Q4 2021 Chevron Corp Earnings Call

January 28, 2022

Good morning. My name is Jen and I will be your conference facilitator today. Welcome to Chevron's fourth-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 will be given at that time. If anyone should require assistance during this 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 call over to the general manager of Investor Relations of Chevron Corporation, Mr. Roderick Green. Please go ahead.

Thank you, Jan. Welcome to Chevron's fourth-quarter 2021 earnings conference call and webcast. I'm Roderick Green, GMO of Investor Relations.

Our chairman and CEO, Mike Wirth, and CFO Pierre Breber are on the call with me.

We will refer to the slides and prepared remarks that are available on Chevron's website.

Before we begin, please be reminded that this presentation contains estimates projections and other forward-looking statements.

Please review the cautionary statement on slide two.

Now I will turn it over to Mike.

Thanks, Roderick.

After the challenges of 2020, we began last year clear eyed about the economic realities, we face and at the same time optimistic about an eventual recovery.

By the end of 2021, we had one of our most successful years ever with return on capital employed approaching 10% our highest since 2014.

The successful integration of noble energy, while more than doubling initial synergy estimates and record free cash flow, 25% greater than our previous high.

2021 was also the year when Chevron accelerated our efforts to advance a lower carbon future by forming Chevron new energies, an organization that aims to grow businesses and hydrogen carbon capture and offsets.

Introducing a 2050 net-zero aspiration for upstream scope, one and two emissions.

In establishing our portfolio carbon intensity target that includes the scope three emissions.

And more than tripling our plan to lower carbon investments.

Chevron is an even better company today than we were just a few years ago.

We're showing it through our actions and our performance, which we expect to drive higher returns and lower carbon.

And we intend to keep getting better.

Our record free cash flow enabled us to strongly address all four of our financial priorities in 2021.

A higher dividend for the 34th consecutive year.

A disciplined capital program well below budget.

Significant debt paydown with a year end net debt ratio comfortably below 20%.

And another year of share buybacks, our 14th out of the past 18 years.

I expect 2022 will be even better for cash returns to shareholders.

With another dividend increase announced this week and first-quarter buybacks projected at the top of our guidance range.

We're optimistic about the future.

Focused on continuing to reward our shareholders, while investing to grow our businesses and maintaining a strong balance sheet.

We've made the most of this challenging period, transforming chevron through a well timed acquisition and an enterprise wide restructuring.

Into a leaner and more productive company.

In just two years, Capex was reduced by almost half from Chevron and Noble's pre-COVID total.

And operating expenses for the combined company in 2021 were lower than for Chevron on a standalone basis in 2019.

The Noble acquisition and increasing capital efficiency enabled us to maintain a five-year reserve replacement ratio above 100%.

And 2021 was very consistent with our longer term performance.

Driven primarily by additions in the Permian, Gulf of Mexico, and Australia.

And partly offset by lower reserves in Kazakhstan, mostly due to higher prices and the negative effect on our share of reserves.

For more on our strong financial performance over to Pierre.

Thanks, Mike.

We reported fourth quarter earnings of $5.1 billion or $2.63 per share.

Adjusted earnings were $4.9 billion or $2.56 per share.

The quarter's results included three special items.

Asset sale gains of $520 million, primarily on sales and mature conventional assets in the US.

Losses on the early retirement of debt of $260 million, which will result in significant future interest cost savings.

And pension settlement costs of $82 million.

A reconciliation of non-GAAP measures can be found in the appendix of this presentation.

Full year earnings for over $15 billion.

The highest since 2014.

Compared with 3Q adjusted 4Q earnings were down $770 million.

Adjusted upstream earnings were flat with higher realizations, offset primarily by negative LNG trading timing effects and higher DD&A.

DD&A increased on catch up depreciation for our interest in northwest shelf, which no longer meets asset held for sale criteria.

And impairments of certain late in life assets triggered by updated abandon minutes estimates.

Other items include additional taxes and royalties related to higher prices under certain international contracts.

Adjusted downstream earnings were down with lower chemicals margins and volumes at CP, Chem and GS Caltex.

In addition to year end inventory charges.

The all other segment declined due to tax charges.

Across all segments, operating expenses increased in part due to higher accruals for employee bonuses and stock-based compensation.

Adjusted earnings increased over $15 billion compared to the prior year.

Primarily due to increased realizations in the upstream.

As well as improved refining and chemicals margins.

Costs are up primarily on the acquisition of noble energy that closed in 4Q 2020.

Higher fuel costs.

And an unfavorable swing in accruals for employee benefits.

2022 production is expected to be flat to down 3% due to expiration of contracts in Indonesia and Thailand.

These contracts are not being extended as we were unable to do so on terms competitive with our alternatives.

Excluding contract explorations and 2022 asset sales.

We expect that 2% to 5% increase in production led by the Permian and lower turnaround activity in TCO in Australia.

We reaffirm our prior long term guidance.

3% production CAGR through 2025.

And we will share more about our long term outlook at our upcoming Investor day.

I'll call out a few items on slide 11.

Full-year guidance for the all other segment exclude special items, such as pension settlement costs.

The all other segment can vary quarter to quarter and year to year.

Affiliate dividends are expected to be between 2 and $3 billion, depending primarily on commodity prices and margins.

We do not expect any additional lending or loan repayments this year at TCO.

Finally, asset sale proceeds are expected to be in line with historical averages.

We've updated our price sensitivities to include natural gas.

Also, our guidance for both earnings and cash flow sensitivities is now the same.

As we are likely to consume the remainder of our NOLs.

And other favorable tax attributes if prices remain higher.

Finally, we did not receive our federal income tax refund last quarter and expected later this year.

Back to Mike.

Alright. Thanks, Pierre.

I believe 2021 was a pivotal year for Chevron, where we got better in so many ways.

And we look forward to 2022 and beyond.

Confident in our strategy and capabilities that aim to deliver higher returns and lower carbon.

We will share more during our Investor day on March 1st.

At this time, we expect to be at the New York Stock exchange with a limited number of participants.

The meeting will be webcast for all to see.

With that, I'll turn it back to Roderick.

That concludes our prepared remarks.

We are now ready to take your questions.

Please try to limit yourself to one question and one follow up.

We will do our best to get all questions answered. Jen, please open the lines.

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Our first question comes from Neil Mehta with Goldman Sachs.

Good morning, team.

And Happy New Year to you all.

The first question I had was more of a housekeeping item for you, Pierre.

Which is in the quarter it looked like LNG timing effects had at a meaningful drag here. I recognize there was a lot of volatility, particularly towards the end of the month with TTS and JKM, but maybe you can break it down in layman's terms for us what does that really mean and what happened in the quarter.

Thanks, Neil. About half of the timing effects in the quarter and first we're showing a swing between 3Q and 4Q, we had a gain in third quarter.

And a negative variance, a negative absolute amount in a negative swing in fourth quarter.

About half of the effects in the quarter were due to a negative inventory charge. So we had two cargoes on the water at year end.

They get valued into inventory at average annual prices, which were well below the purchase price because as you said Neil prices. This was a rising price environment and prices rose in the end of the quarter. So that will reverse itself next year. When those are this year when they were sold at the higher prices that they were purchased that and.

The balance of the timing effects are in paper mark to market effects and as you know the pit the paper, which is tied to physical cargoes gets mark to market was the physical cargoes or not and so that creates a timing effect, which unwind when the physical cargoes are delivered we ended the year with a positive mark to market, but not as positive.

As what we had at the end of the third quarter, we added some JKM shorts during the quarter to balance our portfolio.

We're still net long JKM. So any effects going forward will depend on the direction of future prices and all of this activity is really just geared towards managing our overall price exposure between our sales agreements and our supplies, which are a mix of both Brent and JKM prices and just to put a fine point on it.

But the comment you made.

These positions are not very large, but when we have natural gas LNG price movements that have gone from 10 to 20 to $30, an MCF, it's causing larger timing effects than you would normally see.

That makes a lot of sense, Pierre. And then the follow up for you is just on cash flow. Again, relative to consensus it was softer it does seem like there's some one-timers in there maybe something around the timing of tax refunds and then we're Angola shows up but there is still a gap in there. So can you just talk about how you bridge to street numbers in your mind?

Anything we need to carry forward as we think about next year.

Well, I'll cover the two points you made we and I've mentioned that we did not receive the IRS tax refund that we expect in the fourth quarter, we expect that sometime this year, we did receive a.

TCO dividend. There was a 15% withholding tax that comes off of the dividend and we did receive the Angola LNG return of capital it actually exceeded our guidance. By the way the TCO dividend was at the high end of our guidance range.

And the return of capital from Angola was above our guidance, but again it shows up in cash from investing and not cash from ops, because it's a return of capital. If you look beyond that we do have and as I referred to in our prepared remarks, we have certain contracts internationally that have additional taxes and royalties that kick in essential.

When oil and LNG prices are higher. But we don't share specifics on our contracts, but as we talked about we had extraordinarily high LNG pricing.

Of $30 and then we also had oil prices that increase during the year.

And then the last thing I'd say.

As we provided guidance on the third quarter call on our

expected increase in earnings from LNG spot cargoes.

And we gave that guidance in part because LNG prices increased significantly and we said we expected to have fewer cargoes because our long term contract takes we're going to be higher during the winter from our primarily Japanese customers.

We did not operate, we didn't produce as much out of Australia. So we had fewer LNG spot cargos and again that was an opportunity.

And that resulted in lower earnings and cash flow.

Hey, Neil. The one other thing you talked about what should you bear in mind going forward.

As we've been in this you know.

Fairly depressed commodity price environment, we built up that operating losses.

In our business and as we've returned to profitability.

Those have now been utilized and an offset against taxes payable. As we work our way through those and then a strong price environment that could happen sooner rather than later.

We'll be in a net

Taxable position, that's quite different than what we were before as well and so I think that's another point that may not be as evident in the quarter. But as you go forward, it's kind of a good news, bad news thing I suppose what we're going to be more profitable, but it also means that we're gonna have a higher taxes payable.

Thank you, Mike.

You bet, Neil, and happy new year to you too.

Our next question comes from Phil Gresh from JPMorgan.

Hey, good morning.

My first question is on the 2022 production outlook.

Obviously, you had an extremely strong Permian production in the fourth quarter.

It was about 70,000 barrels a day or 80,000 barrels a day, I'm sorry above the full.

Full-year average and you're guiding to 80,000 barrels a day of new production in '22 over '21.

So it seems like you can just get there from the Permian alone.

I'm just curious are there other moving pieces as you should be thinking about on the new production element of

The growth for '22 or is there some conservatism there?

Any thoughts would be helpful.

Yeah, Phil.

Fourth quarter Permian does look strong and one thing.

You know that we do see from time to time as with our non operated joint venture positions, sometimes the way production gets reported and by partners can result in a little bit of.

Lumpiness in those numbers.

But broadly speaking you know the Permian is healthy and getting better.

I think 2022 Permian production will be a little bit better than we showed at our Investor Day last March.

Permian production will be a little bit better than we showed at our Investor Day last March.

And roughly speaking you know upper on maybe 10% compared to full-year average in 2021.

And that is the largest piece of what we would anticipate in terms of production growth.

Next year.

There is some growth in the base and other primarily, as Pierre said in his comments, we've got lower planned turnaround activity at our TCO and we expect some more uptime.

At Gorgon. And then that's offset by you know a few asset sales that we would anticipate so those are the those are the significant moving moving pieces in production for 2022.

Okay. Great. That's very helpful. Thank you.

And Mike, I know you'll get into a lot more detail in March at the analyst day, and looking forward to that.

But just kind of looking back pre kind of at a prior analyst days.

Your framework was 60, Brent that you're using to balance Capex and distributions.

And a fairly evenly balanced framework, obviously oil's 90, now and maybe you don't want to.

Yeah.

Give a guidance at those types of levels, but I am curious how you're thinking about.

What is the right way to look at the cash balancing framework? What price would you think is a reasonable these days?

As I know you like to manage the business through the cycle not based on spot prices.

Yeah, we will talk about that more in March, Phil, but our longer term view.

You know on the price environment hasn't changed a lot.

There's a lot of resource out there that can be produced.

You know economically at prices lower than what we see today in our breakeven reflects that.

And so we are in a period of time here, where cash flow is strong as we mentioned in our comments. The last two quarters have been the best two quarters of companies ever seen in last year was.

25% higher than the best year in our history.

So you know, we increased the dividend. Debt came down significantly and we've guided to the high end of our share repurchase range. If we continue to see.

In an environment like this, the balance sheet doesn't need to be a lot stronger than it is today. And we've already increased the dividend. And we're gonna be disciplined on capital. And so that really leaves one lever left and I think over time, we're going to you should expect us to be consistent with our history which is

returning cash through our through share repurchases and at least.

In an environment like this, we've got ample cash to do that and sustain that well into any kind of a correction that we eventually will see.

Cash to do that and sustain that well into any kind of a correction that we eventually will see.

Great [season March], thanks.

Okay.

Our next question comes from Jeanine Wai with Barclays.

Hi, good morning, everyone. Thanks for taking our question.

Morning, Jeanine.

Good morning. My first question is on TCO, I guess now that you're through much of the winter campaign. Is there any update on how FTP WP M P and how those are tracking on cost and schedule? And maybe given your COVID-19 protocols and efficiencies and, do you have any color on impact related to the recent geopolitical unrest?

That would also be very helpful.

Sure, Jeanine.

Fourth quarter was really good execution on the.

Was really good execution on the.

On a field productivity, we made terrific progress and that's carried forward as we began the year.

We did have some impact during the unrest.

Some impact during the unrest.

That occurred in Kazakhstan.

But for about a week is the amount of time that it really cost us in the field there.

The amount of time that it really cost us in the field there.

We've really mobilized everyone now are back.

At full strength in terms of our field activity and we've got a highly vaccinated workforce.

More than 90% one of the highest rates of vaccination anywhere in our system in the world and while we have seen omicron cases appear.

Appear in the workforce there, at this point, it's at a level that is very well managed and is not having any impact on the on-field

Construction and activity. So we are continuing to make good progress we have.

Continuing to make good progress we have.

I have not made any change to our cost or schedule guidance and our overall at about 89% project progress and 82% construction progress at this point so.

You know things had been managed really well on the ground by our team during a pretty challenging month of January.

Okay, great. Good to hear. Thanks for all that detail.

A question or second question, maybe following up on Phil's question on the.

The Permian.

You guys had a really strong quarter.

At least compared to our expectations.

You mentioned that 2019 production is a little better than where you thought it was going to be from your March analyst day forecast.

Can you clarify have you accelerated activity there? Or is it really just all based on better efficiencies? And I guess given its importance to corporate growth in the medium term are you, taking any steps related to supplies or lever equipment.

Anticipation of some tightening in the service market over the next couple of years.

So let me let me speak first to

Activity and then I might let Pierre who is now in charge of our supply chain organization by the way.

Speak to any signs of inflation and how we're managing that. Activity in the Permian is really increasing.

Aligned with the guidance that we've issued previously.

And spending this year up from $2 billion to $3 billion.

Wells put on production.

A little bit over 200, we anticipate this year, which is up about 50% versus 2021, and will share an update on all of these things when we see you in March So I would say this is really a very well aligned with what we've already guided to an indicated.

And reflects the ongoing efficiencies that we continue to see in the field.

The efficiencies that we continue to see in the field and.

And just the quality of this asset, which endures as, you know, as we go through cycles like the one we just went through. It's really quite nice to have an asset in your portfolio that is this large. That's this flexible when it comes to capital and that we can.

We can.

Demobilise, remobilize. Not that we would intend to do this frequently but when conditions call for it.

We've been able to exercise that flexibility here over the last couple of years.

So strong progress, there and I'll let Pierre comment on input costs.

Jeanine, we continue to manage our costs, we think very well in the Permian and across our portfolio, our capital budget, which we announced in December expected, some kind of a cogs increase modest in the low single digits.

And what you might be seeing a little bit more than that in the Permian, It's very manageable and we think we can offset it with efficiencies. So as we've talked about although rates are up there is still below where they were pre COVID-19 on rigs capacity in the industry for a specific oil and gas equipment and services, it's still below pre-COVID-19 levels so whereas.

We are exposed to labor and steel and certain other elements cost elements that are tied to the broad-based economy.

Oil and gas specific equipment services are still well under control and our ability to contract well be a very good partner to work with all gives us confidence that a little bit of cost pressure. We're seeing is very manageable within the range of what we expected and we intend to deliver our capital program.

In line with our budget.

Alright, thank you.

Our next question comes from Doug Leggate from Bank of America.

Thanks, good morning, everyone and happy new year from me as well.

Thanks for taking my questions.

Okay.

So Pierre, I think your explanation about the

Dividends from TCO being a return of capital.

Our return of capital.

I think that probably explains why the suites cash flow numbers were too high but my question is really about the go-forward portfolio leverage.

So you, obviously lose Indonesia, you lose Taiwan's, which I guess was gas.

But you've got the Permian driving growth on our lights or recent history of PSC capital for the Costco standpoint. So my question is when I think about portfolio oil leverage for the go-forward outlook.

Does that compare to the legacy portfolio given all of those changes?

Yeah.

Our guidance on. Let me start by saying we've always been.

Sorry by saying we've always been.

Most levered among the integrated energy companies. That's a function of the portfolio we've created over a long time, which tends to be upstream related.

And within upstream, we tend to be oil-weighted and again, a big portion of our LNG is sold under oil prices. So, whereas we were viewed as a defensive stock during some of the challenging times in 2020 and last year because of how we manage the balance sheet and how we were able to flex our capital program and manage our costs we really.

We really are more of our oil play and we're much more levered on the upside. And we've shown that in our last Investor day, and we'll show that again in the upcoming Investor day. In terms of our sensitivity, I mean, it's still around the same when you factor it all in. I mean, Indonesia was working its way to be a fairly modest portion of the portfolio you are right over time.

With both Tengiz in the Permian that increases.

Our waiting in some ways, but the guidance that we provided of 400.

Millions of dollars of earnings and cash flow benefit from a dollar change in prices still holds.

Okay. Thank you.

A follow up if I may just to go back to your one-off comments, the DD&A and the I guess the tightening effect. So I just want to ask the.

A question for a little clarity.

On the DD&A, it looks like there was some catch up what is how much was that because you didn't strip it out. I'm curious why you didn't strip it out and then just real quick on the LNG. Was there a shift in contract versus spot volume exposure? That also impacted the quarter.

That's it for me, thank you.

Yeah, Doug. I mean first just on your first question. So the return of capital is Angola, LNG TCO was dividend withholding tax, but you're right that part of that does not show up in cash from ops. In terms of DD&A, about half is due to the catch up at North West shelf and so we have designated that

Asset as held for sale about 18 months ago. So you're capturing 18 months of depreciation all in the fourth quarter. We don't call i a special item because obviously, it would have been in our underlying results. If we, it had been held for use during that time. And the other half are impairments that are tied to increases in the bag.

And the estimates for late in life assets. So because these estimates, which is part of our regular updating process. Because these assets are very late in life. They don't have the production, remaining production life of time to recover those additional abandonment estimates and therefore that results in an impairment. So about half is the catch up and half,

and those are both I would call them onetime in nature. And in terms of the LNG. Yes, there was a shift in fourth-quarter two more contract, less spot.

And we guided to that on the third quarter and as I mentioned earlier, it was even more so. So in the winter months, our northern hemisphere customers tend to increase their takes under the long term contracts and then we.

We then produces reliably in the fourth quarter. So we had fewer spot cargo so what you're seeing, we did not benefit.

As much with the run-up in spot prices as we had guided to in the third quarter and are waiting was more oil contract related now those contracts are doing very well spot market goes up and down but you'll see more exposure as we go forward.

Thanks, Peter, just I guess the point was the headline miss wasn't as bad as it looks so thanks so much.

Thank you, Doug.

Our next question comes from Devin McDermott from Morgan Stanley.

<unk> comes from Devin Mcdermott from Morgan Stanley.

Hey, good morning, Thanks for taking my question.

So the first one I wanted to ask on just Capex.

It's notable that you all came in for the last year below the bottom end of your Capex guide and I was wondering if you could just talk a little bit more about some of the drivers of that Capex speed. And then Pierre you mentioned before I think that you're seeing are assumed a few percentage points of inflation in the Permian I was wondering if you can just broaden that out and talk about the inflationary

trends you're seeing across the global portfolio and opportunities to potentially offset that as you think about 2022 spending levels.

So yes, sorry.

The low single digits was really meant to be across the portfolio.

And that's factored into our $15.3 billion capital program, but you know obviously, if you look offshore those rig rates have stayed flat to down and we, you know, we do contract where we lock in rates for some services, we have price caps on some services, there's lots of ways that we work to mitigate our exposure to Cogs.

So I would view it as low single digits overall.

Permian, perhaps a little bit higher not nearly as high as numbers that I'm hearing.

From some others, we don't see anything in our costs that would be double digits at all. So a little bit a very modest present or two higher than will be it currently we had planned for and again very manageable within.

Offsetting with efficiencies.

And on 2021, Devin, there's nothing noteworthy in the.

The profile of Capex and what it was that drove our you know the.

The ultimate outcome, which was a little below what we had guided to. You know, there's a lot of inertia in some of these things and as you know we pulled the handbrake pretty hard in 2020.

We throttled a lot of things down and as we start to bottom out and turn that back around a little bit as we will in 2022. This system just needs to be.

It needs to adjust to that and so.

You know I wouldn't call it anything there that's unique or are especially noteworthy.

We have, Bill you know about half of the under spend is due do project deferrals like at Tengiz due to COVID, another impact and about half is capital greater capital efficiency and other cost savings.

Okay. That's helpful. And then separately, I wanted to ask on Australia, LNG and Gorgon, specifically. I was wondering if you could talk in a bit more detail around some of the recent downtime there. What happened and then what steps are being taken to ensure better uptime here in 2022?

Yeah, I'll take that Devin, look it's it's a point of frustration no doubt.

During normal rounds, we had an operator that spotted.

Evidence that we had a risk of an operating issue at one of the units

In the dehydration train.

Nothing that was catastrophic or alarming, but the sharp eyed operator picked up evidence is something that as we investigate it further.

Catastrophic or alarming, but but but the sharp eyed operator <unk>.

Picked up evidence is something that as we investigate it further.

We felt it was prudent to take a quick pitstop to address this and so that's been completed at two of the three trains and they're all the same design. So these things tend to you know.

Show up across all three trains.

The third train is undergoing that pit stop right now.

And it is also addressing a problem with one of the compressors that was identified and this was an opportune time to make.

Dressing.

<unk> with the with one of the compressors that was identified and this was an opportune time to make.

A couple of changes with that in order to reduce risk going forward.

Going forward so.

You know that.

We should, we expect it to operate reliably you know we've done our first major turnaround at all three trains now those are behind us at Gorgon, we do not have any planned turnarounds in 2022 and as we complete this last pitstop that's underway our expectation is that we're gonna have.

Strong operational performance this year and see more production out of Gorgon than we did in '21.

Okay. Thank you.

Yeah.

Our next question comes from Paul Sankey with from [inaudible] Research.

Hi, good morning, everyone happy new year.

Guys, on your guidance that the volumes will fall this year. Would you characterize that as

Our guidance that the volumes will fall this year would you characterize that.

You're using a conservative oil price assumption.

And being determined not to raise Capex or are there other issues surround the concessions, particularly.

And as a follow up. Could you accelerate the Permian if you wanted to? Or can you talk about inflationary pressures that you might be seeing in the Permian?

As a matter of you know, labor, steel et cetera et cetera. Thank you.

Labor steel et cetera et cetera. Thank you.

Okay, yes, on production guidance, Paul.

You know I would hope this isn't big news to people. I mean, it's you know.

Long been public about the fact that we couldn't extend the concessions in Indonesia, and Thailand on terms that would compete with other opportunities within our portfolio.

And so this has been out of the public domain for quite some time.

And so when you pull those out we're at 2% to 5% and Pierre reiterated you know.

The compound annual growth of 3% out through 2025, and so this is very consistent with.

The, you know, the guidance and the messaging that we've been trying to communicate.

Communicate for quite some time. On the question of could you accelerate the Permian.

In theory, the answer to that five years ago was yes, the answer to that today is yes.

The answer to that five years ago was yes, the answer to that today is yes.

We've been very focused on execution efficiency.

Execution efficiency.

And returns. And as I said, we laid out in March of last year, a profile that showed strong production growth long plateau strong returns.

And capital efficiency.

We'll update that again here in the new year, but at March but you know this is an asset to just continues to look as good as we've portrayed it to you and we're not going to get out ahead of ourselves chasing anything as we bring activity back up from $2 billion last year to three.

That's a 50% increase in capital spend.

I mentioned that we're going to see a 50% increase in wells put on production in '22 versus 21.

That is a meaningful step up in activity and we want to execute that well. And so I don't think we're gonna be tempted by the price of the day to put that at risk by us, but by doing more and I think Pierre already addressed inflation I know up here, if there's anything else you'd like to say on either of those topics.

Thanks, Paul.

Yeah.

Our next question comes from Manav Gupta from Credit Suisse.

Thanks, guys. My quick question is your US downstream results were down about 400 million quarter over quarter, and we expected about 200 million of that to be chemicals headwind, but you also saw some their salt what peers are doing is that defining was able to jump up and make up for it.

it looks like both wind down a little and if you can help us understand what the maintenance in the refining system what.

What went on in the US refining because refining was also down quarter over quarter?

I mean, obviously there were a number of items.

Referred to including our year end inventory effects.

But you know the higher employee benefit costs really crosses all segments that would include US downstream. So we had a very strong year, we expect a higher and play bonuses and we accrued for that and our stock ran up in the fourth quarter and it's continued actually in the first quarter and we have to do accrual for stock-based compensation that's tied

to both the absolute stock price movement, and the relative stock price movement because of how some of our incentive programs work. So that's in the segments and I think that helps explain part of your your question.

And a quick follow up is you have a global footprint. Helps us understand within your entire system, how you're tracking refined product demand gasoline diesel and asphalt anything you could help us understand where we are versus before the pandemic started.

Yes, you know Manav, it's a, I think a lot of the data you see in the public domain is pretty good.

Pretty good.

We've got gasoline demand globally up higher than it was pre-pandemic diesel at and perhaps slightly above jet fuel continues to lag.

The specific numbers can vary a little bit region by region.

Numbers can vary a little bit region by region.

But broadly speaking, that's where we are. The transfer the ground transport fuels are at or above pre-COVID-19 levels aviation is not and we still have an economic recovery underway. And we still have a lot of people working from home where people that arent traveling for business and not taking international flights.

Even with the robust demand recovery that we've seen there is still another leg to the demand.

improvement that is likely to occur here.

In 2022, and so I think the demand outlook is solid.

And you know the issues frankly have been a little bit more on the supply side than the demand side.

Thank you so much, thank you.

Next question comes from Paul Cheng from Scotiabank.

Hi. Thank you. Good morning, guys.

Nichol.

That too.

Two questions, please.

If we are looking at your well-spoken [slogan], lower carbon and higher return. In here that Permian, it's definitely it's going to contribute to the higher return, outside Permian can you.

So can lower the top end and higher return.

In here that time, it's definitely it's going to contribute to the higher rate time outside Permian can you.

Help us that to maybe bridge the gap of what that to indicate what are the self help that you guys.

You tried so that could see a better return.

We could see.

A better return.

Over the next perhaps one or two years. And the second question. It's wanted to go back into the Australia, and then [inaudible] indicate that I think has been a source of frustration.

To management, as well as to many people.

And it seems like that that'd be good. The [inaudible] has only been on stream since 2016, 2015, and so it is really not that old, but we have all these tiny little problems from different units coming up and each one every time that they did

The Penn has only been on stream since two.

2016 2000.

15, and so he is really not that Oh, we have what is called a tightening.

Timing of NATO pop them from different units coming up and niche one that epic find that same study as a whole.

[inaudible] because they all thought they seem to be the same manufacturer. So have you guys go into and do a thorough review on the older unit and trying to see what did that that's at the potential time bombs that we need to fix.

Yeah, Paul. Let me make a quick comment on the returns drivers. I might ask Pierre to build on it and then I'll come back to the LNG look on returns yeah, Permian is highly accretive to returns because.

We get very, very strong returns out of the Permian. It's short cycle and we're putting a fair amount of capital into it we are reducing costs across our business.

As I indicated we're running chevron a noble together today for.

For costs that are lower than Chevron was standalone in 2019.

So that isn't approved a significant driver of improved returns, we're working across the value chain to capture more margin. That's both in the downstream and in the upstream a lot of self-help initiatives.

In the downstream and so there are rather than think about pointing.

Pointing to assets. I would talk to you about the way we work and finding ways to improve efficiency and productivity across all of our operations is what is driving the improvement. And it's really rolling up your sleeves and doing this the old fashioned way and it's a lot of little things that are that you stay very focused on.

I don't know, Pierre if you want anything else on drivers of return improvement. We'll share more at the upcoming Investor day, and we've shown at the last couple of Investor days right, what Mike talked about it's a constant margin.

We obviously doubled noble synergies, we transformed the whole enterprise and reduce costs.

Working across the value chain and optimizing as Mike said and Mark Nelson have showed.

Some ambitious self help.

And then capital efficiency, both where we're putting

New capital and higher returns across the portfolio and, of course, as a lower return prior capital depreciates off. So we'll update you and everyone at our next Investor day, but that's the playbook that we've been using and we will continue to do use going forward.

Paul, to your question about Gorgon.

You're right. It is not an old facility and you're right.

It has had more than its share of teething pains as we've been here in the first few years of operation.

More than its share of teething pains as we've been here in the first few years of operation.

We have people all over this. I mentioned earlier that it was a sharp-eyed operator on routine rounds that spotted something that we've.

We've addressed and that has averted you know the possibility of a more serious outage there and we continue to do so we don't have.

The phrase you used I won't repeat but we don't have a big problem that's waiting.

To materialize that we've identified and we have had a strong teams of people from our upstream organization. We brought people in from our downstream organization that have a lot of experience in these process facilities to work on our reliability and mechanical integrity.

And address any of the things that frankly, continue.

You know the things we've been fixing or things that reflect problems that.

Reflect.

Problems that.

The seeds were sown during the design and construction.

At a time when the industry was under a lot of pressure and we've talked a lot about how we need to do better in our commitment to improve major capital projects going forward.

Thanks, Paul.

Our next question comes from Ryan Todd from Piper Sandler.

Great. Thanks.

Morning.

A question on the Gulf of Mexico.

First of all, any update on the progress of our potential deepwater developments in the US Gulf of Mexico, and including an anchor which feels like a sanction what seems like a lifetime ago and the courts just cancel the result of a recent lease wholesale in the Gulf of Mexico, maybe comment on whether you see any potential for.

Incremental headwinds there on the regulatory front that could impact things in the future.

Yes. So quick update on anchor we expect first oil in 2024.

And that that holds. The whole assembly.

Is complete and commissioning is underway in Korea.

We began drilling the first development well with a ship called the Deepwater Conqueror, It's a project that's got

An attractive development costs and that's even when you include.

Some costs that are really onetime costs related to new technologies.

Similarly, the whale project, where we're not the operator is targeted for first oil in 2024 and good progress there.

Finally, Mad Dog 2 where we're also in a non op position.

It is expected to have first oil this year. So a number of projects that are making good progress and an important part of our portfolio.

Lease sale 257, which was in the news.

Yesterday, we were the apparent high bidder on a large number of blocks there.

That we found attractive.

We're reviewing this judicial decision right now and so I can't comment more about that we're disappointed because these lease sales have been conducted successfully in the Gulf of Mexico for decades now.

And you know have resulted in us being one of the largest leaseholders out there.

With you know over 240 leases its a strong part of our base business contributes to energy security in this country are these are you know strong.

Strong contributors to our portfolio and frankly, some of the lowest carbon intensity barrels that we produce so we hope. This is resolved in a manner that allows continued development and investment in the United States Energy economy.

Alright, Thanks, Mike and maybe just an overall question on refining I appreciated some of the comments you made a few minutes ago, but.

In general it feels like global product Martin markets have tightened up quite a bit.

With the outlook looking pretty encouraging for 2022.

How can you provide some thoughts about how you're thinking about the setup for refining this year, what looks encouraging and what are some of the potential risks that you see to the outlook.

Yeah, I mean, I mentioned earlier, the demand recovery, which is underway and which still has another leg.

To it and we.

We have seen margins strengthen.

Across our portfolio as last year concluded.

And so I think those are encouraging signs.

Asia still has I think you know some risks.

The.

Approach taken by some countries, notably China to two.

They've dealt with the pandemic may lead their economy to some some risks.

If the you know these variance.

<unk> to emerge and ER and then of course, you have some other things and in Asia and again in China the situation within the real estate sector.

Hoses and uncertainty I think to.

Some of the economic numbers there overall.

No.

But broadly speaking I think you're right Ryan we're seeing strengthening on the refining side, we're seeing utilization improve.

To improve in the chemical sector has continued to be strong although it has been moderating.

From the highs early last year still above mid cycle as it's kind of trending back towards that and so I think we're setting up for a stronger year in 'twenty two than we saw in 'twenty one across that sector.

Great. Thank you.

You bet.

Our next question comes from Alastair Syme with Citi.

Thanks, Mike.

I just had one question and it's a follow up to this question.

And I'm, just really simple high level observation, but 2021 cash flow of 31 billion ex working capital.

Is almost identical to what was delivered in 2018.

And then almost identical oil price environment.

And of course to pay out ratio has risen considerably over the last three years. So my question is really what is the board.

I think it is seeing because it's because of the confidence to raise that payout ratio.

Yeah, it's the capital efficiency is the big driver Alastair.

So youre right the commodity price environments in those two years or are pretty similar.

Cash from ops pretty similar although there can be some moving parts in there that are not necessarily just commodity price.

But we have you know.

Capital spend that is significantly down.

From that period of time, which means free cash flow is significantly higher and our belief going forward you know our capital guidance going forward is 15 to 17 billion for the next five years. It has come down from 19 to 22 pre COVID-19 . So that's a structural downshift our production guidance has not.

Changed and so what we have is a portfolio that is generating free cash flow and future cash flows in a much more capital efficient manner, which allows us to return more capital to shareholders. So that's the that's the simple story.

Thank you.

Our next question comes from Ross <unk> D C.

Hi, there thanks for taking my questions.

Just a follow up on north west shelf of that reclassification that could you just provide a bit more color on the rationale for that is that changing your intentions. There obviously the last.

Couple of years is not a great time to be selling assets I'm. Just wondering if that was a function of you know getting the valuation you desire or somebody else.

Yeah.

Barrage Ah I think we've said previously we had.

An unsolicited offer on northwest shelf going back a period of time, which led us.

You know to an interesting conversation and.

No.

We want value for we were not in a position, where we need to sell assets to generate cash, but if an asset works better for somebody else and they see a different value equation that we do that's certainly a conversation we're having and so over the last period of time, we've been in a conversation like that it ultimately.

It has not.

Led to a transaction and so it's just changed the accounting classification for that asset. It's a good asset generates strong cash flow. Obviously, we're in a market today, where LNG demand is very high and and Theres a lot of gas in Australia still to run through these plants and so it's a it's a nice part of <unk>.

Our portfolio.

Yeah, just to echo that and do it more as a accounting related than anything else. There is a number of criteria that need to be met for asset held for sale and there is just one part that it no longer has met and so that's why we did the catch up depreciation.

Okay, that's very clear and then on the.

Second of all it was all Tengiz I think previously mentioned.

Potential.

There will be payments back to the parent do you have any guidance for 2022, given the current pricing environment.

Our guidance is no loan repayment, but also no additional loans.

The dividend is included in the overall affiliate dividend I will make a point we changed our guidance from focusing on the cash flow line, which is affiliate income less dividends and just focus on the true cash part if you look back to that that line, which again is the difference between income and dividends from our affiliates, it's still about our income from affiliates expected.

About $2 billion higher than the dividends.

But no loan no loan repayment, we had a little bit of repayment last year again, we had our first dividend in a number of years in December and in the current price environment. Obviously, we expect strong dividends from Tengiz. This year, it's a matter up to their board and as the project is completed and comes on then the.

<unk> to increase dividends further and payback alone and we will share more on the cash flow generation.

The capability of Tengiz during our Investor day.

Thanks barrage.

Thank you.

Our last question comes from Jason <unk> from Cowen.

Hey, Thanks for taking my question.

The first one is just on international gas exposure.

Even even backing out this timing impact it looked like the realizations were a bit light and I thought it would be helpful. If maybe you could talk through that international gas exposure.

That.

But different.

Pricing exposures within that maybe splitting it up between based LNG based fixed price or however, you think about the commodity exposure within that production bucket and the second question thinking about Capex I think your message is loud and clear that this year, you know you're going to be.

<unk>.

Around that 15 billion.

And you're going to manage the business to that but as we look forward.

We think about where you could ramp up spend.

It is is that $17 billion high end of the range is that.

Where you think the kind of <unk>.

Ramp up in spending you could do in your short cycle basins or is there in theory, if oil prices stay at elevated levels can you ramp up in your short cycle base and even more than once again I'm not thinking about this year in particular, but in a theater or if we're in an environment where oil prices stay elevated.

Thanks.

Jason I'll take your first question.

So on our LNG portfolio, you can think of it as bad as the 80% oil linked 20% J Cam that includes Australia, but also west Africa, or Angola, LNG in Equatorial Guinea.

If you look to our international gas, though we have.

Lots of other gas contracts around the world as you say some are fixed price. Some are partially all related with a lag and so you won't see necessarily that direct the fact, we have some that are.

Low end for example in West Africa that would go to domestic domestic markets, but if you look overall for the LNG from those three countries Equatorial Guinea, Angola, Australia 80, 20 is pretty good Australia now is a little bit higher because we had an additional long term contract, but the West Africa LNG is largely <unk>.

Not related and J K M or T T F price related.

And then longer term.

Capex if I.

I caught your question Jason look we've got this range of 15 to 17, we've put out there. We're at the low end of the range. This year now that's a 30% step up from where we finished 2021 and as I mentioned earlier in a place like the Permian, that's a 50% step up so it's not a trivial change, but its still a very disciplined approach.

To that business and and we intend to stay within that range.

As we've guided.

Can we move around within it yeah could that include include additional short cycle, yes.

And as we have you know as the project in Kazakhstan winds down that opens up some capacity within that range two to allocate capital to other high return.

Investments in so we've got plenty of levers to pull but I think the overarching message that investors should take away is we're gonna stay disciplined on capital, we're not chasing price, we're improving returns and and you can count on us to continue to do that and we should generate.

Very strong free cash flow in this environment.

Yeah, sorry, just to clarify I think your guidance was on LNG I was I was hoping to get it on the broader <unk>.

International gas price exposure.

And Thats, just a mix of contracts, Jason I'd I'd follow up with Roderick I mean, I think we show our realizations you know by country, but we don't have a shorthand on how to characterize because it really is a mix of contracts and a number of countries outside the U S.

Got it.

Yeah.

I would like to thank everyone for your time today. We appreciate your interest in Chevron and everyone's participation on today's call.

Please stay safe and healthy Jim back to you.

This concludes chevron's fourth quarter 2021 earnings Conference call you may now disconnect.

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Thanks.

Yes.

Okay.

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Okay.

Thanks.

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Yes.

Got it.

Okay.

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Q4 2021 Chevron Corp Earnings Call

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