Q4 2020 Chevron Corp Earnings Call
Good morning, My name is Laura and I will be your conference facilitator today.
Welcome to Chevron's fourth quarter 2020 earnings conference call. At this time, all participants are in a listen only mode. After the Speakers' remarks, there will be a question and answer session and instructions will be given at that time.
If anyone should require assistance during the conference call. Please press Star and then zero on your touched on telephone.
As a reminder, this conference call is being recorded.
I will now turn the conference call over to the General manager of Investor Relations of Chevron Corporation. Mr. Wayne <unk>. Please go ahead Sir.
Thank you art, Jeff welcome.
Welcome to Chevron's fourth quarter 2020 earnings call and webcast are chairman and CEO.
Mike Wirth and CFO Pierre Forever on the call with me.
Also listening in today is Robert Green, the incoming general manager of Investor Relations, who will assume the position effective April one.
And I will be transitioning together over the next couple of months.
It has been my sincere pleasure working with each of you over the last three years. Thank you for your excellent questions Paul feedback.
<unk> and Chevron.
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.
Alright, Thanks Wayne.
2020 was an unprecedented year.
Global pandemic, resulting in a devastating loss of life and historic collapse in the global economy.
Extremely volatile oil markets.
We began the year in a strong position.
And we took swift action to adapt to the new realities as they emerged.
During last year's first quarter call, we shared our plan to manage through the crisis.
Rounding out our values.
In keeping our strategic and financial priorities intact.
Looking back I am pleased to say that we delivered on each of these five commitments, which I'll cover on the next slides.
First and foremost we focus on the safety of our employees and our operations.
Despite the difficult personal challenges faced by everyone in our workforce and.
Any additional health safeguards at our operating facilities 2020 was our second safest year ever in terms of fatalities.
And our best ever on serious injuries motor vehicle crashes and loss of containment.
It was also a year with the greatest and most rapid change in market conditions.
Our upstream team had to quickly and safely demobilize dozens of rigs and reduce other production activities.
Our refining personnel had to figure out how to make as little jet fuel as possible.
Even though just weeks before Jeff was the fastest growing refined products.
Despite all this our upstream delivered more than 3 million barrels per day for only the second time in the company's history.
At our refineries maintain world class availability.
To deliver the energy required for essential workers in a recovering economy.
I am so proud of our employees.
Are they carried out the responsibilities with excellence.
And helped each other.
And during this extraordinary year rose to overcome the unprecedented challenges.
Turning to capital and cost management.
During last years Investor Day, we told you our capital program was flexible.
Just weeks after we said that we proved it.
2020 capital was down 35% from 2019.
Inorganic capital, excluding incremental <unk> from noble in the fourth quarter.
Was under $13 billion.
Well below our revised guidance of $14 billion.
We also exceeded our guidance for operating cost savings.
Excluding special items Opex was down by over $1 billion. This year.
The decrease is due to reduced activity levels, and lower transportation fuel and incentive compensation costs.
This demonstrates our ongoing cost and capital discipline.
Something you can count on.
A key to winning in this industry.
Moving to the next slide.
We entered and exited 2020 crisis with an industry leading balance sheet.
While also completing a major acquisition.
Early in 2020, we increased our dividend over 8%.
We also bought back shares.
When the crisis hit and cash from operations decreased we took action to halt the buyback and protect our balance sheet.
We completed asset sales received good value and.
And finished our three year high grading program in the middle of our guidance range.
Being prepared with a strong balance sheet.
Consistent with an ongoing asset sales program.
And adaptive on share repurchases.
Enabled us to increase our annual dividend payout for the 30 <unk> consecutive year.
And the actions, we took to preserve long term value, which I'll cover on the next slide.
Should give our shareholders confidence that we intend to sustain and grow the dividend in the future.
Turning to slide seven.
While we reduced short cycle capital that would bring on near term production.
We maintained capital for projects that we expect to deliver production and attractive cash flow for years like it.
Our expansion project in Kazakhstan.
And in the Permian Basin, and other short cycle basis, we preserve the capability to build investment backup.
The conditions are right.
In addition, we were the first to announce and.
And complete a major acquisition.
Showing the way with a low premium equity deal.
At an opportune time.
And as a.
<unk>.
Our total investment over 2020, and 2021 will likely be in line with our free cases guidance.
But we will get there in a much different way.
With a much lower organic capital.
It would have added more barrels to already oversupplied markets.
Offset by an acquisition for low cost barrels already producing.
That also translated to reserve replacement.
With additions from the noble acquisition mitigating reserved emotions from reduced capital investments and price effects as disclosed in last year's 10 Qs.
Committed employees.
Capital and cost discipline.
Decisive actions that balance the short and long term.
That was our playbook to manage through this crisis.
And while we're not out of it yet we look to the future with optimism.
We believe we are better positioned than others.
Confidence in our ability to succeed in any environment.
Turning to slide eight.
I'm also proud that we maintained our commitment to ESG.
Our commitment we've long held.
And one that doesn't ebb and flow with market cycles.
We increased the actions to advance a lower carbon future abating emissions in our operations starting up our first renewable natural gas plants and investing in low carbon technologies like our recent announcement with carbon utilization startup blue planet.
We completed our largest company restructuring in 20 years.
And integration of global employees, and a transparent and equitable manner.
We maintained positive relationships with our suppliers.
And supportive relationships with communities, where we operate.
Lastly, we continued strong governance.
Which starts with our exceptional board of directors.
During an unprecedented year to the meeting and meet the interest of all our shareholders.
With that I'll turn it over to Pierre.
Thanks, Mike.
We reported a net loss of $700 million in the fourth quarter.
Adjusted earnings were about breakeven a.
A reconciliation of non-GAAP measures can be found in the appendix to this presentation.
Excluding working capital changes cash flow from operations was almost $4 billion for the quarter.
Our rental cash breakeven price, excluding working capital was under $50 for the second quarter in a row.
<unk> was $3 2 billion.
Including about 200 million for legacy noble assets.
Full year financial results were significantly lower due to weak market conditions.
As reflected by an adjusted Rosy near zero.
We remain committed to improving returns on capital.
And we will share more about our plans to do so at our Investor day in March.
Total shareholder distributions, including first quarter buybacks were $11 4 billion.
And we ended the year with a net debt ratio in the low twenties. After the assumption of <unk> debt and its step up to market value.
Turning to slide 10.
Adjusted fourth quarter earnings were down about $200 million compared to third quarter.
Adjusted upstream earnings increased primarily due to higher volumes from noble energy and higher commodity prices.
Adjusted downstream earnings decreased due to negative timing effects.
Including and ended the year inventory evaluation adjustment of more than $100 million.
Higher operating expenses, primarily due to turnarounds and.
And higher RIN credit prices.
The other segment decreased primarily due to higher pension charges.
<unk> two lump sum elections.
Turning to our full year earnings.
Adjusted earnings decreased by over $12 billion compared to the prior year.
Adjusted upstream earnings decreased primarily on lower prices.
And under lift and the mix effect of higher U S and lower international lifting.
Also lowered earnings.
Adjusted downstream earnings decreased primarily due to lower volumes and margins.
Unfavorable timing effects and higher rent and other credit prices.
The other segment loss increased primarily due to higher pension expense.
Slide 12 shows our production outlook for 2021, assuming a $50 Brent price.
We expect production to be up to 3% higher than last year.
Excluding the impact of any asset sales that may close in 2021.
Our projected growth is driven by a full year of production from the noble energy assets and lower expected curtailments.
Partially offset by higher base declines in part due to lower capital last year.
Price effects.
An accounting change in Venezuela.
Thousand 20 asset sales and upcoming contract expirations.
Note that our ROE can concession in Indonesia.
Expires in August of this year.
And while our contract in Thailand does not expire until March of next year.
Production is decreasing due to the short time to earn a return on new investments.
Now looking ahead.
In the first quarter, we expect turnarounds and downtime to reduce production by 60000 barrels of oil equivalent per day.
Primarily in Australia.
Gorgon train one repairs are nearing completion and.
And we expect the facility to be back back online in March.
After train one is back online train III will be taken out of service for the propane vessel inspections any repairs and the planned turnaround.
At Wheatstone production is modestly below capacity, while we repair and inlet separator we.
We do not expect production impacts in the second quarter.
The impact from ongoing OPEC plus curtailments.
It's estimated to be 40000 barrels of oil equivalent per day, primarily in Kazakhstan.
At Tcl our project work force reached 20000 by year end.
Before we pause due to a virus resurgence.
Next month, we expect to resume re mobilization for the spring campaign and are targeting a project workforce of 26000 by the end of the first quarter.
In Indonesia, we expect cost recovery barrels to decreased 75000 barrels per day from last quarter.
One time pre funding for drilling and <unk> commitments in the fourth quarter contributed to the working capital build.
We expect these receivables to reverse by the third quarter.
In downstream turnaround activity in the first quarter is expected to have an estimated after tax earnings impact of $100 million to $200 million.
Other financial guidance items are shown on this slide.
With that back to Mike for his closing comments.
Thanks Pierre.
2020 was a year like no other.
And while there are uncertainties and challenges ahead, we are optimistic about the future.
We're stronger with noble, which adds geographic diversity and plays to our strengths.
We're starting the year with an industry leading balance sheet again.
We're executing a disciplined investment program, the gross enterprise value with greater capital efficiency.
We remain committed to our number one financial priority sustaining and growing the dividend.
And we are advancing a lower carbon future with actions that are good for the environment and good for shareholders.
We hope that you'll join us on March 9th to discuss these topics in more during our 2021 Chevron Investor day.
With that I'll turn it back to Wayne.
Thanks, Mike.
That concludes our prepared remarks, we're now ready to take your questions keep in mind that we do have a full queue. So please try to limit yourself to one question and one follow up.
We do our best to get all of your questions answered.
Please open the lines.
Thank you ladies and gentlemen, if you have a question at this time. Please press star one on your Touchtone telephone you May ask one question and a follow up if your question has been answered or you wish to remove yourself from the queue. Please press star two if you have.
This thing on a speaker phone, we ask you to please lift your handset before asking a question to provide optimal sound quality again, if you have a question. Please press star one on your Touchtone telephone.
We'll go first to David Mcdiarmid at Morgan Stanley.
Hey, good morning, Thank you for taking my question.
The first one I had here was just on the capital allocation strategy as we think about the next few years in EBIT released out back in December cutting the capital budget over the next several years to $14 billion to $16 billion as part of that noted that is tengiz spending in Kazakhstan rolls off you would increase spending in the Permian and Gulf of Mexico.
And I was wondering if you could comment on the role of those U S assets in your portfolio in light of the current policy and regulatory backdrop, particularly the Gulf of Mexico, how youre thinking about that at U S concentrated investment strategy in light of current policies.
Yeah. Thanks, Thanks, Devin look Theres a couple of things here that I think are important to recognize number one.
Not only have we transitioned over the last few years into what I would describe as a structurally lower ongoing capital program, but number two it contains a much greater degree of flexibility and we mentioned, we pulled spending down 35% really over just nine months.
Last year, because we could we could flex that downward.
And so we have we have a great degree of flexibility, we've got a high degree of capital efficiency in our portfolio and even at these further reduce levels of spending as Pierre mentioned.
<unk> will.
Would be somewhere between flat and up 3%.
So we've got we've got a capital program that we like and as the Tcl project comes down we've got we've got room to make choices.
When we issued the press release, certainly the Permian and the Gulf of Mexico.
Would have been some of the first places to draw that capital back.
As we look at some of the announcements of this week and developments that seem to be unfolding here in the U S.
It's early days to understand exactly how these will play out.
The executive order was sweeping and broad.
But it also.
Lacks some specificity and I think certainly as you listen to some of the members of the New administration comment.
As a.
Introduce this and answered some questions.
I think they are looking to flesh out the details here in the coming weeks and months and we certainly hope to be engaged in those conversations onshore in the Permian.
We're weighted towards Texas, more so than new Mexico are weighted towards private land more so than federal land. So we've got a fair degree of flexibility there and that remains a highly attractive place for us to step capital up.
As we have the capacity to do so.
And the market conditions supported so I think the.
The Permian equation.
It looks pretty similar to what it did at the time, we made those statements of deepwater Gulf of Mexico.
Have to see how this unfolds.
Certainly we like the projects that we're advancing here.
And there has been.
I think general signaling that existing leases.
Our.
Secure and we would presume the permitting that would go with those leases as is also.
Likely to proceed but there are questions about this that I think we're just going to have to work our way through so.
The risks are probably greater in the Gulf of Mexico that was probably the lower part of the capital step up that we might have envisioned at any rate. So I think we'll be able to manage our way through it but stay tuned we'll keep talking to you about this as we go forward and of course, we've got options outside of the U S as well and I think that's important to just bear in mind.
If conditions in the U S becomes so onerous that.
It really disincentivize investments.
We've got other places, where we can take those dollars.
Got it that makes a lot of sense and then my second question is just on Tcl and Kazakhstan I was wondering if you could give us just an update on progress there and how things are progressing versus your expectations.
Yeah. So.
Quickly I'll reiterate that.
Last year, we completed all module fabrication and all the transportation to get the modules through the Russian inland waterway system through the Caspian unloaded into site, that's a really important milestone because.
Those were risks that could have extended things how do we not accomplish that.
Progress overall in the project is about 81% at this point construction is about 60% complete and as Pierre said, we've re mobilized 20000 workers to the project.
We've plateaued at that number now because.
<unk> is experiencing sort of the same wintertime uptick in.
And coronavirus cases, as youre seeing around the world and so.
We're holding at 20000 right now we've had the quarantine certain.
Portions of the workforce there for certain periods of time.
We plan to restart.
Further mobilization in February and as Pierre said targeting 26000 by the end of the first quarter.
We will we will need to get some.
Some.
Progress under our belt here.
To really see.
Data on productivity.
There's a lot of work that hasn't been done over the last.
Going on a year now as this has been impacting us and so we're working on optimizing schedules and work plans.
Understanding what the full impact of that is it's hard to quantify that until we really are back at work and certainly in the wintertime things tend to slow down in summertime, they will pick up and so we need to see our ability to sustain the workforce there to get work done productively and begin to.
Chew into this backlog that has built up and we will keep you advised.
As to as to what that looks like.
Jay will be with us at the Investor day in six weeks and Hillary of you more detail at that point in time.
Don't believe by that point in time, we will have enough activity.
That we've seen where we'll be able to give you a.
Highly reliable specific update on cost and schedule, but we will be working on that and we will get it to you. When we've got enough data to give you something that we think is really useful.
Great. Thank you so much.
You bet.
We'll move next to Phil Gresh with Jpmorgan.
Hey, good morning.
Good morning, Phil.
First question the 2021 production guidance the high end.
<unk> growth of 3% slightly below where consensus is here.
And you gave some color there on Gorgon and wheatstone for the first quarter.
Which was very helpful. So I guess is it fair to assume that that the extent of the downtime at Gorgon and Wheatstone. That's in your guidance is just kind of what's in that.
In the first quarter and just maybe any color on what you're factoring in for the Permian as well for 2021. Thank you.
Yeah, I mean first thing I'll say, Phil and I know everybody looks at production.
But it's an outcome and we're running the company to deliver financial results and we let the production be what it is.
<unk> gave you a guide for first quarter on.
On Gorgon and Wheatstone.
Wheatstone for the rest of the year should be back up to full capacity until a turnaround that begins late third quarter and runs into fourth which we'd already planned and announced and then of course at Gorgon as Pierre mentioned train three will have inspection of these propane exchangers in a plant turnaround here.
In the second quarter of this year so.
So we will be lighter.
On Australia production, then then where everything up and running for a full year, but a big part of that is planned turnaround activity and then theres some increment related to these repairs.
In the Permian.
There's two pieces to think about overall Permian production will be up.
We've added production from noble.
I think we've previously guided to kind of a 6% to 7% decline on the Chevron legacy production.
That actually today, it looks like it'll be a little less steep maybe more like a 5% decline on chevron legacy production in 2021.
Versus 2020, and Thats with flat activity levels running five rigs in.
One or two completion crews over the course of the year.
And a little bit of this will be dependent upon what NR JV partners do we ended the year last year.
With.
About one four net rigs.
In the Permian JV seven gross our share about one four in January it's up a little bit to about two and a half net rigs 10 gross so so theres a little bit of.
Perhaps upside depending upon what non.
Non operated JV partners too, but those are the key the key pieces there on <unk>.
Both Australia and the Permian for production.
Yes, and Phil I'll, just add that.
As well our year on year is down right, which changed our accounting.
Mid year last year to wherever no longer booking production in reserves associated with those operations. We do continue to have curtailments. This year, which is also also factored in Australia a year on year is not a big variance at <unk>.
<unk> modestly down again, we operated.
A big portion of 2020 with the train down at Gorgon. So that's not a big driver of the year on year change.
Okay, Great. That's very helpful. Thank you.
My follow up but just be.
Just on capital allocation.
She's obviously still looks very strong.
Pierre you said your dividend coverage is below 50, Brian I think for a second straight quarter.
And that's despite downstream still being soft so.
The oil here in the fifties.
I think some people were maybe a little surprised you didn't increase your dividend and the other day.
<unk>, we're still in the midst of a pandemic, but just any thoughts you could share around capital allocation if oil does indeed stay here in the fifties.
Yes.
A couple of things maybe in response to that so thanks for recognizing we are still in the middle of a pandemic.
Demand is still off in total the global economy is functioning at below.
Capacity and I think there's uncertainty out there and certainly oil prices today are supported in part by a unilateral move by Saudi Arabia to take 1 million barrels a day off the market and so while we see inventories coming down and things trending back towards balance that processes.
Still underway and so we want to be.
Mindful of the uncertainties in the commodity price environment and there could be some some downside risk.
So all of that said, maybe two other points one.
Well for the last three years, we announced a.
Dividend increase in the first quarter. If you go further back over the last decade. It was never a first quarter increase it actually was in other quarters and so we don't necessarily have a pattern or a.
<unk>.
Kind of a preference for when the dividend increase would occur it's really based on our assessment of both short term and long term conditions affordability et cetera, and it's a board decision of the board reviews that every quarter. So I hope.
Our words, but more of our actions over recent years have demonstrated to you and to our shareholders that the dividend is our number one priority we have not changed that others have others have made moves in reshuffled priorities and <unk>.
Reset dividends and all the rest.
We have not.
And we were guided through this by those financial priorities and we're very mindful of what our investors look for why they hold our stock.
And that's certainly something that will be part of our discussions as we go forward last comment to your hypothesis, if we stay in a <unk>.
$55 Brent World.
For all of this year, we're in a very strong position from a cash flow standpoint, our breakeven is in the <unk> and.
And so we'd be free cash flow positive and that certainly is supportive of a dividend increase.
Understood. Thanks, a lot.
Next we'll move to Jeanine Wai of Barclays.
Hi, good morning, everyone. Thanks for taking my questions.
You bet and I'd also like to congratulate Wayne and thanks for putting up with all of us for so many years.
Thanks.
My first question is again on shareholder returns Chevron prior 19 to 22 billion medium term Capex range I believe that was based on 60 brands and it left room for about $5 billion a year of buybacks. So can you talk about how your updated 2022 to 2025 Capex guidance.
How if we should think that that range still also leaves room for ratable annual buybacks.
Well it would be a function, Jim primarily commodity price right. So we've.
We've outlined.
That budget premised on a lower price than $60, because we've been through this pandemic and we expect only.
A gradual recovery in the global recovery in the global economy, which would support a gradual recovery in commodity prices. So we've we prepared ourselves for a difficult set of market conditions, which is certainly what we saw last year.
As I just mentioned to Phil we can hold production flat to grow it at these capital levels and.
And so we're in a position to consider dividend increases and share buybacks, if we see a.
On an economic recovery in commodity price environment that supports that.
London mental premise that we outlined at $60.
Continues to be our premise, which is disciplined capital spending our commitment to the dividend and a return of surplus.
Capital above and beyond that to shareholders premised upon a strong balance sheet and the other things that we always talked about within our priorities. So we'll lay out a little more detail on this in March for you. So that you can understand what this would look like under different price scenarios and.
How we might allocate capital flexibility, we'd have for capital distributions under different price scenarios. So stay.
Stay tuned for more discussion in March.
Okay.
Jim for that mine.
Second question is on the energy transition.
I guess, how does the current extremely low cost of capital for energy transition projects energy transition companies, how does that impact your view on the speed of the transition and the potential to create lots of Tibet capacity, that's potentially an economic but nonetheless, it's still rose oil and gas demand. So I guess.
Our views on that and how can chevron compete in that type of environment. Thank you.
Yeah. So certainly this is a space thats getting a lot of love from investors right now and.
And you'll see it in EV startups, you see it in solar started to see it in a lot of different.
A lot of different technologies.
Ed look we're supportive of all of the above we want to see advancements in growth in renewables, we fully expect a lower carbon energy system in the future.
I think you've put your finger on one of the things that needs to be watched us.
Things that are supported by.
Low interest rates.
Lots of Investor enthusiasm and government policy may work in the short term. The question is when the tide starts flowing in other direction and when the day comes that interest rates are up maybe investor perceptions.
Shift a little bit and maybe government policy shifts a little bit heavily invested in things that can sustain in.
In that environment, and I think thats, we hope that they can.
And we want to see the diversification of the energy mix to meet growing demand around the world and lower carbon.
Last thing I'll say I'm not sure that's necessarily erodes energy demand as fast as some might.
Oil and gas demand as fast as some I believe a lot of it is going into power.
That displaces coal and.
In some cases creates capacity that is intermittent and can't be used all the time it actually requires.
Natural gas to create grid stability and and supply reliability and so theres not necessarily a one for one displacement on all of these investments and that requires thoughtful study of the whole energy system to really understand how it's evolving and how this capacity plays against all the other different sources.
Energy.
Okay. Thank you.
Thanks Neil.
And our next question comes from Neil Mehta at Goldman Sachs.
Good morning, Ed Thanks for taking some time this morning and Ed.
Let me congratulate Wayne as well and I appreciate the time and friendship over the years.
Let me kick it off here on downstream.
Think about our model upstream did okay downstream was a clear miss relative to.
Our projections.
And it's not surprising just given how tough demand was in the fourth quarter, we are seeing cracks move in the right direction.
Line of sight to OPEC barrels coming back into the market do you guys envision a downstream ahead and how do you think about your refining configuration.
To capture that.
Yes so.
Youre right downstream conditions have still been tough demand is off it's off differentially across different parts of the product's barrel, which continues to stress there.
The refining system and.
And then it's the amount that is off it varies quite a bit regionally right. So in China things are back to normal by and large other parts of Asia are pretty darn close Europe North America, not so much so.
It's a gradually healing system, but it's different in different parts of the world and refining markets are regional.
They're interconnected globally, but fundamentally they start out regionally so.
<unk>.
We're looking for improvement over the course of this year, but I wouldn't call it.
Full recovery I think it's again, it's a gradual process and.
We're certainly heavy on the west coast in heavy in Asia.
And so in Asia things are as I said, a little bit better, but on the west coast Theres still recovering so.
I think <unk>.
Downstream in 2021, I would expect to be better than it was in 'twenty, but but we're not we're not anticipating pre pandemic downstream.
Earnings performance this year.
Hey, Neil if I can just give a little more on the fourth quarter I made a reference to this our year end inventory adjustment I'll just explain that it was more than $100 million. So during the course of the year, you're costing inventory at average cost.
The commodities at year end.
See if you've built or drove relative to prior year layers and so the good news is we drew we took our inventory levels down so good management of working capital, but we drew into prior year layers that were higher cost and so that is only something we do at year end in the fourth quarter.
You don't Youre not doing any during the year because you don't know if youre going to go into prior year layers.
In the intervening quarters. So you don't want to be always doing this calculation, but our practices at year end, we revalue that so you have think of it as inventory that had been valued at 42 during the course of the year. When we go into prior year. There is we're picking it up at 60 or 70, and there is no cash impact, but there is a one time kind of P&L effect, we don't call. It a special.
Item because it happens every year it just happened this year.
Through good inventory management, we actually drew down in the prior year layers, which are higher caustic.
Thanks, Pierre that makes sense. So the follow up is you guys acquired noble towards the bonds the cycle.
You've built a reputation as being a good deal maker and being willing to walk away.
When the bid asked goes the wrong way or do you still see it as a buyer's market out there.
And do you still see attractive opportunities, whether it's U S E&P or elsewhere in the portfolio.
Yes so.
It's still a tough market and you would say that in general.
I would say both companies and asset valuations are down from where they've been.
Historically been so.
There is opportunity in circumstances like that and we've got the.
The capacity to consider doing things.
We may have passed the bottom.
Hopefully we have from the standpoint of commodity.
In other.
Cycles here.
And.
We're alert to opportunities that may be that as companies.
Come back in terms of their equity valuations are still a lot of people that are carrying a fair amount of debt and have indicated a desire to sell assets in order to.
To repair their own balance sheets, so we could see a market where there are more asset sellers. So there are buyers, which could offer some opportunities at an asset level.
And so we'll be we'll be aware and alert to those things that the nice thing is we're not in a position where we have to do anything.
We strengthened ourselves significantly with a very good deal last year, but we've got plenty of inventory to work on for many many years to come.
And anything we would do would have to a fit strategically into a strong portfolio in be it would have to compete for capital and a strong portfolio and so we'll continue to hold the bar very high and it only consider things that would really make a lot of sense.
Makes sense thanks, guys.
Thanks Neil.
We will go next to Paul Cheng with.
Scotiabank.
Hey, guys good morning.
First just want to say thank you to win over that last two yes, Paul all the help and insight and wish you that.
And your next well.
Two question Michael.
One wanted to go back into the sector leases exposure can you share with us in the <unk>.
No.
2019 and 2020.
What percent of your activity is actually set of businesses.
Understand that.
Lisa maybe only about.
And 15% of Youll Paul Penna.
Land position, but want to see that demand keeps a team that's all how does that look like.
Also that.
How many permit that you're already in hand.
In Permian and whether you have.
Or the mix.
Paul Paul Glen you talked about Mexico.
Also if you can just give us.
That's been done by the fourth quarter.
Permian DJ and ultimately.
The second question, yes on the ESG and day.
And the top and Neil.
New protocol surface.
We understand.
Net interest going into.
Renewable power solar.
And yet there.
New portable surface, we need to say, yes, James comp.
Do you think you have the technology that you can build it into a new business.
Im not sure Thats a cost saving.
Jason.
Okay.
Hey, Paul It's Pierre I'll start with your first question I think it will take some of that offline with Wayne and the IR team in terms of production from the various basins.
Our federal acreage as you said in the Permian is less than 10%. It went down a little bit to the noble acquisition, we're not going to disclose.
The activity for the last year and how much was the mix I think you can find it.
Publicly available data and you can you can chase that down in terms of the Gulf of Mexico, I think it's well known that permits a 10 day you don't you have a lower inventory of permits. So if we have a bigger inventory of permits in the Permian basin, we and other operators do that's not the case in the Gulf of Mexico. So those permits tend to be a lower inventory.
I'll just point out that we have one floating rig on a long term contract in the Gulf of Mexico that expires at the end of the year. So we'll again take your other detailed questions offline and then Mike you want to answer the energy transition.
Yes.
Was thinking about the first questions.
So energy transition if I caught it Paul.
What technologies are we interested in I think we've indicated carbon capture and storage for sure. We recently made an investment in another carbon storage technology startup and you can expect to continue to hear more from us on that front and then of course hydrogen should be in our wheelhouse, we manufacture hydrogen today, we've sold hydrogen before REIT.
Tail and we should have the toolkit to take what is technically feasible today, but not <unk>.
Economically practical and look for ways to drive costs down and scale up of hydrogen over time and so.
I can't promise you, we're going to get that to a point, where it's fully competitive with the alternatives today, but that's an area that a.
Few companies have the capability to do all the things required and we're one of the types of companies that should be able to work on that so those would be two areas you can expect to see us active in.
So Paul.
We'll go next to Doug Harrison at Evercore ISI.
Good morning, everybody.
Good morning.
Mike Chevron to equity has handily outperformed S&P energy since you became CEO a few years ago was as focus or decisiveness once thing because you'd like to call. It on higher returns on capital and lower debt and lower dividend breakeven to have been a winning formula with energy investors.
Simultaneously the pace of change in the industry seems to be quickening, not only as it relates policy, which you talked about a minute ago and likely future energy mix, but also that which is expected from investments in the sector. So my question is a couple of follow number one how do you guys think about how to navigate.
This evolving environment, which is somewhat different to our tactical and strategic dexterity likely to be needed maybe more than in the past and then finally.
What might be the implications for financial strategy in this new environment or is it too early to know.
Yeah, well Hey, Ed.
Doug first of all I want to congratulate you original been thrown bookcase to Wayne.
I know this is last lap around the track for you this year as well so congratulations and best wishes in the future.
John.
On your question.
I think a lot of the fundamentals that we've been.
Exhibiting in our strategy, we will continue to serve shareholders well as we go forward as the capital and cost discipline.
Is the.
The ability to meet the needs of today's markets will also investing for tomorrow's markets and with the diversified portfolio, we have across business lines and across geographies, we can mitigate.
Market and regulatory risk.
That may emerge in one country, because we've got a footprint that allows us to shift resources and.
And capital allocation to other parts of our portfolio. So.
For 140 plus years. This is what we've been doing youre right things are evolving now, but they've been evolving for quite some time and I think the.
The capabilities, we have in our organization.
Honest dialog, we try to have with everybody about how do you how do you meet the growing demand for energy and the desire to see the mix change and how do we continue to invest where we have advantages in both the existing core business and the emerging new businesses is what you will see us continue to do.
At the core I think the financial priorities stay the same.
We are committed to the dividend.
We're committed to.
Organic reinvestments in order to support that dividend and that can be reinvestment across the entire spectrum of energy technologies.
Maintaining a strong balance sheet. We've seen this last year, how important that is and then when we've got surplus cash after those first three needs to distributed back to shareholders that framework is intact and I don't see that changing.
Okay. Thanks, and also good luck to Wayne for me as well he has done a great job in this role thanks a lot.
Thanks, Doug.
We'll move next I'll join horizon market area.
With RBC. Please go ahead.
Hi, Thanks for taking my questions.
I had a couple of say the first one is just around your comments around generating free cash flow.
Yes at prevailing commodity prices I wonder if you could talk a little bit about.
The balance sheet.
Where you'd be comfortable in terms of gearing as you move through 2021 also have Pierre maybe you can touch on that.
<unk>.
Announcement from the S&P on potential changes in credit ratings in the sector and risk of the industry with the transition and how that is likely into your thinking and managing the balance sheet.
And then the second question on a different topic.
With Gorgon down in the quarter presuming that that's obviously a decent hit your LNG portfolio can you confirm.
If you were buying spot LNG Congress in the fourth quarter and then just if you can give a rough sense of the quantity of the earnings impact on that because I guess, that's more transitory in nature and some of the issues that thank.
Thank you.
Alright, Thanks, barrages Prl's I'll start.
And Mike just went through our financial priorities.
And we're in a good place on a debt ratio our net debt ratio is under 23% that includes the assumption of debt from the noble acquisition, which added about $9 billion 9 billion of debt. So I've talked about we don't have a target net debt ratio range, but I've talked about a range between 20%, 25% is a good place to be.
Over the cycle, we can be below that at times we.
Be heading up towards this range if we're above it for some reason I had wanted to have confidence that writing down that range. So it's not a hard and fast target, but we're in a really gets placed with a leading balance sheet low breakeven as Mike talked about and very well positioned. We also have the asset sales that we provided some guidance on here on the call in terms of at S&P look we.
We work with them.
It was an industry wide call.
Think our track record speaks for itself in terms of being disciplined with capital protecting the balance sheet and being very.
Progressive about the future of energy in our approach of higher returns lower carbon so I think that lines up.
The rating agencies, but that's not something we control that will be up to them. We're managing the company for long term value and we think we're doing a good job.
Raj on your question on Australian LNG simple.
Simple way to think about this is we've got.
80% or so of our volume termed up.
And you can think about having a trained down for a better part of this this last quarter. So Florida five trains running so about 80% of our capacity.
So we've been able to satisfy all of our term needs.
We're in the market now with our commercial organization buying a cargo here so on the cargo they're in and out of the spot market, but we haven't been out of position and hurt because we had to buy high and sell low to any any meaningful degree through this whole cycle.
Thanks Raj.
Yes.
Well move next to Doug Leggate at Bank of America.
Thanks, Good morning, everyone I want to wish you good luck in the Corp.
Robert Johnson.
The unsecured.
Congratulations Tom.
John I Wonder if I could.
Just go back to the capital allocation question very quickly Mike.
You've now got Israel on a lot of growth opportunities in mobile have talked about longer term.
And it sounds like you're backing away a little bit from the need for growth in the Permian just wondering if.
Under our by the administration is that how we should think about capital allocation international versus domestic.
And the opportunity set.
Okay.
Yeah.
<unk>.
We'll have to see how things play out in the U S. I don't want to I don't want to over.
React to that at this point in time until we know more.
But.
Fundamentally we intend to continue to be very disciplined in the allocation of capital.
<unk> assets in Israel have the big part of their capital spend behind them right. Now there is capacity to grow production, there with little or no incremental capital right now and.
The nice thing is we bring some capabilities to bear here that might not have been in noble's wheelhouse. So there's ways to take those gas further into regional markets, there's ways to take it into LNG.
Facilities that have OLED today that should go into or noble had been looking at and F. LNG concept there.
There are ways to take it to power markets.
And in the power generation and then regional power.
Power distribution across borders and there are opportunities to look at things like hydrogen in new energy technologies as well so.
We have the financial strength and capacity to underwrite things larger than perhaps normal could have and some technical capability and relationship depth in some of these markets that should be an advantage and so we'll look to use those to support the growth of the position in Israel and then the broad capital I'll equate cash.
<unk> question U S versus other countries, we're always thinking about that always looking at that and drawn by returns and risk and we will continue to evaluate those things.
Okay I appreciate it.
My follow up is maybe for a follow up to the S&P question earlier.
Whoever whichever one of you guys that sounds obvious, but it's really more about the.
The external pressures that you're seeing whether it be from.
One of your large peers being enacted to shareholders, we're talking about big energy.
European investment community and obviously your European peers, moving in that direction and now you've got the credit agencies.
It seems to me at least the U S side of the pond is still very much in the big oil.
Charlie Gary in terms of how you see your opportunity set going forward.
Curious Michael how do you see these external pressures influencing discussions with the board discussions with investors and ultimately the longer term energy mix will we see chevron move towards up again or do you still need overtime.
Well Jim.
Going to come back I think Pierre mentioned earlier that you know.
We describe our strategy with four simple words has higher returns and lower carbon.
And in both of those things matter to the investors that we speak to and we're working hard on both fronts and we've got to improve return on capital and.
And demonstrate that we're going to.
To do that and at the same time, we also have to prepare for a lower carbon energy system in the future and where.
Reducing the intensity of the energy, we deliver today and making really good progress on that and we will continue to set new targets in that area because the world.
Stepping on the hose of supply through one way or another it doesn't really change demand and so somehow demand will need to be met and we think it should be met by those that can do it in a way that has the lowest carbon impact.
We're increasing the production of renewable and lower carbon products for our customers. So they can reduce.
Their energy intensity in carbon intensity and then likewise looking at these breakthrough technologies and I mentioned, a couple of them earlier so.
Every company in the industry, Doug is searching for the right mix. There is not an empirically observable a correct answer to this.
And I think we're all working with our various stakeholders right our boards our employees our customers the countries, where we operate and Thats a policy that we operate under two to manage both of these things and Lee.
Look energy is the lifeblood of the global economy, and reliable affordable energy will be fundamental to the recovery from the pandemic in the short term and in the longer term it will be fundamental to lifting people out of poverty around the world and we have to remember that in today's energy system is not the enemy.
Lower emissions or what we should be focused on and that's what we as a company our focus on and that's what we've talked to our stakeholders about.
And that's what we're committed to doing.
So lots of keep in touch with us.
Yeah.
We'll go next to Paul Sankey.
Search.
Hello, everyone.
Hello, Michael strategy question.
Obviously.
Your strategy on the call, but I, just wanted and the lights of activism.
We're seeing.
Are there any specific.
Requests if you like or strategy pushes that youll guessing from shareholders I wondered if you could just update us on what you've been hearing and perhaps where youll sympathetic to the ideas that are being pushed towards you and maybe where you're pushing back and then I had a follow up.
Just on the decline rates.
Said that.
Higher decline rates on lower spending.
In 'twenty one.
Having said that the number is only 70000 barrels a day or about a 2% decline can you just help me understand why that number is so low thank you.
Yes, Paul so.
Australia pushed from shareholders is not not a lot that's being set and shareholder discussions that I havent discussed here.
What is your strategy for a lower carbon world and where you see yourself, having unique strengths and.
If there's one thing I do hear back from people it is.
Support for not going into things, where we wouldn't have competitive differentiation and we may pursue lower return investments just for the sake of saying we're doing it when there's others out there that can do it just as well so.
Uh huh.
Beyond that I'm.
I'm not hearing a lot of strategy push from shareholders I'll, let Pierre.
Take the question on declines, yes, and just add to Mike's comments I mean this is a sector that is trying to regain favor with investors that hasnt earned its cost of capital and the way out of that isn't by investing more capital so being disciplined in our conventional business with capital being disciplined in M&A and being disciplined with the energy transition as you need us.
Renewable energy products operate in commodity markets that have cycles up and down just like conventional products do.
In terms of our decline, yes, Paul I'm not sure.
What I meant to say is that Youll see.
Declines this year, resulting from our capital last year, because we did take capital down, but as you rightly pointed out the decline and we tried to put that on the best apples to apples basis. So again, we've got curtailment adjust.
Adjusted and then asset sales or contract explorations, adjusted which is a good view of our base and our shale and tight and so it's a little more than a 2% decline. It is a big change because that would have been growth previously because you would've had Permian growing thats, how thats that was part of the reallocation Mike showed a chart that said.
We are likely to invest $40 billion over the last last year than this year, but 13 $1 billion of it was knowable. So no doubt our organic portfolio is not growing like it would've been previously because we've taken some capital out but as you point out. It is a modest decline is because we're facility constrained a lot of places we have long lived assets like in Australia LNG in tengiz.
<unk> and offshore and even the declines in what's considered hide client areas like the Permian where were able to mitigate and like I said earlier that our Permian production is beating our guidance range and will actually be up because of the noble barrels that we added 2021 versus 2020 full year and adjust for curtailment.
It's a good story that we're able to be so efficient and mitigate declines and I'm happy you picked up a net number.
Great.
Of course, thanks, very much to Wayne.
Thanks, Wayne it's been a pleasure.
Thanks, Paul Likewise.
We'll move next to Dan Boyd.
Mr Securities.
Hi, Thanks for squeezing me on one I would just say thanks for sticking to your guns and only doing things, where you have a competitive advantage.
Clear business sense.
Most things have been asked I just have one for Pierre just on the FX, which has been a headwind to earnings. This year can you talk about the cash impact that that has if any and how you see that potentially playing out in 2021.
Yes, the vast majority of it is non cash I mean, its balance sheet translation. So it's taking a your monetary accounts asset accounts and liability counts and revaluing. It what we've seen is during the course of the year. The dollar strengthened initially and then we saw it weakening relative to other currencies and particularly like in Australia, Canada some of the.
Others, where we will have like a deferred tax liability that gets revalued.
It turns into cash over time, but it depends on what the exchange rate is at that time in the future. So you have modest amounts.
Happened in the quarter, but the vast majority is reflecting a fully revaluation of that liability monetary liability or monetary asset account and what how it ultimately settles, we'll decide if those gains or losses are realized or not in cash flow.
Okay. That's helpful.
Okay next question Manav Gupta.
Credit Suisse.
Hey, guys I just wanted to ask one question you are absolutely leading the charge on R&D and some of the projects that you had actually developing RMG has a ci off like minus one to minus 200, that's significantly lower than any EV can actually produce at this point of time, yet we all we see.
There is the demand for Evs and states, saying, they only want to run on Evs and car manufacturers are saying I only want to make evs. So is there something that chevron and the industry groups can do to educate the governments of the markets that there are other forms of lower carbon like R&D, which actually have a much significantly lower.
Carbon intensity than than an actual EV.
Manav I'm impressed you've done your homework on carbon intensity and.
Not not many have to your to the.
The foundation of your question look.
Our R&D is very good from a carbon standpoint, because you mitigate otherwise unmitigated methane emissions.
And that's why it gets the very attractive Ci factor.
Ci factor has to be worth something.
Because RG.
First cost basis is more expensive than fossil natural gas and so in markets, where there is a policy framework that creates that financial connection to the low Ci.
It's attractive and economic.
And that's where we're playing today I would expect over time that those policy frameworks could expand for the reasons that underlies your question and we are working with customers as well to help incentivize the adoption of CMG vehicles, We've got an initiative in California.
Where will subsidize truck owners to convert or buy new heavy duty <unk> engines in return for a supply agreement and and then we're working with a number of different distribution points to enable that to happen. So we think this is a good part of the mix, it's not the answer everywhere, but it is certainly.
A part of the mix that we think deserves to grow and that's why we've been investing into it and it ties to the earlier comments about doing things, where we've got a unique and competitive advantages.
Okay. Thank you so much for taking my question.
Thank you.
We'll move next to Jon Rigby of UBS.
Hi, yes, thanks for taking my question.
Two questions actually one is on what do you think about the portfolio and also what you've seen in the market through the sort of 15 14 15 volatility the volatility you've seen now.
Are you starting to change the way you look at the investments that Youre, making.
Going forward, so you're looking at hurdle rates payback periods et cetera, and changing them to sort of tailor a dip.
Environment going forward.
Also I mean, if you are are you able to do that.
Through the portfolio can you also do that through the way you approach the development of an asset so.
You build it with the expectation that adding satellites longer term will you build the bigger host et cetera.
First question, the second which is slight you talked to that it seems to me also demonstrates the low gearing.
Low levels of.
Indebtedness as you very well to those two cycles.
So when you think about that sort of three shock absorber you have so.
It looks like the investment.
Balance sheet.
And buybacks is.
In the near term the priority getting debt down.
Alright, Thanks, John look I'll get started I think the answer to your first question is yes, and no no we're not changing how we look at investments.
We don't have to go to ancient history books to know that the top line.
<unk> is volatile.
We've had not just 14 13, Colorado nine you get late Ninety's and so to have companies in our industry that don't have balance sheets that are built for something that we know occurs with some frequency.
As the capital structure that doesn't make a lot of sense of trends there is too much risk to equity holders and thats, partly reflected hat lie the energy sectors underperformed other sectors for a while so in that sense I don't think we think of it differently, but to the second part of your first question can we do developments differently, absolutely can we size them to keep them full.
Longer offshore I mean, I think Mike has talked about the capital efficiency of our shale and tight the flexibility of it so so undoubtedly our capital efficiency.
Is better than it ever has been and it means our ability to generate.
Positive free cash flow from a dollar of capital invested we've talked about being very disciplined with our capital, which reinforces it but the basic premise of operating in a set of commodity businesses that are volatile that hasnt changed in the last several years. That's been the case for the 30 years I've been with the company and as you said I think to your second part of the question.
How we operate with our four financial priorities as it reflects that reality and so we understand.
What business, we're in and then how what kind of capital structure. We should have that's in the interest of our shareholders.
Right.
To that point as is.
Even with the vantage balance sheet and do you have against your peers.
As widely acknowledged.
Would it be fair to say that.
First policy those sort of three variable things excepting was the dividend is a structural thing.
It's probably balance sheet.
Well again, our first priority as Mike went through them its dividend reinvestment, because we got to generate cash with the dividend maintaining a strong balance sheet and buybacks is fourth and so we're always going to maintain a strong balance sheet I gave.
Kind of a range that we think is a good place to be over the cycle and again, we can be below it heading towards it or above it so the balance sheet as well it's right in the middle of the range I've been talking about since I've been CFO. So theres no theres no primary need on balance sheet I mean, what's more the bigger driver is and we're not at a full economic recovery here and so getting control depend.
Getting the world's economies growing again on a sustained path that would be good for our business. Our breakeven is under 50, you can do the math.
If oil prices are above 50, and if downstream margins improve because that's a breakeven under 50, including pretty weak downstream margins.
The excess cash and we will look at our priorities and make decisions like we have in the past just as a reminder, we bought back shares 13, I'll ask 17 years, we bought back shares on average during that time period.
<unk> equivalent to the daily average so we're pretty consistent return of cash to shareholders in the form of a sustained and growing dividends and share buybacks when we have excess cash.
Thanks, John Thank you.
We'll take our final question from Ryan Todd of Simmons energy.
Great. Thanks, guys I'll, just maybe a couple of quick ones that CNN on.
On disposals moving forward I mean, with the downsized capital program should.
Should we expect a relatively downside disposal program on a run rate basis.
And if so is there a range in terms of what we should think of in terms of annual disposals.
And then maybe as a follow up question as we think about your 2021 production.
Guidance.
The contract explorations in Indonesia, and Thailand can you confirm what the.
The volume impact is there.
And any willingness to share what the.
What the potential cash flow impact of those volumes a day at $50 oil.
Okay I'll take the asset sale question I'll, let Pierre handle contracts.
Yes, Ryan first thing is we don't need to conduct asset sales to generate cash.
Other companies might be in a different position.
But look we've closed out the program, we announced previously we're not announcing a new program.
Pierre guided to $2 billion to $3 billion.
For 'twenty one.
And if you look back over the last two decades, we've been kind of plus or minus a couple of billion dollars a year.
Normal portfolio maintenance and kind of rotation and so I think that's the kind of a number you ought to think about for your model and like I said this coming year, we might be a little bit to the upside of that there'll be some years, we'd be below that but.
But we're doing this to hybrid and strengthen our portfolio not to generate cash.
Pierre already took the contract question, Yeah, Ryan I mean, we disclosed in our supplement tables that we provide each quarter production by country you see it in our 10-K, so I think it's pretty transparent what.
<unk> in Indonesia, and Thailand is not all of Thailand is part of the concessions that are expiring here early next year, we don't disclose cash flow by by country. I mean, there is a fair amount of disclosure in our oil and gas tables that you can look back for their so we will continue to provide what we think is meaningful guidance.
Each quarter as we go forward, we showed the variance that was tied to contract exploration. So I think all the pieces of the puzzle are therefore, you and of course, if you have follow up questions. Please reach out to Wayne and Roderick.
Yeah.
Okay. Thanks, guys.
Well I'd like to thank everyone for your time today, we do appreciate your interest in Chevron and everyone's participation on today's call. Please stay safe and healthy I'll get back to you.
Thank you ladies and gentlemen, this concludes chevron's fourth quarter 2020 earnings Conference call you may now disconnect.
Okay.
[music].
Yes.
Uh huh.
[music].
Sure.
Yes.
[music].