Q2 2021 Chevron Corp Earnings Call
Good morning, My name is Katie and I will be your conference facilitator today welcome to Chevron second quarter 2021 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 given at that time, if anyone should require assistance during the conference.
Call. Please press Star and then zero on your Touchtone telephone.
As a reminder, this conference call is being recorded.
I will now turn the conference over to the General manager of Investor Relations of Chevron Corporation. Mr. Roderick Green. Please go ahead.
Thank you Katie and welcome to the Chevron second quarter earnings Conference.
Paul I'm, Robert Green G M of Investor Relations and on the call with me today are Jay Johnson EVP of upstream and Pierre Bruvver CFO.
We will refer to the slides and prepared remarks that are available on chevron's website.
Before we get started please be reminded that this presentation contains estimates.
Estimates projections and other forward looking statements. Please review the cautionary statement on slide 2.
Now I will turn it over to Pierre.
Thanks Roderick.
We delivered strong financial results in the second quarter with the highest reported earnings and over a year.
Adjusted earnings were $3.3 billion.
Our $1.71 per share.
The quarter's results included special items totaling $235 million.
Including remediation charge in the Gulf of Mexico, and pension settlement costs.
A reconciliation of non-GAAP measures can be found in the appendix to this presentation.
Adjusted return on capital was near.
Your 8% and we lowered our net debt ratio to 21%.
Strong operating cash flow enabled us to meet Chevron's top financial priorities are.
Our dividend was up 4%.
We continue to execute our efficient capital program, and we paid down $2.5 billion of debt.
Despite.
<unk> got lower year to date prices and margins first half 2021 quarterly average free cash flow is near 2018 levels, primarily due to lower capital and operating costs and contributions from legacy noble assets.
We're maintaining strong capital and cost discipline.
Despite any is down 32% from a year ago, and we're lowering our full year organic see any guidance to around $13 billion.
Primarily due to lower spending at Tcl and greater capital efficiency across the portfolio.
Operating costs are on track with our March 2021, Investor day guidance of 10.
Reduction from 2019.
Adjusted second quarter earnings were up $6.2 billion versus the same quarter last year.
Adjusted upstream earnings increased primarily on higher prices in listings.
Adjusted downstream earnings increased their higher chemicals results as well as higher refining margins and volume.
10% of all other was roughly unchanged between periods.
Compared with last quarter.
Adjusted second quarter earnings were up about $1.5 billion.
Adjusted upstream earnings increased primarily on higher commodity prices and higher production in the U S.
Adjusted downstream earnings increased primarily from.
<unk> chemicals results.
As well as increased refining margins and volumes.
All other charges were roughly flat between quarters and are running ahead of ratable guidance, primarily due to tax charges and valuation of stock based compensation.
The all other segment results can vary between quarters and our full year guidance.
Strong gains.
I'll now pass it over to Jay.
Thanks Pierre.
Second quarter oil equivalent production increased 5% compared to a year ago.
The increase in production was driven by noble acquisition, and lower curtailments, partially offset by normal field declines price related entitlement effects.
On churn asset sales.
Turning to the Permian, we continue to incorporate greater efficiency into our activities.
Even with our reduced activity levels production is expected to be comparable to last year.
System with the guidance, we shared in March we're adding rigs and completion crews in the second half of this year.
<unk> delivering an expected production rate of over 600000 barrels a day by year end.
For 2021, we expect free cash flow, excluding working capital to exceed $3 billion.
Assuming an average Brent price of $65 a barrel.
We're committed to lowering the carbon intensity of our Permian operations.
1 recent example is our shift from diesel fuel to electricity and natural gas to power drilling rigs and completion spreads.
This reduces emissions reduces well costs and takes trucks off the roads, which results in higher returns and lower carbon.
Ed FTP AWP MP.
Year for all progress is at 84% with field construction, 69% complete.
We've recently reviewed our cost and scheduled targets.
At this point the net schedule extension from the pandemic is expected to be roughly a quarter for WP E&P and 2 quarters for FTP.
Our.
Over target remains $45.2 billion as cost reduction efforts and favorable exchange rates offset an estimated $1.9 billion of incremental cost associated with COVID-19.
The Covid costs include mitigation efforts day, mobe and re mobilization costs as.
Our cross sell to the expected schedule extension I just mentioned.
Although the total project cost target is unchanged, we have increased the project contingency to $1.9 billion.
To recognize this schedule uncertainty associated with the virus and its variance.
The project is currently at peak.
As well bores and our primary focus is to mitigate the impact of the virus with vaccinations testing and isolation protocols to enable our workforce to achieve its productivity.
In the deepwater Gulf of Mexico. The Valley more project is being developed as a subsea tieback to our existing blind faith.
Facility.
The project recently entered front end engineering and design and remains on track for a final investment decision next year.
Earlier this month, we sanctioned the whale project, which has the potential for future expansion.
Fabrication of the anchor project remains on track with assembly of the production.
<unk> facility hole underway.
In Australia, we've sanctioned the Janssen <unk> compression project, which will support the flow of natural gas to Barrow Island.
Repairs to the Gorgon propane heat exchangers are complete.
And we now have all 5 operated LNG trains online in Australia.
In Colorado, our newest generation of production facilities have eliminated the tanks and flare system to deliver a carbon intensity of only 6 kilograms of cotwo per Boe.
The new facilities also have a 60% smaller footprint.
Higher reliability.
And 15%.
<unk> percent lower lifecycle cost than a traditional facility design.
Another Great example of higher returns and lower carbon back.
Back to you Pierre.
Thanks, Jay and.
In May we closed the acquisition of noble midstream with this transaction complete we are fully integrated knowable and have achieved greater than 600.
The $20 in synergies 3 months earlier than previously guided.
We also started up the next feed cracker at <unk>, Capex and plan to be at 100% of design capacity in the third quarter.
The project was completed under budget and 5 months ahead of schedule.
In the third quarter Robert.
We're resuming our share repurchase program at a targeted annual rate of $2 billion to $3 billion.
This is a rate that we believe are sustainable through the cycle, while continuing to pay down debt.
The restart of our program is consistent with our financial priorities and builds on our track record.
We.
We have a history of buying back shares consistently and.
In meaningful quantities and at a price close to the daily ratable average over the entire 17 year period.
We're continuing to grow lower carbon businesses.
This quarter, we started co processing bio feedstock at our El Segundo refinery.
Binary growing renewable diesel production in a capital efficient manner by leveraging existing infrastructure.
We recently announced an Mou with Cummins to develop commercially viable businesses and hydrogen.
Also we've completed front end engineering on a carbon capture project for emissions from the gas turbines and.
And 1 of our California cogeneration facilities.
This project Leverages, 2 innovative technologies Sidoti.
Oh, 2 concentration and carbon capture and.
And as a potential scale across our full fleet of turbines.
Finally yesterday, we announced the creation of Chevron, new energies and new organization reporting direct.
Did the CEO.
This is an important step to build fast growing profitable new energy businesses to further advance a lower carbon future.
Now looking ahead.
In the third quarter, we expect major turnarounds to reduce upstream production by 150000 barrels of.
<unk> per day.
Primarily a tcl, which also reduces our expected curtailments to about 5000 barrels per day.
We expect to make an incremental pension contribution in the third quarter a $500 million.
This is a 1 time payment in addition to our regular quarterly contributions.
With higher operating cash flows TCE.
<unk> expects to payback part of its loans this year versus our prior guidance of increasing its debt.
There's no change in Tc as expected dividend this year.
Adjusted the guidance on the affiliate income line to reflect higher expected TCE earnings.
Also.
We expect higher dividends from CP Chem in line with our share of higher earnings.
On September 14th we will be hosting our energy transition spotlight.
To provide more details on how we plan to lower carbon intensity in our operations and grow lower carbon businesses.
We invite you all to join us for.
We'll webcast.
Our objective is unchanged.
Higher returns lower carbon.
During this quarter, we continue to make progress towards this goal.
Delivering stronger financial results and achieving important lower carbon milestones.
And with oil prices well.
This video dividend breakeven.
And an industry leading balance sheet.
We will resume share buybacks.
Sharing part of the cash upside with our investors.
With that I'll turn it back to Roderick.
Thanks Pierre.
This concludes our prepared remarks, we're now ready to take your questions.
Above is try to limit yourself to 1 question and 1 follow up.
We will do our best to get all your questions answered.
<unk> Please open up the lines.
Thank you if you have a question at this time, please press star 1 on your Touchtone telephone.
May I ask 1 question and follow up question. If your question has been answered or.
Or you wish to remove yourself from the queue. Please press star 2 if you release listening on a speaker phone. We ask you. Please lift your handset before asking your question to provide optimum sound quality again, if you have a question. Please press star 1 on your Touchtone telephone. Our first question comes from Phil Gresh with J P. Morgan.
Hey, good morning, Pierre I want to pick up where you left off there on capital allocation.
You announced that $2 billion to $3 billion buyback, which adds about $5 a barrel to your breakeven.
Which I think is about $50 inclusive of the dividend. So obviously, you're 1 of the sustainable plan.
You've always talked about that.
Oil is at 75 now so I guess help us put this in context, I mean, we have $15.20 a barrel extra oil price at this point and your leverage is at 21% net debt to cap. So do you want to keep driving down debt from here how are you thinking about things.
Thanks Bill.
By resuming the program will now be 14, I'll ask for 18 years that we have repurchased shares. So that's more than 3 out of every 4.
For years <unk>.
And we're doing it at a level that allows us to continue to pay down debt as you say with prices above $70.
Our debt levels should head below the range I've talked about 2.
20% to 25% that 20% to 25% net debt ratio range is really over the cycle kind of implies prices between 40 and 60 like we talked about during our investor day, but again with prices well above that we should head below the bottom.
Range.
In terms of the breakeven I mean this is our fourth.
Priority from a financial perspective, and so it is.
We feel it's sustainable we intend to sustain that over the cycle, but I don't necessarily view it as.
A commitment like we would say our dividend is in and bake it into.
Of that the breakeven calculation, but the last thing I'll say is that our investor day, we showed that at $60 flat Brent nominal over 5 years.
We can generate more than 25 billion of excess cash that's cash in excess of our capital and our dividend and so you'll see us starting this buyback program at $2 billion to $3 billion a year.
It shows that we have more than enough capacity to sustain that at reasonable prices.
Got it okay that makes sense.
And then the second question just on the Capex side of things the $1 billion reduction.
You said it was a combination of tengiz timing and the efficiencies is there.
Into.
For the breakdown you could give up those 2 factors I'm trying to think about how some of this might carry forward as we look at the longer term $14 billion to $16 billion range you've talked about.
Yeah, Let me start then I'll pass it over to Jay So we lowered our guidance for this year only to $13 billion.
As you say, it's primarily due to.
Lower spent a T C O and part from work that is being deferred and then greater capital efficiencies across the portfolio. I think you can view that as about 50.50, it's a half project, that's being deferred and have greater.
Greater capital efficiency, there's no change in our long term guidance or guidance through 2025 of 14 to 16 billion, but Jay maybe.
Maybe you could talk about some of the ways, we're being more capital efficient.
Yeah, it's really across the portfolio as Pierre said in particular drilling and completion activities. The Gorgon stage 2 project in Australia has been very efficient and gone.
Head of plan from a cost standpoint, the Permian drilling and completion and other U S shale.
<unk> has been very efficient and then we're seeing just overall good discipline on costs, making sure every dollar counts and it's really consistent with operating in not only this COVID-19 environment, but operating with a very disciplined mentality throughout the organization.
Thanks, Phil.
Thank you.
We will take our next question from Paul Sankey with Sankey research.
Hi, Good morning, everyone, just a follow up.
If I could you guys, obviously have the megaproject at tengiz as and ongoing development, but the the history of these mega projects has been somewhat troubled bye.
Pretty high costs and Capex.
<unk> is tengiz is going to be the last Mega project do you think and beyond that would be really be looking at the Permian is.
Sort of a fragmented but mega development.
Is that what we're looking at and is that how you can.
<unk> guidance that you just repeated.
Is that sort of how that sets up that we won't see another mega project developed by you will perhaps by any major western oil. Thanks.
Thanks, Paul you know in the oil industry, you never say never but look we've talked before that as we move forward with the asset in.
Capex Julio that we have the preponderance of our capital, 60% and more is going to be going into shorter cycle high return projects, which are very quick to bring new production on we have low pre productive capital they tend to be very efficient and we can adjust based on market conditions and react quite rapidly but that doesn't.
You mean, all of our investment will always be in just short cycle. The deepwater continues to be an important part of our portfolio. It has very low carbon footprint and it tends to have higher returns and so we've seen projects like anchor and whale and bally more in the queue and we will continue to see.
Ports roll in but we're going to do that in a very disciplined way we talked at the Investor day about how we are taking action to make these capital projects more efficient more effective.
Going to the minimum facility objectives, and really building only what's necessary to deliver the returns that we're looking for and I think that whole approach as well as it.
Being a relatively small amount of our capital is going to lead to a much more efficient and higher return outcomes.
Thank you very much Jay and then the follow up would be Pierre how did you come up with the 2 to 3 billion of buyback annually can you just talk about the parameters maybe the oil price assumption. Thank you.
Well, we're thinking of a range.
You have oil prices.
We I've said in the past Paul as you know that we would start a program. When we were confident we can sustain it over the cycle through multiple years.
Based on our confidence in excess cash flow and the strength of the balance sheet and so.
You certainly can assume that both of those criteria have been met.
In terms of the level.
It is to continue to pay down debt wolaver.
Thanks.
Having these prices so it's nothing really more than that again.
Again, as I said earlier to Phil's question, but prices above 70, our debt net debt ratio should be below 20% and so this is.
Net earnings that allows us to continue to do that is also gives us a range to deal with uncertainty we feel good about the macro but undoubtedly there is a.
Variance out there.
That can impact demand and you have OPEC plus still havent curtailed volumes, so that flexibility is inherent in the.
Our range. It also gives us flexibility to buy more or less depending on the strength of Chevron stock price, which we've heard from shareholders, who have said they want us to try to beat the daily average I showed a chart that says we don't buy high we buy very close to the daily average, but if we can do a bit better and use some discretion.
We've heard from our shareholders that they prefer that so that's the thinking that goes behind the level the range and the timing.
Thank you Sir.
Thank you we'll take our next question from Doug Leggate with Bank of America.
Oh, Thanks, good morning, everybody.
Gary I Wonder if I could go to your first name.
Smith.
Small follow up the post question.
It seems to all Scott.
Mark going on in the Gulf of Mexico, that's kind of flying under the radar.
Mentioned Baltimore fill long term you've got left for you Paul.
Non working interest in leopard, and Puma and a few other things going on and this obviously has been a legacy.
As he infrastructure and even for you guys very efficient capital tie back opportunities and so on I just wonder if I could ask you just to give us a quick update as to what.
What are your activity level is there and what your longer term plans are because it seems there's a lot more going on than perhaps you've laid out the street's at this point.
Well, Doug the Gulf of Mexico.
<unk> been unimportant part of our portfolio for a long time and it continues to be well.
We're 1 of the largest leaseholders in the Gulf of Mexico, but importantly, what we've been doing is focusing our new lease acquisitions.
Primarily concentrated in those areas, where we already have infrastructure and as we've talked before with our focus.
And returns we're looking for those opportunities, where we can do exploration and if we find something that's normal it can be tied back into our existing infrastructure much like a ballet more if we find something that ends up really big and justifies a greenfield development. We can go the route of a whale project, where we.
Continue to focus on the minimum functional objectives building facilities that are replicated in nature. So that we are building on the learnings of the past we've developed the deepwater asset class. So we're taking learnings from the Gulf of Mexico from West Africa from deepwater, Australia sharing those rapidly between these different assets.
<unk> to make sure that we're staying on the forefront of efficiency. So we have an exploration program. That's laid out we keep that at a pretty low level. These days. So that it can be very efficient very focused we have a good resource base across the portfolio, but we're always looking for that next high return low carbon barrel.
And the Gulf.
Net grid represents a good hunting ground for that.
Sorry, Jim.
Question, but I mentioned, a couple of leopard Puma silver box as well can you give us an update on those.
We will release information on those in due course, but at this point in time, we're not we're not sharing information.
Okay. Thanks Pierre.
Just a quick follow.
Hep is.
Many of cash flow coming in extraordinary capital efficiency.
Ed.
As Paul pointed out not a huge amount of big projects in front of you.
What are you thinking.
Currently on M&A, because clearly you did a fantastic job incorporating <unk>.
<unk>, what's your latest thinking in terms of what that might fit in.
If a metrics going forward and I'll leave it there.
Yeah.
Well, we're very happy with noble as we just said we started declared the integration complete more than double the initial synergies are completed and <unk> were the first to announce first to close quality assets, a low premium and done at a at a good time for.
The exchange ratio perspective, as you know we're always looking we have a very high bar and we certainly don't need to do a transaction, we just talked about our portfolio and how we can sustain and grow it in a very capital efficient Wayne.
Just the last thing I'd say is and we've shown this Ed we don't really view cash as being something that's.
This acquired to do M&A.
Our business with.
<unk> prices volatility doing it on a stock basis as we did with noble makes a lot of sense. It kind of keeps you hedged in case prices go up or down between a buyer and seller. So I wouldn't connect any kind of balance sheet.
Actions.
As being an indicator 1 way or the other on M&A, we're going to be disciplined with our capital. It's all capital, whether it's organic or inorganic and of course will only take action. If we see it in the interest of our shareholders.
Alright, I appreciate the answers thanks guys.
We'll take our next question from Neil Mehta with Goldman Sachs.
Okay. Thank you a J. The first question for you on <unk>. Appreciate the update here can you just go through some of the modeling work that you've done to get to that $2 billion of contingency and give investors your latest read to read and confidence interval around other cost it did.
Seemed like a good update relative to what was feared.
And the summer is always so important.
In Kazakhstan.
Talk about the key things that youre going to be watching for over the next couple of months.
To ensure that you're on track.
Thanks, Neil I'd be happy to.
The team's just done an extraordinary job of responding to the impact of the virus and as we said we've been able to capture cost savings, which have largely offset along with some of our foreign exchange gains offset the incremental costs due to COVID-19.
So at this point in time, we've reached our peak workforce on FTE.
TC and so we are maintaining that workforce.
It is something where we have to continue to stay focused on mitigation, particularly with the rise in the in the Delta Varian and other variance that we are exposed to.
The vaccination program continues to go well, we have 42000 members of our workforce that have gotten their initial dose.
About 30000 that are fully vaccinated now and we continue to try and work with the Kazak government to increase those numbers.
Because we were so successful in completing the fabrication and that fabrication was done with such high quality and it's been proven to be now dimensional accurate we've had.
Our module is showing up at site within 1 to 3 millimeters of accuracy on where pipes land and the connections between modules. It's really helped us move forward from that standpoint, all of the modules going through the shipping program to arrive at tengiz, they've all been successfully move to site to site restocked.
Stacked and said on their foundations. So we have that entire program behind US now all the heavy equipment for the project has been set on foundations throughout the projects. So our heavy lift program is complete and being demobilized and now we're just focused on the interconnections in the hookup and preparing for the turnover.
2 completions and startup.
So normally at this point, we would be decreasing our contingency because we have eliminated so many of the traditional risks, but in this case, we've actually increased it to $1.9 billion and that's primarily due to our uncertainty around future impacts from Covid. This pandemic is far from.
From over around the world and so while we're doing well and we've been very successful at.
Mitigating any potential impact to this as you said critically important summer we need to stay that way. We're monitoring our productivity. We are very focused on being capital efficient here. Our focus is on delivering this.
Inject at $45.2 billion, we've allowed the schedule to slip a little bit because it's just too hard to try and catch up we didn't feel that was a good use of resource. So we're predominant focus is on the.
Cost and we're managing the schedule within that cost parameter.
Thanks.
Protest following up here on the asset level can you talk about how you see the cadence of activity in the Permian.
You talked about exiting the year close to 600000 barrels a day or remind us where you are right now.
And do you see the.
Do you see the Permian still.
Jay with engine for you where are you.
We're planning on running the business more.
For free cash flow and with less growth in mind as we think about 2022.
In the Permian. We currently as you know we scaled back activity significantly last year and we've maintained at a lower level of act.
Activity, but.
But at the same time, even with a constant level of activity because the efficiency is getting better we're actually getting more output from those those reduced levels. We did add an additional completion crew in July and we expect to add another 1 before year end. We currently have 5 drilling rigs out.
And we expect to add at least 1 or 2 more in late third quarter and fourth quarter. So we are seeing our activity levels start to increase in the second half as we see markets not imbalanced, but are starting to move in the right direction approaching equilibrium will continue to monitor where we are in terms of the overall market signals.
Signals that come to us, but we're going to continue to be very disciplined and focused our returns remained the number 1 objective we are going to stay disciplined around those returns, but we are moving back into more and more efficient factory drilling again as opposed to having to be focused on lease retention as we were over the last 18 months or so.
So I think the Permian is going to continue to be a critical asset in our portfolio. What we've generated and demonstrated is that we can generate free cash flow, while we continue to grow and thats because we maintain that disciplined focus on the balance as we look forward.
And Neil in our earnings supplement.
Memo item the Permian unconventional.
Total production was 577000 barrels of oil equivalent in the second quarter.
Thanks Neil.
Thanks Pierre.
We'll take our next question from Paul Cheng with Scotiabank.
Hi, good morning, guys.
Good morning, good morning, 2.
2 questions.
And pardon me.
When when you.
When you're looking at what you're going to do in the next year or the next couple of years.
How are you with that.
The OPEC Cowen catamaran means that that.
That what Mark had there's still a bond day.
Mentally long supply or not that's net pay into your decision making process.
Well I think of course, it does and that's because we're not just being triggered by an instantaneous price or some price thresholds to signal a need for more activity as we've talked about is we gave.
Give you guidance at the Investor Day, we've given you our forward look of the Permian with the expectations of how markets recover and now we've seen demand recover in the marketplace quite rapidly and in most of the products other than maybe international jet fuel we are seeing a day.
Demand starting to return to pre pandemic.
But the supply picture, it's still a fundamentally oversupplied world and that's why we're being cautious we're being balanced and we're going to continue to monitor the market as we continue to decide how to ramp up our activity levels in the Permian. The Permian has very low carbon intensity. So it's a good place for us to continue to.
Develop new barrels.
Not only for us, but for the world, but it also has high returns for us. So it remains a key target for increased capital allocation, but we're not going to be driven by an output target or a production target were driven by the opportunity to make returns.
Well, maybe let me just ask another way.
Level, Jay if you determine.
Yeah. The Mark are you still fundamentally oversupplied are we would you still grow the Permian production.
We've given you the guidance, we're going to continue to be disciplined as we have in the past and I'd, rather not speculate beyond that Paul.
Paul.
I've given you about as much of our thinking as I can.
Okay.
Question actually this is Paul Pierre.
In the next several years when you're looking at 14 to 16 billion net Union Capex did you have a target.
Percentage, how much you're going to.
In the new ESG initiative.
Yes.
Paul Yes, we talked at our Investor day about $3 billion in total.
To lower the carbon intensity of our operations and grow low carbon businesses that was through 2028 and.
Spam update to that I'll wait and put another advertisement for energy transition spotlight. So that'll be September 4 it will be webcast for everybody. We will go deeper into our actions to advance a lower carbon future and you will have more to say than.
Alright, well thank you.
Thanks, Paul.
We will take our next question.
In terms of from Manav Gupta with credit Suisse.
Hey, guys are you and your partner recently Saidi LVL can you help us with some more detailed capex volumes anything which would help us model the project a little better so you'll get credit for it in the estimates.
Jeff.
Well.
Question. Your question, what I would say is we're not the operator and so for those types of questions. We like to refer refer you to the operator is the best source of information for those types of things I will say whale is a really good asset we're happy to invest in this project we expect low.
Carbon intensity from the production for.
Thanks for that asset we're looking for good returns. It's also based on many of the principles that we have been talking about for better capital efficiency. It's based on a minimum facility objective, where this facility is largely a replica of our previous Gulf of Mexico development. There was great cooperation between.
Between Chevron and the operator to develop.
What was the right balance between using exactly what was done before and what enhancements or innovation needed to be incorporated into the facility.
So we're quite happy with this project and look forward to seeing it progress, but I'll refer to the operator for the details.
Michael.
This all El pen is.
CP Chem, obviously was very strong in the quarter.
My question is at 1 point you in Qatar Petroleum would actually looking to do JV crackers, and then obviously the pandemic Kaplan and so how should we think about those crackers or is that a possibility. They can be brought back on the table given the tightness we're seeing.
And ethylene chain margins or should be thinking about them as projects, which might not be pursue whatever.
We're continuing to advance those projects and when I say, we I mean, our joint venture Chevron Phillips chemical company in partnership.
With its tires as you said, so I'd say the Gulf Coast project is a bit ahead.
Feed was completed.
Late last year, and then we're working together on determining next steps, including when a final investment decision will occur and we continue to advance the project and <unk>. They both are.
Our very competitive projects that work off of a low cost feedstock ethane feedstock.
Feedstocks so their advantage, we think relative to others around the world at the same time and all of you know it is tight right now with.
Strong demand tight inventories and some of the carry on effects from winter storm, Yuri, but we are seeing capacity additions.
Coming on in the medium term and so.
Nelson our head of downstream and his team are focused on having very capital efficient.
So it's not enough to just have the ethane feed advantage, but it's having a really capital and cost efficient development and that's what the teams are working on.
Thank you.
Thanks Manav.
We will.
Mark next question from barrage, Barca, Tarrier with Royal Bank of Canada.
Hi, Thanks for taking my question.
First 1 is on a balmy 1.1 of your peers have highlighted the redetermination of the army field in Nigeria.
And you are a majority owner.
I'll take R&D limited details on this outside of the headlines, but would you be able to confirm whether this impacts did you had any change in ownership in that field and whether that whether there's any cash impact in the second quarter.
And then I have a follow up on a different topic.
Yeah, we won't comment specifically on.
This is Ed.
Okay.
It's commercially sensitive, but we have a long standing practice of not discussing commercially sensitive matters.
Okay fine.
Second question is that she just a more general question on inflation and would you be able to talk about.
Uh huh.
Across services, and raw materials, and whatnot, and what youre seeing or any any worrying signs of inflation across the portfolio.
We are not I've, we've talked in the past about isolated.
Areas I mean for example, steel costs that go into our tubular and our wells is up but its a fairly.
Early is a small component of our well cost maybe about 10%.
We certainly are seeing tightness and trucking services that has impacted us at time and some wage labor cost increase increases there, but I think theres more talk about it than we're seeing in terms of action I'd say, our Cogs is it's.
It's pretty well under control in the upstream and downstream segments.
Okay. Thank you.
Thanks Raj.
We will take our next question from Stephen Richardson with Evercore ISI.
Hi, good morning.
Sure I was wondering if you could talk a little bit about.
In terms of the new energies business I'm curious.
As you go further down this road in and build out this business plan is you're seeing there just seems to be like.
The consistent theme here, which is policy frameworks in different geographies and are they conducive to actually building a business and so you know curious your perspective.
Finding enough high return businesses that have the right market and policy framework today versus some of the things that you might have to wait on them and just in the context of making sure you don't tie up some capital on some things that have some externalities. So just curious on that point.
Well, we operate in California, which has a lot of policy support in this area and we have you know we're the leading downstream player here with the leading brand in and have a large upstream business.
And but you're right policy does vary but there's enough policy.
To to advance these businesses now.
There are 2 main.
Park store, a lower carbon activities. The first is to lower the carbon intensity of our operations and that.
Largely does not inherent on policy or at least certainly the first steps we put out a 2028 target that is a 35% reduction of 24 kilograms per barrel.
And that's something we're taking action on and then we're also advancing lower carbon.
And this is the announcement yesterday was it really focus on hygiene carbon capture our downstream team is advancing renewable fuels, we've talked about renewable natural gas and renewable diesel previously.
What we're trying to do around lower carbon really is connected to our assets capabilities and customers. So 1 thing we're.
We're not doing in lower carbon is large scale wind and solar and we're certainly having renewable power supplier operations again part of lowering the carbon intensity, but not pursuing it as a standalone business. That's a decision that we're making because we don't feel like we have the competitive advantage, but when we get to renewable fuels.
Carbon visible natural gas renewable diesel sustainable jet hygiene carbon capture these are areas that are adjacent to our business, where again, we have capability, we have customers and we have assets that we can leverage we sell to United Airlines, United Airlines is going to buy a sustainable jet sustainable jets gonna be a percentage of.
Jet for some time period, 2%, 5%, 10%.
Mix with conventional where the natural player in that space. So again, we'll share more on September 14th, but that's a little taste of what you should expect from us.
Great. Thank you very much I appreciate the clarity.
Thanks, Steve.
We'll take our next question from Jon Rigby with UBS.
Thank you very much I think I'm just a quick question for Jay is you've referenced a couple of times.
Robert intensity around projects. So I think your your we operate on whale highlighted it in the <unk>.
These statements.
Wondering whether you could.
Could talk a little about that I was struck actually by the comment you made in the prepared remarks around the Colorado.
Very low carbon emissions.
So a few things 1 is can you talk about how you feature carbon emission profiles into your <unk>.
Staff sit alongside the traditional Mpv's irr's payback periods et cetera.
Secondly, whether.
As you look at your.
The portfolio as it stands right now, which obviously been built up over years and decades, whether this works it can be done around it that both soles for lower.
Our carbon emissions and actually is I think Pierre referenced if youre, adding renewables is that sort of power source, whether you can actually also.
And Ed.
Economic return as well in conjunction with that.
Thanks for the question a pretty broad question, so I'm going to start broad, but then I'll focus in on the Gulf of Mexico in the upstream.
Stream portfolio as we take stock of where we are a chevron our entire upstream portfolio.
As best we can determine sits at roughly half of the industry average for carbon intensity worldwide. So we're starting from a good position.
We've been very focused on starting to bring our carbon down for some time now and so we set our initial.
Shall goals back in 2016 for carbon.
Intensity reduction for the upstream.
Since 2016, we've actually reduced our flaring by 60% and our methane emissions by 50% and we've done that largely through what we call the marginal abatement.
Cost curves and just as we do in exploration we don't.
Business unit out there, making their own independent decisions, but rather they bring their ideas for carbon reduction investments to the center and then we look across the entire enterprise not just upstream, but upstream and downstream midstream.
And we invest into those opportunities that give us the greatest carbon reduction for.
Have you ever amount of capital and that's in keeping with our focus on being a higher return company.
While we've been able to find so far is that the projects have been relatively low hanging fruit and so we've seen these big reductions in carbon that's occurred since 2016 and in fact, we reached our 2013 targets or sorry 2023.
The least hits in 2023 years ahead of schedule and so we've already set new targets, which we talked to you about at the Investor Day in March for 2028, and that's the path that we're working towards now and Thats to get down to an average of 2004 kilograms of cotwo per barrel equivalent.
Across the entire portfolio.
Places like the DJ Basin.
Some of the noble teams have done a great job of designing out the parts of the process that have the highest emissions have resulted in those huge gains and so as we said not only are we seeing a 15% to 20% lower lifecycle cost we're seeing high.
Our reliability, 60% footprint reduction and Theyre down in the 6 kilogram per cotwo per barrel equivalent range, which is tremendous.
To put that into comparison, the entire Gulf of Mexico, Our operations last year in 2020, we're at 7 kilograms per Cotwo and that's why we think it's so important there is.
Information.
For policymakers to understand that places like the Gulf of Mexico allow us to produce a very critical supplier of energy to the United States into the world.
But also do that in a very carbon efficient manner.
In terms of our decision, making these are all elements that we have to.
As good as we make investment decisions, but we are bringing these factors in these criteria into the equation as we evaluate where we are going to allocate capital and how we're going to move forward.
Okay. That's great. Thank you.
Thanks, John.
We'll take our next question from Jason.
The <unk> with Cowen.
Yes, thanks for taking my questions.
First on the buyback.
If I recall correctly last year.
There was concern around what OPEC, plus would do and that factored into both your shareholder distribution strategy as well as.
<unk> your Permian production strategy are you kind of confident now that OPEC plus is going to continue to manage the market and does that factor into.
Your strategy or your decision to resume buybacks or what were those kind of looked at independently and then.
Secondly, just a clarification on <unk> can you remind us what the free cash flow flip is from I guess 2022, which is the last full year of project spend to 2024 when the.
Project is fully up and running.
Thanks, Jason I'll start with the second 1 we haven't given.
Asset level free cash flow guidance for <unk>, you're absolutely right that you will see.
Increased dividends from Tengiz for Mark.
Ownership interest and Tcl, both as capital Rolls off.
And as the projects.
<unk> starts up it is a big part of.
The company's guidance of 10% annual free cash flow between now and 2025.
A lot of that comes from the Permian a lot of it comes from.
<unk> and as you also know we will get the loans repaid back that shows up in a different part of the cash.
Cash flow statement, but it's still cast so theres nothing asset specific that we've shared but it's included in our overall free cash flow guidance that I'll refer you to our Investor day, and perhaps as we get closer to the start up we can we can share that and then a more specific way for you all.
In terms of the share buyback again, we.
If those criteria are we comfortable we can sustain it confident we can sustain it over the cycle. There are uncertainties I cited.
Delta Varian is an uncertainty in OPEC plus so it OPEC plus we're going to take the actions.
That are in their interest.
We don't have any great.
Greater insight into that.
That it is an uncertainty, but we have enough confidence in all the investments and assets that Jay has been talking about the strong downstream and chemicals performance that we've seen the economic recovery that we've seen the discipline on the supply side that we've seen from companies in this country and really around the world.
That we feel good that we can keep this program in place for multiple years and also pay down debt while.
While we're doing it.
Thanks, Jason.
We'll take our next question from Ryan Todd with Piper Sandler.
Yeah.
Okay. Thanks, maybe maybe a quick follow up on some of.
The balance sheet conversation from earlier I know I know Pierre you said that you know.
This is 1 of those times, there with an oil price, where it is you're likely to trend below the 20% to 25% target net debt target but.
Is there a floor on the on the debt level in terms of the balance sheet, where you start to feel like you're under Levered.
At some point either from our absolute debt level point of view from a debt to cap point of view or even from like an efficient.
Retirement of debt point of view that would that would skew start to shoot SKU excess cash more towards buyback or dividend growth.
Well.
There is.
Yes, I'm on side, a number and it's and it's because we don't we don't have 1 internally I mean, there's no hard and fast number but undoubtedly with the flexibility of our capital program with the cash flow generation I mean, the reason why that I've cited that $20 to 25% range, which is arguably higher maybe than we would have had it 5 years ago. When we had a lot of long.
A long dated capital projects and you would have wanted we would have on it than it had in fact, the debt level quite a bit lower because we had long dated commitments. We are as we've talked about earlier.
Getting to the.
Near the end are a couple of years away from Tengiz being completed the vast majority of our capital program is much more flexible.
It gives us this higher range, so I'd like to get comfortably below it if you're asking the question would we increased the share buybacks, yeah, that's absolutely possible.
We get our debt ratio comfortably below the 20% and we look out again in terms of the.
Our cash flows.
We can increase the range we showed the history of.
Of our share buybacks, we haven't.
Kept it at the rate that we've.
We've started it at.
We've increased that at times, we've decreased that and so you would expect us to continue to do the same thing.
Great, Thanks, and maybe a.
Separate follow up on.
On the energy transition activities.
You've continued to be fairly active and renewable natural gas you've done.
A modest amount I know you mentioned some co processing as seen in our renewable diesel or maybe we just don't have a lot of detail on it yet, but how are you thinking about the opportunity set as you look down the line for renewable diesel and sustainable aviation fuel.
Would you consider doing something more meaningful including.
The potential conversion of an asset or likely focus on smaller steps like co processing.
Well again, we will share more at the spotlight the co processing that we just started.
Is.
It's a 2 stage process. So it will be up to the capacity of up to 10000 barrels a day by year end.
<unk> brought on the first phase of another phase will be the first U S refinery to co processed through an FCC and.
In the second phase and again that'll give us the capability to produce up to 10000 barrels a day, we did it this way in part because it's very capital efficient we are leveraging existing kit.
It's literally just a tank and some pipes.
And so we can do this in a in a very capital efficient way there is undoubtedly a growth in renewable diesel on the demand side, but there's also growth on the supply side renewable markets work and commodity markets just like the conventional products do and so we're going to continue to be disciplined in how we approach it.
And so this is a very competitive project.
<unk>.
And I think you'll see more from US again, when we talk about it on the spotlight on September 14th.
Great. Thanks Pierre.
Right.
Our next question from Sam Margolin with Wolfe Research.
Thanks, how are you.
Just 1 from me on.
On LNG as an asset class in the context of low carbon.
I'm pretty sure it would be below your target.
Per unit basis, but.
Gas prices are very high globally LNG prices are very high there are some opportunities out there in LNG and I'm, just wondering on sort of chevron.
Official position on how that marries with.
With your broader.
Missions targets.
Well this.
Certainly a part of when we look at our portfolio, we consider the LNG assets and production to be part of the upstream. So that's in all of the numbers that we've given you.
Continue to look for opportunities to make those operations more efficient and lower our carbon intensity. We think natural gas is an important fuel. It's an important transition fuel it's going to play a critical role as the world continues to lower its overall carbon footprint and so we are going to stay focused on.
Mentally creeping capacity of our existing facilities, we'll look at the opportunities to use existing knowledge or upcoming elledge and other facilities to increase our production through those facilities.
But most importantly, we want to leverage the investments that we've already made to continue to focus on higher returns as we go forward. So it's.
And we can portfolio, but that doesn't occupy any particular premium or special place.
Okay. That's it for me thank you.
Thanks Sam.
Last question comes from Neal Dingmann with Trust Securities.
Good morning, All my 1 question is just really on protection.
Yeah.
Part of the past you've used interest rate swaps and other factors just wondering there's a lot of discussion. These days about hedges at all I'm. Just wondering obviously, you've got a fantastic balance sheet with nobody worries on that side, but just wondering kind of your policy and strategy. How you think about various protection as I mentioned interest rate swaps hedges sort of all the above.
You guys.
Well on the commodity price I E. We don't hedge.
Except for you know transportation, but we don't have flat price commodity hedges and in terms of our.
That I mean, we tend to have a fair amount of variable debt, our short term debt and commercial paper.
In others, but undoubtedly we also have some term debt that's at fixed so I think our average interest cost is around 2% our mix is probably less than half variable, but but as you say we are very strong credit very strong balance sheet and so we don't pay for a lot for insurance and we don't think.
Our shareholders want that I think our shareowners, 1 certainly exposure to commodity prices. So they enjoy the upside and then.
Want us to maintain a strong balance sheet.
Thanks, Neil no apps absolutely. Thank you.
Okay.
I would like to thank everyone for your time today, we appreciate your interest in Chevron.
And everyone's participation on the call today.
Please stay safe and healthy Katie back to you.
Thank you. This concludes chevron's second quarter 2021 earnings Conference call you may now disconnect.
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