the covert crisis that we had already embarked on a transformation effort that transformation effort was all encompassing a covers every aspect of the company and it's really built on trying to better integrate techno.
Algae into our operations and our workflows, making sure that was officially as we can be across our organizations. How do we provide technical services to our business units.
In the upstream we reduce from four to three regions that went into effect July one we've reduced one to two layers across our organization. We're building on that geographic based business unit in the upstream which has served us so well, but we're adding in asset class coordination across business units or we can better team.
And perform a cross business unit boundaries geographic boundaries and segment boundaries and we've also added in additional focus on value chains, and making sure that we're getting the highest realization for upstream products that we can all the way through the value.
So the transformation itself, while it involves some restructuring I think some of the biggest impact it's going to come is around how we think about the business the financial fluency that we're getting throughout our workforce.
Focus on and proving returns and understanding where the gap SAR between what's possible and where we are today.
As well as incorporating as peer said the lower for longer mentality, the lower activity levels lower turnaround activity and some of the other effects that we're seeing so as you put all this together I think we'll continue to see not only the commitments towards lowering our cost structure, but I do think we're going to find ways to continue to drive for that aspiration of improving returns.
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Okay, great. Thank you Okay. That's helpful I'll answer.
Oh, Yeah my saw that it's kinda similar question, but on the Permian in terms of it just looking medium and longer term.
On the efficiency improvements that you mentioned.
Before you mentioned that does she have I can try the Permian So about 1.2 million barrels a day $4 billion to $5 billion Capex I know, that's a ways off but beyond that drilling efficiencies that you mentioned that assuming this recovery in demand sound material could somebody deficiency consistency that you've mentioned, meaning specifically.
Based on what you're seeing you could deliver the same or similar perceptive capacity of that 1.2 million Ajay materially lower capex.
Yeah. Good eight I think I'm, we're poised to continue to drive increased efficiencies throughout the Permian operations. The drilling is just one example, where we're seeing that efficiency, but the advances in technology. The advances in our understanding of the reservoir is and how to best complete and produce from those.
The integration of our operation centers that maintenance the operations are all driving efficiency.
All the near term activity levels, we've changed those because we can and because we think it's prudent given the current environment that we find ourselves and the underlying long term value and even mid term value. This asset is unchanged and I'm actually really excited about the changes that we're making and how we are working together.
In the organization and so I do expect to see us be able to deliver on previous expectations and continue to deliver on becoming a more efficient more effective operator in the Permian basin.
Thanks to the.
Thank you.
Well go next to Paul Cheng at Scotiabank.
Hey, guys come on it.
And Paul.
I have two question I think one puts a wonderful Tia Jay you mentioned about the problem Vulcan.
It's a bit surprising given gets a new machine I'm going to Phineas only come on stream fall say less than five yes, and that you have faced problem. So it is the problem is that the saw nishu or thats, just cool and wet shave and also what at the same vanda is that pining dose that to the training.
And then train three that's why I asked me and public stone and yet they all.
Have you already see some inspection on those students.
Yeah, Paul so the defects that we found in the wells we believe we're.
There from the original manufacturer, they're not a design defect at all but they are a manufacturing defect.
They were discovered and train two when we took train two down for its first major turnaround and inspection and as I said as part of the routine inspection that's when we encountered a this particular issue.
We are evaluating based on the learnings that we got how to best address trains one and three and we put additional mitigations in place until that's been accomplished.
We do not have the same manufacturer for the vessels and wheatstone, it's a different manufacturer and I don't expect to see the same issue replicated there.
And Jay not chosen one im trying to be already went through the full would kind of 'em, we something by it just seems I lost you ought to.
No train one went through the turnaround last year train three is scheduled for next year.
So that the if that's a rich yes train three yes more off the restructuring one Dan because I assume that you assess the issue. When you went with a ton of on unit trains and you should have already discussed.
We did not see the issue and train one, but we're assessing whether or not we need to reevaluate that inspection and go through it again.
And we are addressing how best to to inspect and if necessary repair train three at this time.
Okay. So generally what has been.
The second question its Philadelphia.
I thought about say that to the again put things we turned this one off the top pilot people at the company. We appreciate that.
She is that we have a conflicting.
The how may be pilati, because you from a cash flow standpoint, you are cutting.
You all Capex pardon me and Permian actually is the highest we try and Oh, Jeff why that you assume investing in Anca and 10 key.
Which has killed the thought much about where we time campaigns that Permian, so how except that the company is going to be able to what you see over time. When you are not investing at these seem that mix maybe youre too.
The most pulpo policy.
I mean, what thank that all that you would be able to take.
So Paul one of the things we're doing as you know we've been bringing our unit development cost in the deepwater down significantly on our target is to be below $20 a barrel.
Anchors, we've talked about in the past opens up new opportunities for us in a new class of deepwater assets.
We are pacing the development of anchor.
In its most efficient pace, we're not focused on having to bring it on by a certain date, but rather keeping all the different aspects of the project.
Consistent and aligned as we move through the impacts of the co good crisis.
In terms of the Permian, It's simply we don't see the point of investing in any assets around the world to bring on new production capacity when the world is so heavily oversupplied.
So because we have that flexibility, we're exercising that and we'll continue to look at the current environment and begin ramping up funding and activities when it's appropriate to do so when we see a better overall supply demand balance that are fundamentals for the industry.
Yeah, not only at what Jay said look we're gonna be diversified across different asset classes were not going to be a pure play.
Company and their operating on different time frames and one involves production comes on in years and one evolves production. The comes on the months and we're making that distinction. So we've been laser focused on capital that supports long term value capital that's adding shorts action has been hit very hard. Thanks, Paul We appreciate your question.
Well move an extra Roger read at Wells Fargo.
Yeah. Thanks, Good morning, I guess two things to follow up on first question for you Jay on T. CEO, just what do you think the critical you mentioned critical path items, what are those and 2020 and 2021, we really want to keep our eyes on for confidence.
The project is coming along as expected and then I don't know second question is for appear for you, but as you think about your outlook for the Permian.
Unconventional and 21, the down 67% when does that become a written in stone event versus you know something that you could tweak and we could see something different.
So the critical path for T. C O FTP project it really runs through the setting of all the utility modules and the compressor Bruce facilities for the wellhead pressure management part of the project and getting those fully integrated and that's where our real focus is so its mechanical electrical and.
Instrumentation work once those modules are set on their foundations.
That really represents the main focus but there's a lot of work as well that has to be maintained in parallel with that to be able to deliver the project as expected.
Yeah, and I look on the Permian, we could bring completion crews back very quickly.
Ever to happen. So again, it's just you know we're in the middle of our planning process, we'll update our capital budget, but even after we have a capital budget, we can reallocate capital if the world changes and there's a lot of flexibility in the Permian. It goes back to the earlier question. There's a lot of value. There. So we'd want to see the sustained economic recovery see inventory levels heading down.
But it's something that we could change very quickly with by adding completion crews in adding rigs over time, just as we brought it down we can take it back up.
Thanks Roger.
Well go next to that and I get at Bank of America.
Well thanks for squeezing in guys on the I just got a couple of quick ones.
PR, perhaps you could just elaborate on your Shingo Prize.
Price assumptions on most of what I'm really looking forward as you anticipate you will continue to that.
Given you've got substantial had too much you pointed out last quarter over the foreseeable future.
I'm, sorry, you broke up a little bit on your question, Doug can you say that again.
Yes. So can you hear me now.
Yeah.
Okay. So do you anticipate causing additional debt given its still got substantial headroom as you pointed out last quarter and as you could elaborate please on the change in price assumptions for two hours.
Yeah. So on the price assumption I'm not sure I can say much more or we don't disclose our price outlooks, we view it as commercially sensitive or obviously in the market at time, selling or buying assets and we went on our counterparty to know what our price outlook as we don't think that's in the interest of our shareholders, but again, we lowered our price outlook, primarily due to what we think are the.
Likely.
Lower economic activity Jews, a global pandemic no one knows what the recovery will look like but it's clear that there's been an economic contraction and they'll to it'll take some time period to recover in our products are so closely linked to economic activity in terms of debt. We had a very successful bond issuance that we did right after last.
Quarter.
It was.
Better than any any of our peers in terms of the pricing and we'll continue to monitor the market. We're in a very strong position.
Our commercial paper balances are well below levels very comfortable levels, but we always look at where the market isn't what our liquidity is and we certainly couldn't go to the bond market and do another issuance. If we think it's the right thing to do.
Thanks, So my follow up for T., a little quicker.
Hit to get a bit nobody but some.
Your comments about Gorgon can use elaborate just a true also had an issue or what does the remediation youre anticipating always there. Thanks.
So are you asking about the repair for the vessels.
Yeah, I'm just trying on Sun the nature of the hold the problem and what remediation what will continue for the issue.
It's really just grinding out and replacing a well that had some abnormalities in it and ensuring that we have the structural and a pressure containing capacity that we're looking for.
Thanks, Doug.
Let's get comfortable place.
Sorry, you're breaking up again Doug.
Sorry, no trend from the replacement requirement.
The placement required so no we do not need to replace the vessels. We believe the repairs are going to be fully effective.
Okay. Thanks, a lot.
Thanks, Doug.
Well go next to Sam Margolin at Wolfe Research.
Sam you May have your line you did.
I'm sorry, San we're hearing you may have your line muted.
Maybe a double argued the phone and that line.
Okay, Audra why don't really over the next question.
Okay, well go next step arise architecture yeah.
With Royal Bank of Canada.
Hi, Thanks for taking my question I just had a couple of quick assessments on TCOS I think Jay you mentioned that you used up some of that so some of it continue chunk tightening, but can you talk about how much continue see there's less on cost.
Just get essentially all that and then a follow up on the Atlas. Thank you.
The efficiencies that we saw in our schedule and the games that we made on schedule were consistent with also gains were making on cost.
But really tell you where are you all where we are we're going up to see how we get through this fourth quarter remobilization and sustaining the workforce. So we'll update cost and schedule are probably early next year.
Got a billion dollars less capital this year, a portion of that as deferral, but about half, but a portion is lower currency effects are currently benefits and higher productivity. So we think some of those cost savings are are rolling through the spot all just deferral.
Okay understood and then maybe one for you if yes.
The only impediments alongside the low commodity prices did you also chefs your expectations on a median time refining and chemicals margins.
There are no impairment, they're all upstream related so yeah. We have you know again, we have various outlooks.
For our upstream and downstream and chemicals margin.
But the impairments were all upstream related.
And name or.
There's no LNG refining chemicals and.
Again, venezuelas the big as part of it there was the price related impacts and then there were some suspended costs.
That also from enough.
Thanks Raj Okay.
Thanks.
Hi last question comes from Jason Campbell, then Cowen.
Yeah. Thanks for squeezing me in.
Oh I want ask about the downstream business, specifically U.S. downstream was particularly weak this quarter I think even distributing all the timing impacts to the U.S. portion of downstream is still would have missed I think well people were expecting can you just talk about some of the challenges you're experiencing particularly that part of the business.
I'm thinking along the lines of maybe you're over indexation to the West Coast was a headwind this quarter and the outlook.
For that part of the business in the in the near term and I've a follow up.
Yes, the first thing I'd say is our execution across upstream and downstream was excellent I mean, we ran safely and reliably across our upstream and downstream portfolio under very difficult.
Conditions, and again extraordinary kind of market conditions, Jason I referred to you know our view as crude utilization in the second quarter was 55% now its operating higher than that now it's north of 70 and it's heading towards.
80% here in the next couple of weeks. So there were extraordinary contractions we.
Ran we matched our supply to our demand we have sales channels through our retailers and marketers.
And we weren't going to we were going to meet their demand, but we've tried to minimize any building inventories and try to match, which is very unusual obviously, we had to significantly reduce our jet production because the jet reductions, we're even more significant so the actual execution. We thought was outstanding it's just I don't think.
The model frankly work under the circumstances that we had in the second quarter, we never planned I led that business for three years.
You know nowhere did I did if we ever plan to run at 55% of crude utilization nowhere did we plan to make as little jet as we possibly could so truly extraordinary conditions. It was all very well executed, but I think when you take the timing effects.
Margins, which are not entirely transparent across.
The portfolio and big volume effect, I think I think you'll get there the west coast I mean, it's just very there were times the west Coast is better there was times the west Coast, where it was worth was worse I mean, it's I wouldn't view. It if you look at inventory levels on the west coast in PADD five.
They're actually below year ago level. So there was nothing I think structural there was a fast moving set of circumstances in the second quarter different regions were operating at different time periods Asia outside the U.S., obviously held up better in the second quarter. It was more impacted in the first quarter and that's the kind of nature of operating right now through.
Level pandemic and the economic impacts of it.
Sure. Thanks, and then the follow up in the next kind of a large project I guess in your Q is.
One studio ends are the two pet Chem crackers that have been proposed within.
The CP Chem JV.
I think those were differ from being F. aidid, either late this year or early next year, but the F. I'd was pushed out can you just talk about how you're thinking about.
F Ideating those two crackers and you overall thoughts.
About chemicals demand growth given the pandemic.
Yeah, I mean <unk> chemicals.
The man has held up better than that.
Refined products.
And and demand is flat to maybe even up a little bit so theres been some.
Mix effect, some things are up some things are down, but but overall pet chem demand has held up pretty well, but as you know even pre.
Coated margins are weak as there's been a lot of supply added so I'll, just keep going to capital discipline and and that's really the key for the company in for the industry I'm just not just the demand side, we gotta look at the supply side. So we have very competitive projects. They are on the low end of the cost curve in other words.
They can compete better than almost than had been than most others right. They have very advantaged feedstocks. We believe the had very low construction costs, but you're right. We are pacing and deferring those decisions until we get more clarity, we like the business long term, we'd like to invest in at long term, but we just have to see where the economy.
He goes and really where industry players go in terms of how disciplined everyone will be about capital investments going forward.
Great. Thanks for the time.
Hey, Jason.
I'd like to thank everyone for your time today, we appreciate your interest in Chevron and everyone's participation on today's call. Please stay safe and healthy Audra back to you.
Thank you ladies and gentlemen, this concludes Chevron second quarter 2020 earnings Conference call you may now disconnect.
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